We continue our journey into OTC listed MSO’s today with our first look at Marimed Incorporated ($MRMD). Naturally, it’s share price has been tracking like others in the space:

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OTC markets present different challenges for investors and trade. For investors, disclosure rules are less robust. With trade, liquidity is often a problem: the last transaction might be up 20%, but the remaining bid/ask spread just became the Grand Canyon. There’s more challenges of course (many), but those two factors alone pre-empts most interest I might have in transacting on a particular company. I got stung once on liquidity, and learned a valuable lesson about transacting in things I didn’t know or understand. Hey, better to learn from someone else’s experience right?

I don’t want to leave the impression that every company in the OTC Market resembles a scene from MadMax. The OTC Market does have a Sheriff, and they try (to whatever degree) to keep the townsfolk safe from the outlaws. If nothing else, High Tide ($HITI) probably learned their own ‘valuable’ lesson from that speeding ticket.

For clarity, many Canadian companies are listed on OTC Markets – but – they are also listed on the Canadian exchanges (CSE, TSXV), which provides higher degrees of liquidity and disclosure rules. These aren’t seen as very ‘adult’ when compared to the TSX or NASDAQ or the ‘Big Board’….the NYSE.

<The Montreal Stock Exchange claims derivatives as its’ homeland. The one and only time I looked at it…I found option pricing to be somewhat – ahem – unaligned with traditional valuation methods, and liquidity looked downright silly on the strips. So, that was the end of that (I think it’s as an acid vat for the unsophisticated or law abiding). There’s also an exchange that functions as a parking lot for listings in Canada that someone might try to sell you a car from. I mention these for awareness purposes only>

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Today we look at another OTC listed company (like $TRTC, it doesn’t have a Canadian listing) in $MRMD. The company claims to have operations in 7 states:

• Production in NEV and MASS
• Distribution in MA, RI, DEL, MD, MASS, and ILL
• Retail in MASS – two in operation for these financials, one opened in late September (close to border states….they actually tout that), and one more planned to open in the first quarter of 2021.
• Retail in ILL – a storefront that began operations under $MRMD in September (need to look into that, the location’s been in operation for a year).

I don’t know anything about this outfit than what I just typed, and the ticker symbol. And nothing says ‘let’s do it’ more than right now.

To the financials!

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• $13.4MM in revenue last quarter, $30.5MM YTD. Margins of 64% all through it, needle hasn’t budged in any quarter.
• $5.2MM in OPEX against that, interest costs of $2MM, they made $1.6MM last quarter. Look at that.
• It’d even be better if they didn’t have a ‘bad debt expense’ wart of $900k. Perhaps it’s a one-off……oh….ummm…..no. It’s part of a $44MM reserve against bad debts. Good lord. Much more below.
• Their current CEO is a lawyer. Ugh. (Chin up, be positive Molly...benefit of doubt and all).
• Some convertible debt was struck in October, and a re-fi of existing debt was completed in the same month. This was long before the recent share increase. Good things. I was going to remark on the interest expense, it’ll drop by ~=25% (by thumbnail).
• $MRMD’s a bit of a cash machine for the CEO and CFO. Cash travails have led to them making personal guarantees against mortgages, some rental income from other properties. Not a fan of this in general. Should a capital raise come about – and they are absolutely ripe to hit the market right now – if they aren’t announcing one within the next couple of weeks…..there’s something wrong.
• There’s reasons for those personal guarantees and the restructuring of debt. More below.
• 41.7MM options and warrants. Options have a nice table with strikes and tenors and vesting numbers. Warrants is a longhand account that fails in saying much of anything specific. There is some deep in the money, can’t say much more. Why they didn’t include a warrant table……….uncool.
• 290MM shares. Ugh.
• Intangibles negligible, no goodwill. Most other deals (other than those covered below) pretty straight-forward, and not terribly expensive
• An acquisition in MediTaurus (some sort of pharma-level CBD thing) was picked up for $3.2MM. $2.6MM of it was goodwill (written off due to COVID, hence, no Goodwill). Looks like absolutely nothing.
• Dealmaking overall has been uneven. More below.

Ok. I’m going to cut this here. I need more time with this, and I have a couple of questions out to some folks who can probably answer them.

There’s reference to the company being able to exist as a ‘Going Concern’. They’ve only got $2MM in the bank. Specifically:

I haven’t seen an outfit in-sector that could benefit from a share price run more than these guys.

When I looked up that ‘bad debt’ expense, I found a larger back story driving it. GenCanna is the centre of it, and it went belly up and stuck these guys with big $32.3MM bag of USD denominated rocks:

GenCanna went boom back in January last year; emerged from bankruptcy in June and, it still twitches. The whole shmozzle continues to generate billable hours for the lawyers. I wouldn’t try to follow further unless you have a legal fetish.

$MRMD’s did aspire to have a central role in reconstituting it – but apparently – no cash. $MRMD’s relationship with GenCanna began when $MRMD CEO Robert Fireman (both then and current) apparently had grand designs for taking over the world (of hemp):

Aside from that $30MM going into the bin, the ‘bad debts’ referred to in regards (of a then) related party transaction saw $MRMD sell some seeds to GenCanna. That ‘some’ happened to be $33.2MM:

Guess Fireman (getting a Board seat on GenCanna no less) just couldn’t help doing a major sale without looking at the possible solvency of GenCanna. There’s some (very ‘some’) good news in this, oddly enough. It hinges on what $MRMD actually reclaims. I doubt it’ll be much. GenCanna continues to check the sofa cushions for spare change.

With respect to $MRMD….this whole GenCanna thing feels so freaking dumb. Like, really dumb….with a ”I’ma a Lawyer and a CEO” (with a nod to Ralph Wiggums). To be fair, I haven’t gone to find the conditions of the initial transaction and timing. Sure, hindsight is 20/20. But. Fireman was already on the Board of GenCanna when related party revenue began occurring during 2019. That’s close enough for me to call this ‘dumb‘. $73.2MM worth of it. I’m ok calling it that.

$MRMD can apparently sell weed. Their investment acumen on the other hand….reveals far less proficiency. In no particular order, they’ve written off investments in various companies: Terrace Inc. (an entity that develops and acquires international cannabis assets, you might recognize that name regarding $FLWR, -$500k), Chooze (some sort of mood thing, it didn’t leave $MRMD in a good mood though, $250k fully impaired and deemed worthless), Iconic (dabbing hardware, -$500k) and the White Whale of it all….GenCanna.

Interestingly, the whole ‘mood’ thing that Chooz promised seems to be a tool that attracts marketers, as Canopy Growth ($WEED) is pursuing the same angle with some of their beverages.

Looking up the Nevada grow op (‘Harvest’), it’s apparently only at grow licence:

In Maryland, $MRMD did a deal (kinda sorta) with Kind Therapeutics. I usually don’t like leaving large blocks from the financial statements in Structures (as I want to make your read easier, after all). But, this one deserves some space. This sort of conflict is apparent in many MSO’s and rollups. ‘Kind’ began changing its’ mind about the whole thing a couple of months after signing a memorandum of understanding (MOU), so it’s been going on since at least 16 months. $MRMD had even purchased a nearby building as a dispensary in support of the deal (ouch):

Show me a company that commits to capital spend on a partner’s behalf without papering it first…..or moreseo…show me a lawyer who’d suggest that’s a good idea. The trial is slated to begin in June 2021.

$MRMD remains in litigation with their previous CEO, and has accrued a million for it, saying they won’t need it anyway. So there:

$MRMD presents a different topology than many MSO’s, apparently leaning towards distribution. Completely on the face of it, this could be framed as a potential for takeout. I mean, ops across higher priced states, and importantly, distribution. A drawback is several of the states’ markets are the size of a phone booth when compared to NY or FLA. But if the markets been hyped into the potential for inter-state commerce to emerge…the benefits of smaller markets magnifies. Particularly in the travel distance required to support, logistical smoothing, and regional brand deployment.

Operationally, it’s provides an ok story. But, Maryland’s in the twilight zone at the moment…’Kind’s’ obviously moved on, probably lured by the bigger checks and potential of upgrading their new Mercedes’ into an AMG.

Their new Mt Vernon storefront location is on the moon – relative to local population. But, it’s also an hour’s drive from St. Louis. Could be a good source of revenue until that whole ‘inter-state’ thing comes about. If ever. Overall, the operations look ok.

I see the lawyer (in CEO Fireman) though being a major drawback. I can’t get past Gencanna thing….that dumb has put stress on their working capital for several quarters. That the ‘Kind’ transaction wasn’t buttoned down….it also looks dumb (hey, perhaps it is. It’ll still take two years and cash to find out). I’d give the ‘Kind’ thing a pass if they were a few heads putting together a collective and pooched it. I’ve seen many of these transactions now, and rarely do they go this deep without some sort of merit attaching to the defendant (Disclaimer: I’m not a lawyer. I also would’t transact a related-party sale to a company that I was a Board member on that was worth a double digit percentage of my other company’s market cap…….. without demanding a pre-pay or a Letter of Credit. So there).

I don’t know if Fireman’s itch to be a ‘Captain of Industry’ has been scratched. That he’s still there…means he owns the joint.

If ops bear out to be civilized, I’d think that $MRMD presents assets (albeit small) that would be desirable. The GenCanna thing has probably discounted the equity hard (and almost put them into bankruptcy). I can’t see Fireman as useful steward, for those very ‘dumb‘ reasons listed above (and that I keep going on about).

Speaking to that, I’m going to need more time on this….and wait to hear back on a couple of questions I have out. The operations are appealing to me on the face of it. I can’t say yet whether they are well priced. This looks good as speculative to take a position on in anticipation of a raise. Whether the markets can get past Fireman (or if he can get past himself) is the core.

$LHS went for $390MM. With similar sales, this thing’s got a market cap of $240MM. Revenues aren’t that disparate. But playing ‘M&A Lotto’ is very high risk. More to come.

he preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $MRMD