Item 3. Legal Proceedings
ITEM
3. LEGAL PROCEEDINGS.
Terminated Employment
Agreement
In
July 2019, Thomas Kidrin, the former chief executive officer and a former director of the Company, filed a complaint in the Massachusetts
Superior Court which alleged the Company failed to pay all wages owed to him and breached his employment agreement, and requested
multiple damages, attorney fees, costs, and interest. The Company moved to dismiss certain counts of the complaint and asserted
counterclaims against Mr. Kidrin which alleged breach of contract, breach of fiduciary duty, money had and received, and unjust
enrichment.
While the Company’s
motion to dismiss was pending, the parties entered into a settlement agreement and general release in August 2021 whereby, among other
conditions, (i) Mr. Kidrin’s complaint was dismissed with prejudice, (ii) the Company issued to Mr. Kidrin five-year warrants to
purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $0.50 per share, (iii) the Company irrevocably
transferred intangible assets relating to the online virtual worlds business the Company had conducted in early 2014, prior to its pivot
into the legal cannabis industry (such assets had zero carrying value on the Company’s balance sheet), and (iv) each party released
and discharged the other from all claims, losses, and liabilities.
Maryland Litigation
As
previously discussed in Part I, Item 1. Business in this report, in 2019, the members of Kind had sought to renege on the parties’
original agreement to a partnership/joint venture made in 2016 and subsequent MOU. The Company engaged with the members of Kind in good
faith in an attempt to reach updated terms acceptable to both parties; however, the members of Kind failed to reciprocate in good faith,
resulting in an impasse. Incrementally, both parties through counsel further sought to resolve the impasse; however, such initiative
resulted in both parties commencing legal proceedings.
In
November 2019, Kind commenced an action by filing a complaint against the Company in the Circuit Court for Washington County,
MD captioned Kind Therapeutics USA, Inc. vs. MariMed, Inc., et al. (Case No. C-21-CV-19-000670) (the “Complaint”). The
Complaint, as amended, alleges breach of contract, breach of fiduciary duty, unjust enrichment, intentional misrepresentation,
rescission, civil conspiracy, and seeking an accounting and declaratory judgment and damages in excess of $75,000 (the Court has
subsequently dismissed Kind’s claims for declaratory judgment on the lease, rescission of the lease, and civil conspiracy).
On November 15, 2019, the Company filed counterclaims against Kind and a third-party complaint against the members of Kind (Jennifer
DiPietro, Susan Zimmerman, and Sophia Leonard-Burns) and William Tham (the “Counterclaims”). The Counterclaims, as amended,
allege breach of contract with respect to each of the partnership/joint venture agreement, the MOU, the MSA, the Lease, and the Licensing
and Manufacturing Agreement (“LMA”), unjust enrichment, promissory estoppel/detrimental reliance, fraud in the inducement,
breach of fiduciary duty, and seeks reformation of the MSA, a declaratory judgment regarding enforceability of the partnership/joint
venture arrangement and/or the MOU, specific performance of the parties’ various contracts, and the establishment of a constructive
trust for the Company’s benefit. The Counterclaims also seek damages.
At
the time the Complaint and Counterclaims were filed, both
parties, the Company (including its subsidiaries Mari Holdings MD LLC and MariMed Advisors Inc.) and Kind, brought
motions for a temporary restraining order and a preliminary injunction. By Opinion and Order entered on November 21, 2019, the Court
denied both parties motions for a temporary restraining order. In its opinion, the Court specifically noted that, contrary to Kind’s
allegations, the MSA and the Lease “appear to be independent, valid and enforceable contracts.”
A
hearing on the parties’ cross-motions for preliminary injunction was held in September 2020 and November 2020. Also in November
2020, the Court granted the Company’s motion for summary judgment as to the Lease, determining that the Lease is valid and enforceable.
Based on this ruling, the Company is seeking judgment at trial in the amount of approximately $5.4 million for past due rent and expenses
owed by Kind under the Lease.
In
December 2020, the Court entered a Preliminary Injunction Order, accompanied by a Memorandum Opinion, denying Kind’s motion for
a preliminary injunction (which Kind had withdrawn at the conclusion of the hearing) and granting the Company’s request for preliminary
injunction. The Court determined that the Company is likely to succeed with respect to the validity and enforceability of the MSA and
the LMA, that the Company would suffer substantial and irreparable harm without the preliminary injunction, and that the balance of convenience
and public interest both warranted the issuance of a preliminary injunction in the Company’s favor. The Court ordered, inter
alia, that the MSA and LMA are in effect pending judgment after trial on the merits, and that Kind and its members, and their attorneys,
agents, employees, and representatives, are prohibited from (a) interfering with the Company’s duties and responsibilities under
the MSA and (b) withdrawing funds, making any distribution, paying any loans, returning any capital, or making any payment towards a
debt from any Kind bank or other financial account(s) without written consent of the Company or Order of the Court, thereby preserving
the Company’s control of Kind’s operations and finances at least through the jury trial currently scheduled to begin on March
28, 2022. Further, the Court ordered Kind to pay management and licensing fees to the Company beginning January 1, 2021. Kind has noted
an appeal of the Order to the Maryland Court of Special Appeals, which the Court denied in December 2021, leaving the preliminary
injunction order in effect.
In
addition to the favorable rulings on the Lease, MSA, and LMA, the Company believes that its claims for declaratory relief, specific performance,
and/or breach of contract with respect to the partnership/joint venture agreement claims are meritorious. Further, the Company believes
that Kind’s claims against the Company are without merit. On March 18, 2021, the Court issued an opinion and order on Kind’s
motion for summary judgment finding that the MOU was not enforceable by the Company against Kind as a final binding agreement. The Company
is evaluating an appeal of this ruling which under Maryland rules can only be pursued upon final judgment.
In
March 2021, the Kind parties filed motions to modify the preliminary injunction order or, alternatively, for direction from the Court
based on Kind’s claim to have terminated the MSA. In September 2021, the court denied the motion to modify the preliminary injunction
and granted, in part, the motion for direction, but only with respect to Kind’s request to pay litigation costs. The preliminary
injunction remains in full effect, and the Company filed a petition for civil contempt against the Kind parties for interfering with
the Company’s management of Kind. The contempt petition remains pending.
On
December 31, 2021, the parties to the foregoing Maryland litigation entered into a global Confidential Settlement and Release Agreement,
along with the parties to the DiPietro lawsuit (described below). Also on such date, as previously discussed in Part I, Item 1. Business
in this report, the Company entered into (i) a membership interest purchase agreement with the members of Kind to acquire 100% of
the equity ownership of Kind, and (ii) a membership interest purchase agreement with one of the members of Kind to acquire such member’s
entire equity ownership interest Mari-MD and Mia.
On
January 4, 2022, the Maryland court entered an order staying the litigation and rescheduling the jury trial to October 24, 2022, to November
4, 2022, in the event the transactions contemplated by the Confidential Settlement and Release Agreement are not consummated. Otherwise,
simultaneous with the closing of the transactions contemplated by the Confidential Settlement and Release Agreement, the foregoing Maryland
litigation will be dismissed with prejudice, along with the DiPietro lawsuit.
In
the event the transactions contemplated by the Confidential Settlement and Release Agreement are not consummated, the Company intends
to aggressively prosecute and defend the action.
DiPietro Lawsuit
In August 2020, Jennifer
DiPietro, directly and derivatively on behalf of Mari-MD and Mia,
commenced a suit against the Company’s CEO, CFO, and wholly-owned subsidiary MariMed Advisors Inc. (“MMA”), in Suffolk
Superior Court, Massachusetts.
( 14 )
In
this action, DiPietro, a party to prior ongoing litigation in Maryland involving the Company and Kind as discussed above, brings claims
for breach of fiduciary duty, breach of contract, fraud in the inducement, aiding and abetting the alleged breach of fiduciary duty,
and also seeks access to books and records and an accounting related to her investments in Mari-MD and Mia. DiPietro seeks unspecified
money damages and rescission of her interest in Mari-MD, but not of her investment in Mia, which has provided substantial returns to
her as a member.
The
Company has answered the complaint and MMA filed counterclaims against DiPietro on its own behalf and derivatively on behalf of Mari-MD
for breach of her fiduciary duties to each of those entities, and for tortious interference with Mari-MD’s lease and MMA’s
management services agreement with Kind.
On
December 31, 2021, the parties to the foregoing Massachusetts litigation entered into a global Confidential Settlement and Release Agreement,
along with the parties to the Maryland lawsuit described above. Because the Massachusetts litigation
involves derivative claims, the Massachusetts Superior Court must approve the parties’ proposed dismissal of those claims. The
parties to the Massachusetts litigation have filed a joint motion seeking to dismiss the derivative claims. Simultaneous with
the closing of the transactions contemplated by the Confidential Settlement and Release Agreement, all
direct claims in the foregoing Massachusetts litigation will be dismissed with prejudice, along with the Maryland lawsuit.
In
the event the transactions contemplated by the Confidential Settlement and Release Agreement are not consummated, the Company believes
that the allegations of the complaint in the foregoing Massachusetts litigation are without merit and intends to defend the case vigorously.
The Company’s counterclaim seeks monetary damages from DiPietro, including the Company’s legal fees in the Maryland lawsuit.
Bankruptcy
Claim
During
2019, the Company’s MMH subsidiary sold and delivered hemp seed inventory to GenCanna Global Inc., a Kentucky-based cultivator,
producer, and distributor of hemp (“GenCanna”). At the time of sale, the Company owned a 33.5% ownership interest in GenCanna.
The Company recorded a related party receivable of approximately $29.0 million from the sale, which was fully reserved on December 31,
2019.
In
February 2020, GenCanna USA, GenCanna’s wholly-owned operating subsidiary, under pressure from certain of its creditors including
MGG Investment Group LP, GenCanna’s senior lender (“MGG”), agreed to convert a previously-filed involuntary bankruptcy
proceeding with the U.S. Bankruptcy Court in the Eastern District of Kentucky (the “Bankruptcy Court”) into a voluntary Chapter
11 proceeding. In addition, GenCanna and GenCanna USA’s subsidiary, Hemp Kentucky LLC (collectively with GenCanna and GenCanna
USA, the “GenCanna Debtors”), filed voluntary petitions under Chapter 11 in the Bankruptcy Court.
In
May 2020, after an abbreviated solicitation/bid/sale process, the Bankruptcy Court, over numerous objections by creditors and shareholders
of the GenCanna Debtors which included the Company, entered an order authorizing the sale of all or substantially all of the assets of
the GenCanna Debtors to MGG. After the consummation of the sale of all or substantially all of their assets and business, the GenCanna
Debtors n/k/a OGGUSA, Inc. and OGG, Inc. (the “OGGUSA Debtors”) filed their liquidating plan of reorganization (the “Liquidating
Plan”) to collect various prepetition payments and commercial claims against third parties, liquidate the remaining assets of the
ODDUSA Debtors, and make payments to creditors. The Company and the unsecured creditors committee filed objections to such Liquidating
Plan, including opposition to the release of litigation against the OGGUSA Debtors’ senior lender, MGG, for lender liability, equitable
subordination, and return of preference. As a part of such plan confirmation process, the OGGUSA Debtors filed various objections to
proofs of claims filed by various creditors, including the proof of claim in the amount of approximately $33.6 million filed by the Company.
Through intense and lengthy negotiations with the OGGUSA Debtors and the unsecured creditors committee regarding the objections to the
Liquidating Plan, the Company reached an agreement with the OGGUSA Debtors to withdraw the objections to the Company’s claim and
to have it approved by the Bankruptcy Court as a general unsecured claim in the amount of $31.0 million.
Since
the approval of the Liquidating Plan, the OGGUSA Debtors have been in the process of liquidating the remaining assets, negotiating and
prosecuting objections to other creditors’ claims, and pursuing the collection of accounts receivable and Chapter 5 bankruptcy
avoidance claims.
In January 2022, the
Company, at the request of the Liquidating Plan administrator for the OGGUSA Debtors, executed a written release of claims, if any, of
the Company against Huron Consulting Group (“Huron”), a financial consulting and management company retained by the senior
lender of the OGGUSA Debtors to perform loan management services for the lender and OGGUSA Debtors prior to and during their Chapter
11 bankruptcy cases. Such release was executed in connection with a comprehensive settlement agreement between the OGGUSA Debtors and
Huron. In consideration for the Company’s execution of the release, Huron paid an additional $40,000 to the bankruptcy estates
of the OGGUSA Debtors to be included in the funds to be distributed to creditors, including the Company.
As
of the date of this filing, there is still insufficient information as to what portion, if any, of the Company’s allowed claim
will be paid upon the completion of the liquidation of the remaining assets of the OGGUSA Debtors.
ITEM
4. MINE SAFETY DISCLOSURES
Not
Applicable.
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PART
II