Leases

9 Months Ended

Sep. 30, 2020

Leases of Lessee Disclosure [Text Block]

LEASES

(a)

Operating Leases Under Accounting Standards Update

No. 2016-02

In February 2016, the FASB issued ASU No. 2016-02 - Leases (Topic 842) (“ASU 2016-02”), which requires lessees to put most leases on the balance sheet but recognize expense on the income statement in a manner similar to current accounting. On January 1, 2019, the Company adopted the ASU 2016-02 and all related amendments, using the optional transition method (modified retrospective approach) applied to leases at the adoption date. Under the modified retrospective approach, comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods. Additionally, an adjustment was recorded to accumulated deficit to account for the initial adoption of the standard.

For additional information regarding the adoption of ASU

2016-02,

see Note 9 – Leases in the 2019 Form

10-K

Other information related to operating leases as of and for the three and nine months ending September 30, 2020 were as follows:


	As of September 30, 2020
Weighted average remaining lease term		10.81
Weighted average discount rate		13.2	%

Maturities of lease liabilities for operating leases as of September 30, 2020 were as follows:


	Maturities of Lease Liability
	Third Party			Related Party			Total
Remainder of 2020	$	4,767,957		$	322,287		$	5,090,244
2021		22,243,662			1,307,183			23,550,845
2022		22,285,836			1,337,130			23,622,966
2023		22,092,882			1,367,771			23,460,653
2024		21,387,294			1,255,714			22,643,008
2025 and Thereafter		183,998,689			10,345,330			194,344,019

Total Lease Payments		276,776,320			15,935,415			292,711,735

Less: Interest		(177,811,636	)		(7,837,605	)		(185,649,241	)

Present Value of Lease Liability	$	98,964,684		$	8,907,810		$	107,062,494

For the three and nine months ended September 30, 2020 the Company recorded operating lease expense of $6,590,553 and $19,021,190, respectively. For the three and nine months ended September 30, 2019, the Company recorded operating lease expenses of $1,962,561 and $4,229,889, respectively.

(b)

Related Party Operating Leases

The Company entered into related party transactions with respect to its leasing arrangements for

certain

facilities in Florida, Illinois, Maryland, Massachusetts and Nevada.

Wendy Berger, a director of the Company, is a principal of WBS Equities, LLC, which is the Manager of Mosaic Real Estate, LLC, and owns certain facilities leased by the Company. Additionally, Mosaic Real Estate, LLC is owned in part by Ms. Berger (through the Wendy

Berger 1998 Revocable Trust), Benjamin Kovler, the Chief Executive Officer and a director of the Company (through KP Capital, LLC), and Anthony Georgiadis, the Chief Financial Officer and a director of the Company (through Three One Four Holdings, LLC). The terms of these leases range from 7 years to 15 years. For the three and nine months ended September 30, 2020, the Company recorded lease expense of $157,076 and $601,753, respectively, associated with these leasing arrangements. For the three and nine month ended September 30, 2019, the Company recorded operating lease expenses of $148,226 and $339,961, respectively, associated with these leasing arrangements.

On June 5, 2020, a wholly owned subsidiary of the Company purchased the building and building improvements of the Company’s dispensary located in Joliet, Illinois for $1,814,000 from Mosaic Real Estate Joliet, LLC. The transaction resulted in the termination of the Illinois related party leasing arrangement. For additional information see Note 6 – Notes Payable.

In connection with the Company’s acquisition of Integral Associates, LLC, the Company, through a subsidiary, leases property from Durango Teco Partners, LLC, which commenced on June 27, 2020 for an Essence retail store in Nevada. Durango Teco Partners, LLC is owned in part by Armenco Capital LLC, which is in turn owned in part by Alejandro Yemenidjian, a former owner of Integral Associates, LLC and a current director of the Company. The lease has a ten year term. For the three and nine months ended September 30, 2020, the Company recorded lease expense of $58,332 and $77,776, respectively, associated with this lease.

(c)

Sales Lease Back Transactions

On January 31, 2020, the Company closed on a sale and lease back transaction to sell its Toledo, Ohio processing facility to IIP. Under a long-term agreement, the Company has leased back the facility and continues to operate and manage it. The purchase price for the property was $2,900,000, excluding transaction costs. The Company is making certain improvements to the property that will significantly enhance production capacity, for which IIP has agreed to provide reimbursement of up to $4,300,000.

Following the end of the third quarter of 2020, on

October 1, 2020, the Company and IIP agreed to amend the lease on the Toledo, Ohio processing facility. Under the amendment, IIP will provide an additional $25,000,000 in funding to be used for the construction of a cannabis cultivation facility at the property, which currently houses a separate cannabis processing facility. Assuming full payment of the additional funding, IIP’s total investment in the property pursuant to the sale and leaseback transaction and related amendment will be $32,200,000. The Company is in process of evaluating the lease amendment and will conclude on the classification, and value of the right of use asset and related lease liability in the following quarter.

On March 6, 2020, the Company closed on a sale and lease back transaction to sell its Oglesby, Illinois cultivation and processing facility to IIP. Under a long-term agreement, the Company has leased back the facility and continues to operate and manage it. The purchase price for the property was $9,000,000, excluding transaction costs. The Company is making certain improvements to the property that will significantly enhance production capacity, for which IIP has agreed to provide reimbursement of up to $41,000,000. Assuming full reimbursement for such improvements, IIP’s total investment in the property will be $50,000,000. The lease has a term of 16 years and was recorded as an operating lease and resulted in a right of use asset and related lease liability of $26,828,221 and was recorded net of the improvements allowance of $41,000,000.