Item 7. Management’s Discussion and Analysis
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward
Looking Statements
When
used in this form 10-K and in future filings by the Company with the Commission, words or phrases such as “anticipate,”
“believe,” “could,” “would,” “should,” “estimate,” “expect,”
“intend,” “may,” “plan,” “predict,” “project,” “will”
or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward looking statements, each
of which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual
results to differ materially from historical earnings and those presently anticipated or projected. The Company has no obligation
to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such statements.
These
forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to be
materially different. These factors include, but are not limited to, changes that may occur to general economic and business conditions;
changes in current pricing levels that we can charge for our services and products or which we pay to our suppliers and business
partners; changes in political, social and economic conditions in the jurisdictions in which we operate; changes to regulations
that pertain to our operations; changes in technology that render our technology relatively inferior, obsolete or more expensive
compared to others; changes in the business prospects of our business partners and customers; increased competition, including
from our business partners; and enforcement of federal cannabis related laws.
The
following discussion should be read in conjunction with the financial statements and related notes which are included in this
report under Item 8.
We
do not undertake to update our forward-looking statements or risk factors to reflect future events or circumstances.
( 18 )
Overview
MariMed
Inc. (the “Company”) is a multi-state operator in the United States cannabis industry. The Company develops,
operates, manages, and optimizes over 300,000 square feet of state-of-the-art, regulatory-compliant facilities for the cultivation,
production and dispensing of medicinal and recreational cannabis. The Company also licenses its proprietary brands of cannabis
and hemp-infused products, along with other top brands, in several domestic markets and overseas.
Upon
its entry into the cannabis industry in 2014, the Company was an advisory firm that procured state-issued cannabis licenses on
behalf of its clients, developed cannabis facilities which it leased to these newly-licensed companies, and provided industry-leading
expertise and oversight in all aspects of their cannabis operations. The Company also provided its clients with as ongoing regulatory,
accounting, real estate, human resources, and administrative services.
In 2018, the Company made the strategic decision
to transition from a consulting business to a direct owner of cannabis licenses and operator of seed-to-sale operations (hereinafter
referred to as the “Consolidation Plan”). The Consolidation Plan calls for the acquisition of its cannabis-licensed
clients located in Delaware, Illinois, Maryland, Massachusetts, and Nevada. In addition, the Consolidation Plan includes the
potential acquisition of a Rhode Island asset. All of these acquisition are subject to state approval, and once consolidated,
the entities will operate under the MariMed banner.
To date, acquisitions of the licensed businesses
in Massachusetts and Illinois have been completed and establish the Company as a fully integrated seed-to-sale multi-state operator,
The acquisitions of the remaining entities located in Maryland, Nevada, and Delaware are at various stages of completion and subject
to each state’s laws governing the ownership transfer of cannabis licenses, which in the case of Delaware requires a modification
of current cannabis ownership laws to permit for-profit ownership. Meanwhile, the Company continues to expand these businesses
and maximize the Company’s revenue from rental income, management fees, and licensing royalties.
A goal in completing this transition from
a consulting business to a direct owner of cannabis licenses and operator of seed-to-sale operations is to present a simpler,
more transparent financial picture of the full breadth of the Company’s efforts, with a clearer representation of the revenues,
earnings, and other financial metrics the Company has generated for its clients. The Company has played a key role in the successes
of these entities, from the securing of their cannabis licenses, to the development of facilities that are models of excellence,
to providing operational and corporate guidance. Accordingly, the Company believes it is well suited to own these facilities and
manage the continuing growth of their operations.
The Company has also created its own brands
of cannabis flower, concentrates, and precision-dosed products utilizing proprietary strains and formulations. These products
are developed by the Company in cooperation with state-licensed operators who meet the Company’s strict standards, including
all natural—not artificial or synthetic—ingredients. The Company licenses its brands and product formulations
only to certified manufacturing professionals who follow state cannabis laws and adhere to the Company’s precise scientific
formulations and trademarked product recipes.
The Company’s proprietary cannabis
genetics produce flowers and concentrates under the brand name Nature’s Heritage™, and cannabis-infused products under
the brand names Kalm Fusion®, in the form of chewable tablets and drink powder mixes, and the award-winning 1 Betty’s
Eddies® brand of all natural fruit chews. Both cannabis-infused brands are top selling products in Maryland and Massachusetts 2
and the Company intends to introduce additional products under these brands in 2021. The Company’s brand of hemp-infused
cannabidiol (“CBD”) products, Florance™, is distributed in the US and abroad.
The Company also has exclusive sublicensing
rights in certain states to distribute the Binske® line of cannabis products crafted from premium artisan ingredients, the
Healer™ line of medical full-spectrum cannabis tinctures, and the clinically tested medicinal cannabis strains developed
in Israel by global medical cannabis research pioneer Tikun Olam™. The Company intends to continue licensing and distributing
its brands as well as other top brands in the Company’s current markets and in additional legal markets worldwide.
In March 2020, the
World Health Organization declared the outbreak of COVID-19 a global pandemic. The spread of the virus in the United States and
the measures implemented to contain it—including business shutdowns, indoor capacity restrictions, social distancing, and
diminished travel—have negatively impacted the economy and have created significant volatility and disruption in financial
markets. Consequently, the Company’s implementation of its aforementioned Consolidation Plan has been delayed. Additionally,
while the cannabis industry has been deemed an essential business, and is not expected to suffer severe declines in revenue, the
Company’s business, operations, financial condition, and liquidity have been impacted, as further discussed in this report.
1 Awards won by the Company’s
Betty’s Eddies® brand include LeafLink 2020 Industry Innovator, Explore Maryland Cannabis 2020 Edible of the Year, and
LeafLink 2019 Best Selling Medical Product.
2 Source: LeafLink Insights
2020.
( 19 )
Revenues
The
Company’s revenues are primarily comprised of the following categories:
●
Product
Sales – direct sales of cannabis and cannabis-infused products by the Company’s dispensary and wholesale operations
in Massachusetts and Illinois, and sales of hemp and hemp-infused products. Future product sales are expected to include the
Company’s planned cannabis-licensee acquisitions in Maryland, Nevada, and Delaware (upon this state’s amendment
to permit for-profit ownership of cannabis entities).
●
Real
Estate – rental income and additional rental fees generated from leasing of the Company’s state-of-the-art, regulatory-compliant
cannabis facilities to its cannabis-licensed clients.
●
Management
– fees for providing the Company’s cannabis clients with comprehensive oversight of their cannabis cultivation,
production, and dispensary operations. Along with this oversight, the Company provides human resources, regulatory, marketing,
and other corporate services.
●
Supply
Procurement – the Company maintains volume discounts with top national vendors of cultivation and production resources,
supplies, and equipment, which the Company acquires and resells to its clients or third parties within the cannabis industry.
●
Licensing
– revenue from the sale of precision-dosed, cannabis-infused products—such as Kalm Fusion®, Nature’s
Heritage™, and Betty’s Eddies®—to regulated dispensaries throughout the United States and Puerto Rico.
Expenses
The
Company classifies its expenses into three general categories:
●
Cost
of Revenues – the direct costs associated with the generation of the Company’s revenues.
●
Operating
Expenses – comprised of the sub-categories of personnel, marketing and promotion, general and administrative, bad debts,
and goodwill write-downs.
●
Non-operating
Income and Expenses – comprised of the sub-categories of interest expense, interest income, losses on debt settlements,
earnings and losses on equity investments, changes in the fair value of non-consolidated investments, and other non-recurring
gains or losses.
( 20 )
Liquidity
and Capital Resources
The
Company produced significant improvements to its liquidity in the reported periods:
●
Cash
and cash equivalents increased four-fold to approximately $3.0 million at December 31, 2020, from approximately $739,000 at
December 31, 2019.
●
In
2020, the Company’s operating activities provided positive cash flow of approximately $3.4 million, compared to approximately
$24.1 million of negative cash flow used by such activities in 2019, a positive swing of approximately $27.5 million.
●
The
Company successfully restructured the terms of its short term promissory notes payable in 2020, whereby approximately $10.7
million of payments were deferred to 2021 and beyond. These amounts were repaid in full in March 2021 using a portion of the
proceeds from the Hadron financing transaction referred to below.
●
The
Company refinanced a mortgage agreement and entered into a new mortgage agreement which generated approximately $13.9 million
of proceeds which were used to pay down outstanding short-term debt.
The
aforementioned improvements to cash and cash equivalents and operating cash flow, as well as a year-over-year improvement of
working capital of approximately $27.2 million, were primarily the result of increases in revenues and profitability generated
by the Company’s cannabis operations in the states of Illinois and Massachusetts. These operations were acquired as part
of the Company’s aforementioned Consolidation Plan to transition from a consulting business to a direct owner of
cannabis licenses and operator of seed-to-sale operations. In addition, the section below entitled Non-GAAP Measurements
discusses two additional financial measurements that are not defined by GAAP which the Company’s management uses
to evaluate liquidity.
To
further improve the Company’s liquidity, in March 2021, the Company entered into a securities purchase agreement with Hadron
Healthcare Master Fund (“Hadron”) whereby Hadron will provide funding of up to $46.0 million to repay existing non-mortgage
debt, to fund expansion plans of existing operations, and to finance planned acquisitions. In March 2021, Hadron funded $23.0
million under the facility. This transaction is further discussed in below under the section entitled Financing Transaction.
Operating
Activities
Net
cash provided by operating activities in 2020 approximated $3.4 million, compared to net cash used in operating activities of
approximately $24.1 million in 2019. The year-over-year improvement was primarily attributable to the increase in cannabis-derived
profits in 2020 generated by the acquisition of the KPGs in Illinois and ARL in Massachusetts, coupled with improved collections
on trade accounts receivable, and offset primarily by the increase cannabis inventory due to expanded cannabis operations.
Investing
Activities
Net
cash used in investing activities in 2020 approximated $4.5 million, compared to approximately $12.5 million in 2019. The year-over-year
decrease in the use of cash was due to the investments in Healer, MHWC, MediTaurus and another cannabis entity in 2019. No similar
investments were made in 2020. The year-over-year decrease is also due to reduced property and equipment purchases in 2020.
Financing
Activities
Net
cash provided by financing activities in 2020 approximated $3.3 million, compared to approximately $33.3 million in 2019. The
Company raised approximately $21.4 million from debt financings in 2020, offset by approximately $17.4 million of promissory note
and mortgage repayments during the year. In 2019, the Company raise approximately $32.1 million in the aggregate with no repayments
of debt.
The
proceeds from the aforementioned financings were used to execute on the Company’s strategy to become a fully integrated
multistate operator of seed-to-sale cannabis operations, to continue the development of its regulated facilities, to pay down
its debt, to expand its branded licensing business, and for working capital purposes.
( 21 )
Results
of Operations
Year
ended December 31, 2020 compared to year ended December 31, 2019
Total
revenues in 2020 approximated $50.9 million compared to approximately $45.6 million in 2019, an increase of approximately $5.3
million or 11.6%. As discussed in Note 20 – Related Party Transactions within the audited financial statements at
December 31, 2020, the Company generated approximately $29.0 million of revenues in 2019 from the sale of large quantities of
hemp seed inventory to GenCanna, a related party (the “Seed Transactions”). Such revenues were fully reserved at December
31, 2019, as a result of GenCanna’s filing under Chapter 11 as discussed in Note 21 – Commitments and Contingencies
within the audited financial statements.
Excluding
the Seed Transactions, core revenues in 2020 grew to approximately $50.9 million from approximately $16.6 million in 2019, an
increase of approximately $34.3 million or 207.1%. The year-over-year increase was due to aggregate cannabis sales in 2020 of
approximately $39.4 million generated by the Company’s cannabis-licensee acquisitions of the KPGs in Illinois and ARL in
Massachusetts. The cannabis sales were offset by decreases in procurement revenue and management fees charged to Kind, the Company’s
cannabis-licensed client in Maryland, and with whom the Company is currently engaged in litigation.
Cost of revenues in 2020 approximated $19.6
million compared to approximately $26.9 million in 2019, a decrease of approximately $7.3 million or 27.3%.
The year-over-year variance was primarily attributable to the cost of seeds incurred by the Company in 2019 of approximately $20.8
million as part of the Seed Transactions. Excluding the Seed Transactions, cost of revenues in 2020 increased to approximately
$19.6 million from approximately $6.2 million in 2019. As a percentage of revenue, these costs increased slightly to
38.5% in 2020 from 37.1% in 2019, primarily due a non-recurring cost increase of approximately $1.8 million due to the expansion
of the Company’s cultivation capacity in Massachusetts.
As a result of the foregoing, gross profit
approximated $31.3 million, or 61.5% of total revenues in 2020, from approximately $18.7 million, or 41.0% of total
revenues in 2019. Excluding the Seed Transactions, gross profit increased to approximately $31.3 million in 2020 from approximately
$10.4 million for the same period a year ago, an increase of approximately $20.9 million or 200.6%.
Personnel
expenses increased to approximately $5.5 million in 2020 from approximately $3.8 million in 2019. The increase was primarily due
to the hiring of additional staff to support (i) higher levels of revenue, and (ii) the Company’s expansion into a direct
owner and operator of seed-to-sale cannabis businesses. As a percentage of revenues excluding the Seed Transactions, personnel
expenses dropped significantly to 10.8% in 2020 from to 23.2% in 2019.
Marketing
and promotion costs increased slightly to approximately $411,000 in 2020 from approximately $370,000 in 2019. As a percentage
of revenues excluding the Seed Transactions, these costs fell to 0.8% in 2020 from 2.2% in 2019.
General
and administrative costs increased to approximately $9.9 million in 2020 from approximately $8.8 million in 2019.
This increase is primarily due to taxes paid on the Company’s cannabis operations, and higher depreciation expenses and
facility costs on additional properties owned and in service in 2020. As a percentage of revenues excluding the Seed Transactions,
these costs fell significantly to 19.5% in 2020 from 53.2% in 2019.
Bad
debt expense decreased to approximately $982,000 in 2020 from approximately $44.5 million in 2019. As discussed in Note 18
– Bad Debts within the audited financial statements, in 2019, the Company reserved receivables of approximately
$29.0 associated with the Seed Transactions, and aggregate amounts due from (i) Kind of approximately $11.2 million, in light
of the current litigation between the Company and Kind, and Harvest of approximately $2.1 million, based on the expected impact
of the pandemic. In 2020, the Company increased the reserve against amounts owed from Kind and Harvest.
In
2019, the Company wrote off approximately $2.7 million of goodwill associated with its acquisitions of MediTaurus as discussed
in Note 3 – Acquisitions within the audited financial statements. No goodwill was written off in 2020.
As a result of the foregoing, the Company
generated operating income of approximately $14.5 million in 2020 compared to an operating loss of approximately $41.5
million in 2019. Excluding the Seed Transactions, the Company generated operating income of approximately $14.5 million
in 2020 compared to an operating loss of approximately $20.8 million in 2019, a positive swing of approximately $35.3 million.
Net non-operating expenses decreased to approximately
$10.0 million in 2020 from approximately $40.3 million in 2019. The decrease is primarily due to the approximate $30.2 million
write-down in 2019 of the Company’s investment in GenCanna.
As a result
of the foregoing, the Company generated income before income taxes of approximately $4.5 million in 2020,
compared to a loss before income taxes of approximately $81.8 million in 2019. After a tax provision of approximately $2.1
million in 2020 and approximately $67,000 in 2019, net income was approximately $2.4 million in 2020, compared to a net loss of approximately $81.9 million in
2019, a positive swing of approximately $84.3 million.
( 22 )
Non-GAAP
Measurements
In
addition to the financial information reflected this report, which is prepared in accordance with GAAP, the Company is providing
two additional financial measurements that are not defined by GAAP – EBITDA and EBITDA Excluding GenCanna
(defined below). The Company is providing these non-GAAP financial measurements as a supplement to the preceding discussion of
the Company’s financial results,
The
Company’s management uses these non-GAAP measurements to understand and compare operating results across accounting periods,
for financial and operational decision making, for planning and forecasting purposes, and to evaluate its financial performance
and liquidity. The presentation of these non-GAAP measurements is not intended to be considered in isolation or as a substitute
for the financial information prepared in accordance with GAAP.
Management
believes that investors and analysts benefit from considering these non-GAAP measurements in assessing the Company’s financial
results and its ongoing business as it allows for meaningful comparisons and analysis of trends in the business. These non-GAAP
measurements are used by many investors and analysts themselves, along with other metrics, to compare financial results across
accounting periods and to those of peer companies.
Management
believes EBITDA is a useful measure to assess the performance and liquidity of the Company as it provides meaningful operating
results by excluding the effects of expenses that are not reflective of its operating business performance. Management defines
EBITDA as net income (loss) before interest, income taxes, depreciation, and amortization.
Management
believes EBITDA Excluding GenCanna is another useful measure to assess the performance of the Company as it provides more meaningful
operating results by excluding the effects of the Company’s investment in GenCanna, the Seed Transactions, and GenCanna’s
Chapter 11 filing. Management believes that it is appropriate to exclude these items as they are not indicative of the Company’s
ongoing operating business performance.
As
there are no standardized methods of calculating these non-GAAP measurements, the Company’s calculations may differ from
those used by others, and accordingly, the use of these measurements may not be directly comparable to similarly titled measures
used by others. Accordingly, these non-GAAP measurements are intended to provide additional information and should not be considered
in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
Reconciliation
of EBITDA and EBITDA Excluding GenCanna (Non- GAAP Measurements) To Net Income (Loss)
The
table below reconciles Net Income (Loss) to EBITDA and EBITDA Excluding GenCanna for year ended December 31, 2020 and 2019:
Year Ended December 31,
2020
2019
(Unaudited)
Net income (loss)
$ 2,429,267
$ (81,880,925 )
Interest expense, net
9,654,130
12,251,154
Income taxes
2,067,049
67,157
Depreciation and amortization
2,182,092
1,196,606
EBITDA
16,332,538
(68,366,008 )
Exclude effects of GenCanna:
Profit on Seed Transactions
-
(8,204,248 )
Reserve against GenCanna accounts receivable
-
29,029,249
Loss on investment in GenCanna
-
30,229,315
EBITDA Excluding GenCanna (Loss)
$ 16,332,538
$ (17,311,692 )
The
EBITDA Excluding GenCanna for the year ended December 31, 2020 approximated $16.3 million compared with an EBITDA Excluding
GenCanna Loss of approximately $17.3 million for the year ended December 31, 2019, an improvement of approximately $33.6
million. The primary contributors to this improvement were the completion of the consolidations of Illinois and Massachusetts
core cannabis operations in 2020 as part of the Company’s Consolidation Plan. The Illinois acquisition was completed
in the fall of 2019 and the Massachusetts operations opened in late 2019 and reached full production capacity in mid-2020. Other
factors contributing to the improvement in performance include (i) the opening of a third cannabis dispensary in Illinois in September
2020, (ii) introduction of recreational cannabis sales in Massachusetts in January 2020, and (iii) opening of the Middleborough
dispensary in Massachusetts in March 2020, and (iv) growth in the Company’s managed operations.
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2021
Plans
For
2021, the Company’s focus will to be on the following key areas:
1)
Subject
to the applicable state approvals, continue the execution of its Consolidation Plan.
2)
Identify
and open two new dispensary locations in Massachusetts that can service both the medical and adult-use marketplaces.
3)
Open
a fourth dispensary location in Illinois, to be located in the city of Metropolis.
4)
Increase
sales and profits in Delaware by expanding cultivation and processing facilities.
5)
Complete
the acquisition of Maryland and proceed with a plan to expand the cultivation and processing facilities as well as adding
a dispensary location.
6)
Drive
licensing fees through the expansion of the Company’s Nature’s Heritage™ branded flower and popular infused-product
brands Betty’s Eddies® and Kalm Fusion® into the Company’s owned and managed facilities, and with strategic
partners into additional markets. Expand the exclusively licensed Tropizen® and Binske® brands.
7)
Identify
acquisition opportunities in other states.
No
assurances can be given that any of these plans will come to fruition or that if implemented will necessarily yield positive results.
The
following transactions occurred in early 2021:
Financing
Transaction
In
March 2021, the Company entered into a securities purchase agreement with Hadron Healthcare Master Fund (“Hadron”)
with respect to a financing facility of up to $46.0 million in exchange for newly-designated Series C convertible preferred stock
of the Company and warrants to purchase the Company’s common stock.
At
the closing of the transaction in March 2021, Hadron purchased $23.0 million of Units at a price of $3.70 per Unit. Each Unit
is comprised of one share of Series C preferred stock and a four-year warrant to purchase two and one-half shares of common stock.
Accordingly, the Company issued to Hadron 6,216,216 shares of Series C preferred stock and warrants to purchase up to an aggregate
of 15,540,540 shares of common stock. Each share of Series C preferred stock is convertible, at Hadron’s option, into five
shares of common stock, and each warrant is exercisable at an exercise price of $1.087 per share. The warrants shall be subject
to early termination if certain milestones are attained and the market value of the Company’s common stock reaches certain
predetermined levels.
In
connection with the closing of the transaction, the Company filed a certificate of designation with respect to the rights and
preferences of the Series C convertible preferred stock. Such stock is zero coupon, non-voting. and has a liquidation preference
equal to its investment amount plus declared but unpaid dividends. Holders of Series C convertible preferred stock are entitled
to receive dividends on an as-converted basis.
Of
the $23.0 million of proceeds received by the Company in March 2021, approximately (i) $7.8 will fund construction and upgrades
of certain of the Company’s owned and managed facilities, and (ii) $15.2 million was used to pay down debt and obligations,
comprised of the $4.4M Notes, the $1M Note, the New $3M Note, the $5.8M Note, the Existing Notes, a portion of the Third Party
Notes (all referred to in Note 11 – Debt ), and a portion of the Due To Related Parties balance discussed in
Note 20 – Related Party Transactions .
The
balance of the committed facility of up to an additional $23.0 million is intended to fund the Company’s specific targeted
acquisitions provided such acquisitions are contracted in 2021 and consummated, including obtaining the necessary regulatory approvals,
no later than the end of 2022. Such funds shall be provided by Hadron on the same aforementioned terms as the initial proceeds.
Provided
that as at least 50% of the shares of Series C convertible preferred stock remain outstanding, the holders shall have the right
to appoint one observer to the Company’s board and to each of its board committees, and appoint a member to the Company’s
board if and when a seat becomes available, at which time the observer roles shall terminate.
The
transaction imposes certain covenants on the Company with respect to the incurrence of new indebtedness, the issuance of additional
shares of any designation of preferred stock, and the payment of distributions.
Lease
Agreement
In
February 2021, the Company entered into a five-year lease agreement for a 12,000 square foot premises located in Wilmington, DE
which the Company intends to develop into a cannabis production facility with offices, and sublease to its cannabis-licensed
client in this state. The lease contains an option to negotiate an extension at the end of the lease term.
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Off-Balance
Sheet Arrangements
The
Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial
condition, changes in financial condition, revenues, or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
Inflation
In
the opinion of management, inflation has not had a material effect on the Company’s financial condition or results of its
operations.
Seasonality
In
the opinion of management, the Company’s financial condition and results of its operations are not materially impacted by
seasonal sales.
( 25 )
Recent
Accounting Pronouncements
The
Company has reviewed all other recently issued, but not yet effective, accounting pronouncements, and does not believe the future
adoption of any such pronouncements will have a material impact on its financial condition or the results of its operations.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
Company is a “smaller reporting company” as defined by Regulation S-K and, as such, is not required to provide the
information contained in this item pursuant to Regulation S-K.
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