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 the Company
can charge for its services and products or which it pays to its suppliers and business partners; changes in political, social and economic
conditions in the jurisdictions in which the Company operates; changes to regulations that pertain to its operations; changes in technology
that render the Company’s technology relatively inferior, obsolete or more expensive compared to others; changes in the business
prospects of the Company’s business partners and customers; increased competition, including from the Company’s 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.
The Company does not undertake to update its
forward-looking statements or risk factors to reflect future events or circumstances.
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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 ongoing regulatory, accounting,
real estate, human resources, and administrative services.
Over
the last few years, the Company made the strategic decision to transition from a consulting business to a direct owner and operator of
cannabis licenses in high-growth states. Core to this transition is the acquisition and consolidation of the Company’s clients
(the “Consolidation Plan”). Among several benefits, the Consolidation Plan would 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 funding their operations, and to providing
operational and corporate guidance. Accordingly, the Company believes it is well suited to own these businesses and manage the continuing
growth of their operations.
To
date, the acquisition and consolidation of the Company’s client businesses in Massachusetts and Illinois have been completed.
The acquisition of a client business in Maryland has been contracted, and the Company is awaiting approval by the Maryland Cannabis
Control Commission, which is pending. Upon approval, this entity will be consolidated. The acquisitions of the remaining businesses
located in Nevada and Delaware are at various stages of completion and subject to each state’s laws governing the ownership
transfer of cannabis licenses and other closing conditions. Delaware will require a modification of current cannabis ownership laws
to permit for-profit ownership, which is expected to occur when the state legalizes recreational adult-use cannabis. Until the law changes and the acquisition is approved, the
Company continues to generate revenue from rental income, management fees, and licensing royalties.
The
transition to a fully integrated muti-state cannabis operator (“MSO”) is part of a strategic growth plan (the “Strategic
Growth Plan”) the Company is implementing to drive its revenues and profitability. The Strategic Growth Plan has four components:
(i) complete the Consolidation Plan, (ii) increase revenues in existing states, by spending capital to increase the Company’s cultivation
and production capacity, and develop additional assets within those states, (iii) expand the Company’s footprint in additional
legal cannabis states through new applications and acquisitions of existing cannabis businesses, and (iv) optimize the Company’s
brand portfolio and licensing revenue by expanding into additional states with legal cannabis programs.
The Company has 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 quality 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 product recipes.
The
Company markets its high-quality cannabis flowers and concentrates under the award-winning 1 Nature’s
Heritage brand; cannabis-infused chewable tables and powder drink mixes under the brand names Kalm Fusion and K Fusion; all natural fruit
chews under the award-winning 1 Betty’s Eddies brand; and brownies, cookies, and other social sweets under the Bubby’s
Baked brand. The Company’s cannabis-infused brands have been top-selling products in Maryland and Massachusetts. 2 The Company
intends to introduce additional product lines under these brands in the foreseeable future.
The
Company also has strategic alliances with prominent brands. The Company has partnered with renowned ice cream maker Emack & Bolio’s®
to create a line-up of cannabis-infused vegan and dairy ice cream. Additionally, the Company has secured distribution rights for 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.
1
Awards won by the Company’s Betty’s Eddies brand include LeafLink 2021 Best Selling Medical Product, Reddit Sparkie
2021 Best Edible, Respect My Region 2021 Hottest Edible, LeafLink 2020 Industry Innovator, and Explore Maryland Cannabis 2020 Edible
of the Year. Awards won by the Company’s Nature’s Heritage brand include the Cultivators Cup 2021 Silver Medal and the High
Times Cannabis Cup 2021 Bronze Medal.
2
Source: LeafLink Insights 2020.
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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 – resale of cultivation and production resources, supplies, and equipment, acquired by the Company from top national
vendors at volume discounted prices, to its clients and third-parties within the cannabis industry.
●
Licensing
– revenue from the sale of precision-dosed, cannabis-infused products—such as Betty’s Eddies, Kalm Fusion,
and Nature’s Heritage—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, and bad debts.
●
Non-operating
Income and Expenses – comprised of the sub-categories of interest expense, interest income, losses on obligations settled with
equity, equity in earnings of investments, changes in the fair value of non-consolidated investments, and other non-recurring gains
or losses.
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Liquidity
and Capital Resources
The
Company produced significant improvements to its liquidity in the reported periods:
●
Cash
and cash equivalents increased nearly ten-fold to $29.7 million at December 31, 2021, from $3.0 million
at December 31, 2020.
●
In
2021, the Company’s operating activities provided positive cash flow of $35.9 million, compared to $3.4 million
in 2020.
●
At
December 31, 2021, working capital increased to $17.4 million from a working capital deficit of $2.2 million at December 31, 2020,
a positive swing of $19.6 million.
●
The
Company generated net income of $7.6 million in 2021, an increase of 214% from net income of $2.4 million in 2020.
The
aforementioned improvements to the Company’s liquidity 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 launched 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. The liquidity improvements were also attributable to $23.0 million of equity
capital raised from Hadron Healthcare Master Fund (“Hadron”), further discussed under the Financing Activities section
below.
In
addition to the above, the Company evaluates liquidity using the financial measurement of Adjusted EBITDA, a commonly used
metric to assess liquidity that is not defined by generally accepted accounting principles. The section below entitled Non-GAAP
Measurement discusses the components of this measurement in further detail.
Operating
Activities
Net
cash provided by operating activities was $35.9 million in 2021, compared to $3.4 million in 2020. The year-over-year
improvement was primarily attributable to the increase in cannabis-derived profits in 2021 generated by the Company’s
four active dispensaries in Illinois, and its retail and wholesale operations in Massachusetts.
Investing
Activities
Net cash used in investing
activities was $16.6 million in 2021, compared to $4.5 million in 2020. The year-over-year increase was attributable to an increase in
property and equipment expenditures in 2021 for the Company’s facilities in Delaware, Illinois, Maryland, and Massachusetts, offset
by $1.2 million of proceeds from the asset sale of a Company-owned investment.
Financing
Activities
Net
cash provided by financing activities was $7.5 million in 2021, compared to $3.3 million in 2020. 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 this facility. The Company also raised $2.7 million
from a new mortgage. These proceeds were offset by the repayment of $17.0 million of debt in 2021.
In 2020, the
Company raised $21.4 million from debt financings,
offset by $17.4 million of promissory note and mortgage repayments during the year.
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.
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Results
of Operations
Year
ended December 31, 2021 compared to year ended December 31, 2020
Revenues
grew to $121.5 million in 2021, an increase of $70.6 million or 139%, compared to $50.9 million in 2020. The year-over-year
increase was primarily due to the nearly three-fold expansion of the Company’s cannabis sales to $108.2 million in 2021, compared
to $39.4 million in 2020. This growth was primarily attributable to sales increases of (i) $38.3 million generated by the Company’s
dispensaries in Illinois, where one new dispensary commenced operations in May 2021, and three ongoing dispensaries experienced an 80%
year-over-year increase in customer visits, (ii) $14.0 million generated from the Company’s dispensary in Massachusetts, which
experienced a nearly six-fold year-over-year increase in customer visits, and (iii) $15.7 million generated by the Company’s wholesale
operations in Massachusetts, which experience a 151% increase in customers in 2021 compared to 2020.
The
year-over-year increase in revenues was also the result of the continued growth of rental income, management fees, and supply procurement
revenue, generated primarily from the Company’s cannabis clients in Delaware and Maryland.
Cost
of revenues were $55.2 million in 2021 compared to $19.6 million in 2020, an increase of $35.6 million. The year-over-year variance was
primarily attributable to the higher level of revenues as these costs are largely variable in nature and fluctuate in-step with revenues.
As a percentage of revenues, these costs increased to 45.4% in 2021 from 38.5% in the same period in 2020, primarily due to the
change in the relative mix of revenue categories in each period. Specifically, in 2021, (a) 88.2% of revenues were comprised of product
sales, which historically have had corresponding costs of revenue of in the range of 45.0% to 50.0%, and (b) 8.6% of revenues were comprised
of real estate and management revenue, which have no corresponding cost of revenue. This compares to revenues in 2020 that were comprised
of (x) 77.4% of product sales and (y) 16.2% of real estate and management revenues. While the cost rate is higher for product sales,
the level of product sales able to be generated by the Company is several multiples higher than the level of real estate and management
revenues able to be generated, resulting in significantly higher gross profit dollars to be generated by the Company.
Accordingly,
gross profit grew to $66.3 million in 2021 from $31.3 million in 2020.
Personnel
expenses increased to $8.4 million in 2021 from $5.5 million in 2020. 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, offset by the reversal of an approximate $1.0 million accrual related to the settlement in August
2021 of an employment-related complaint. As a percentage of revenues, personnel expenses decreased to 6.9% in 2021
from to 10.8% in 2020.
Marketing
and promotion costs increased to $1.6 million in 2021 from $411,000 in 2020. The increase is primarily the result
of increased spending on branding and design consulting, customer loyalty programs, social media, and local outdoor advertising. As
a percentage of revenues, these costs increased to 1.3% in 2021 from 0.8% in 2020.
General and administrative costs increased to
$27.6 million in 2021 from approximately $9.9 million in 2020. This change is primarily due to increases of (i) $13.2 million in non-cash
equity compensation expense associated with option grants and warrant issuances, (ii) $1.2 million in credit card processing fees from
a significant increase in credit card sales at the Company’s cannabis dispensaries, (iii) $1.1 million in facility costs on additional
properties in service in 2021, (iv) $965,000 in net professional fees primarily due to the hiring of investment bankers, offset by a
reduction in legal costs, and (v) $514,000 in depreciation and amortization expenses from higher levels of property, equipment, and intangibles.
Bad
debt expense increased to $1.9 million in 2021 from $982,000 in 2020. The change is due to the increase of reserves recorded
against aging trade accounts receivable and against the working capital balance of the Company’s client in Nevada. As a percentage
of revenues, this expense decreased to 1.5% in 2021 from 1.9% in 2020.
As
a result of the foregoing, the Company generated operating income of $26.9 million in 2021 compared to $14.5
million in 2020.
Net non-operating expenses decreased to $3.0 million
in 2021 from $10.0 million in 2020. The change is primarily due to a $7.5 million reduction of interest expense from lower levels of
outstanding debt, coupled with a $309,000 gain on a nonconsolidated private company investment, offset by a $757,000 decrease in the
fair value of nonconsolidated public company investment.
As
a result of the foregoing, the Company generated income before income taxes of $23.8 million in 2021 and $4.5 million in
2020. After a tax provision of $16.2 million in 2021 and $2.1 million in 2020, net income was $7.6 million in 2020 and $2.4 million in 2020.
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Non-GAAP
Measurement
In
addition to the financial information reflected in this report, which is prepared in accordance with generally accepted accounting principles
in the United States (“GAAP”), the Company is providing a non-GAAP financial measurement of profitability – Adjusted
EBITDA – as a supplement to the preceding discussion of the Company’s financial results.
Management
defines Adjusted EBITDA as net income (loss), determined in accordance with GAAP, excluding the following:
-
interest
income and interest expense;
-
income
taxes;
-
depreciation
of fixed assets and amortization of intangibles;
-
non-cash
expenses on debt and equity issuances;
-
impairment
or write-downs of intangible assets;
-
unrealized
gains and losses on investments and currency translations;
-
legal
settlements;
-
gains
or losses from the extinguishment of debt via the issuance of equity;
-
discontinued
operations; and
-
merger-
and acquisition-related transaction expenses.
Management
believes Adjusted 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. In addition, the Company’s
management uses Adjusted EBITDA to understand and compare operating results across accounting periods, and for financial and operational
decision making. The presentation of Adjusted EBITDA 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 Adjusted EBITDA in assessing the Company’s financial results and
its ongoing business as it allows for meaningful comparisons and analysis of trends in the business. Adjusted EBITDA is used by many
investors and analysts themselves, along with other metrics, to compare financial results across accounting periods and to those of peer
companies.
As
there are no standardized methods of calculating non-GAAP measurements, the Company’s calculations may differ from those used by
analysts, investors, and other companies, even those within the cannabis industry, and therefore may not be directly comparable to similarly
titled measures used by others.
Reconciliation
of Net Income to Adjusted EBITDA (a Non-GAAP Measurement)
The
table below reconciles Net Income to Adjusted EBITDA for the years ended December 31, 2021 and 2020:
2021
2020
(Unaudited)
Net income
$ 7,623,551
$ 2,429,267
Interest expense, net
2,247,685
9,654,130
Income taxes
16,192,327
2,067,049
Depreciation and amortization
2,788,029
2,182,092
Earnings before interest, taxes, depreciation, and amortization
28,851,592
16,332,538
Amortization of stock grants
235,353
21,459
Amortization of option grants
12,494,209
969,136
Amortization of stand-alone warrant issuances
55,786
2,179
Amortization of warrants issued with stock
654,681
-
Loss on equity issued to settle obligations
2,546
44,678
Equity in earnings of investments
-
(98,813 )
Asset write-down
-
84,708
Legal settlement
(266,717 )
-
Change in fair value of investments
1,106,593
349,638
Adjusted EBITDA
$ 43,134,043
$ 17,705,523
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2022
Plans
During
2022, the Company’s focus will 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. Additionally,
the Company plans to begin expansion of its New Bedford, MA cultivation and processing facility in the fourth quarter
of 2022 and complete the project in 2023.
3)
Build
and open a cultivation and processing facility in Mt. Vernon, Illinois and begin the production and sale of MariMed’s award-winning
branded products in both their retail dispensaries and through wholesale channels.
4)
Increase
fees paid by its managed services client in Delaware by expanding cultivation and processing facilities.
5)
Complete
the acquisition in 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 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 2022:
In
January 2022, the Company entered into a stock purchase agreement to acquire 100% of the ownership interests of Green Growth Group Inc.,
an entity that has been awarded a craft grow cannabis license issued by the Illinois Department of Agriculture (the “IDA”)
for cultivation, production, and transporting of cannabis and cannabis-infused products in Illinois. The purchase price of $3,400,000
shall be comprised of $1,900,000 in cash and shares of the Company’s common stock valued at $1,500,000. The acquisition is
conditioned upon the approval by the IDA, among other closing conditions, which is expected to occur by July 2022.
Also
in January 2022, the Company entered into an agreement to purchase a 30-acre parcel of land located in Mt. Vernon, IL containing a
33,000 square foot manufacturing facility and a 13,000 square foot storage warehouse, in exchange for $1,495,000 in cash. Upon
execution of the agreement, the Company provided a deposit of $100,000 to the seller. The transaction is expected to close in the
second quarter of 2022, after the Company has performed a complete inspection and feasibility review. If such review determines that
the premises will not satisfy the Company’s requirements, the Company shall have the right to terminate the agreement with no
other obligation other than the loss of the deposit.
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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.
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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