What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-09 compared with 2022-11-08 · 114 added, 103 removed, 144 unchanged (60% of the section changed)

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Securities and Exchange Commission (“SEC”) on March 3, 2023.

Forward Looking Statements

When used in this Quarterly Report on Form 10-Q and in future filings by the Company with the SEC, 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 U.S.

federal cannabis-related laws.

The following discussion should be read in conjunction with the financial statements and related notes which are included in this Quarterly Report on Form 10-Q.

The Company does not undertake to update its forward-looking statements or risk factors to reflect future events or circumstances, unless required by law.

We are a multi-state operator in the United States cannabis industry.

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We also license our proprietary brands of cannabis and hemp-infused products, along with other top brands, in several domestic markets.

Our common stock commenced trading on the Canadian Securities Exchange effective July 12, 2022, under the ticker symbol MRMD, and continues to trade on the OTCQX under the same symbol.

On April 27, 2022 (the “Kind Acquisition Date”), we acquired Kind Therapeutics USA (“Kind”), our former client in Maryland that holds licenses for the cultivation, production, and dispensing of medical cannabis (the “Kind Acquisition”).

The financial results of Kind are included in our condensed consolidated financial statements for the periods subsequent to the Kind Acquisition Date.

On May 5, 2022, we completed the acquisition of 100% of the equity ownership of Green Growth Group Inc.

On March 9, 2023 (the "Ermont Acquisition Date"), we acquired the operating assets of Ermont, Inc.

("Ermont"), a medical-licensed vertical cannabis operator located in Quincy, Massachusetts (the "Ermont Acquisition").

The financial results of Ermont are included in our condensed consolidated financial statements for the period subsequent to the Ermont Acquisition Date.

We completed two acquisitions during the year ended December 31, 2022 that we recorded as asset purchases.

On May 5, 2022 (the "Green Growth Acquisition Date"), we completed the acquisition of 100% of the equity ownership of Green Growth Group Inc.

("Green Growth"), an entity that holds a craft cultivation and production cannabis license in the state of Illinois (the "Green Growth Acquisition").

During the balance of 2022 and into 2023, we are focused on continuing to execute our strategic growth plan, with priority on activities that include the following:

• Continuing to consolidate the cannabis business that we have developed and manage.

On December 30, 2022 (the "Greenhouse Naturals Acquisition Date"), we completed an asset purchase under which we acquired a cannabis license and assumed a property lease for a dispensary in Beverly, Massachusetts that had never been operational.

During 2023, we are focused on continuing to execute our strategic growth plan, with priority on activities described below:

• Continuing to consolidate the cannabis businesses that we have developed and managed.

• Expanding revenues, assets, and our footprint in the states in which we operate.

◦ In Massachusetts, we intend to open two additional dispensaries and significantly expand the capacity and capability of our manufacturing facility.

◦ In Delaware, we intend to develop an additional 40,000 square feet of cultivation and production capacity at our facility in Milford, which, upon completion, will be leased to our client in this state.

◦ In Maryland, we opened a dispensary in Annapolis on October 18, 2022, and we intend to expand our manufacturing facility by 40,000 square feet.

Under Maryland cannabis laws, we have the potential to add three additional dispensaries, for a total of four.

◦ In Illinois, we recently closed on the acquisition of an Illinois craft cannabis license which will enable us to be vertically integrated and add cultivation, manufacturing, and distribution to our four existing retail cannabis operations in Illinois.

Under Illinois cannabis laws, we have the potential to add six additional dispensaries, for a total of ten.

• Expanding into other legal states through mergers and acquisitions and by filing new applications in states where new licensing opportunities are available.

• Expanding into other legal states through mergers and acquisitions and by filing new applications in states where new licensing opportunities become available.

• Increasing revenues by producing and distributing our award-winning brands to qualified strategic partners or by acquiring production and distribution licenses.

• In Massachusetts, we recently opened two additional dispensaries, and intend to significantly expand the capacity and capability of our manufacturing facility in New Bedford, Massachusetts.

• In Maryland, we opened a dispensary in Annapolis in October 2022, and we intend to expand our manufacturing facility by 40,000 square feet.

Under current Maryland cannabis laws, we have the potential to add three additional medical dispensaries, for a total of four.

• In Illinois, in May 2022, we closed on the acquisition of a craft cannabis license, which will enable us to be vertically integrated and add cultivation, manufacturing, and distribution to our four existing retail cannabis operations in Illinois.

Under Illinois cannabis laws, we have the potential to add five additional dispensaries, for a total of ten.

Critical Accounting Policies and Estimates

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We limit our credit risk by performing credit evaluations of our clients and maintaining a reserve, as applicable, for potential credit losses.

Such evaluations are judgmental in nature and include a review of the client’s outstanding balances with consideration toward such client’s historical collection experience, as well as prevailing economic and market conditions and other factors.

Such evaluations are judgmental in nature and include a review of each client’s outstanding balances with consideration toward such client’s historical collection experience, as well as prevailing economic and market conditions and other factors.

Accordingly, the actual amounts collected could differ from expected amounts and require that we record additional reserves.

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The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

Acquisitions and Business Combinations

Business Combinations and Asset Purchases

Classification of an acquisition as a business combination or an asset acquisition depends on whether the assets acquired constitute a business, which can be a complex judgment.

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Any adjustments to assets acquired or liabilities assumed subsequent to the purchase price allocation period are included in operating results in the period in which the adjustments are determined.

Intangible assets typically are comprised of trademarks and tradenames, licenses and customer relationships, and non-compete agreements.

Intangible assets typically are comprised of trademarks and trade names, licenses and customer relationships, and non-compete agreements.

Loss Contingencies and Reserves

We are subject to ongoing business risks arising in the ordinary course of business that affect the estimation process of the carrying value of assets, the recording liabilities, and the possibility of various loss contingencies.

We are subject to ongoing business risks arising in the ordinary course of business that affect the estimation process of the carrying value of assets, the recording of liabilities, and the possibility of various loss contingencies.

An estimated loss contingency is accrued when it is probable that a liability has been incurred or an asset has been impaired and the amount of loss can be reasonably estimated.

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To assess the recoverability of any tax assets recorded on the balance sheet, we consider all available positive and negative evidence, including our past operating results, the existence of cumulative income in the most recent years, changes in the business in which we operate and our forecast of future taxable income.

In determining future taxable income, we make assumptions, including the amount of state and federal pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax strategies.

In determining future taxable income, we make assumptions, including the amount of state and federal pre-tax

operating income, the reversal of temporary differences and the implementation of feasible and prudent tax strategies.

These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage our businesses.

Results of Operations

Three and nine months ended September 30, 2022 and 2021

Three months ended March 31, 2023 and 2022

Our main sources of revenue are comprised of the following:

• Product sales (retail and wholesale) - direct sales of cannabis and cannabis-infused products primarily by our retail dispensaries and wholesale operations in Massachusetts, Illinois, and, as of the Kind Acquisition Date, Maryland.

We recognize this revenue when products are delivered or at retain points-of-sale.

We recognize this revenue when products are delivered or at retail points-of-sale.

• Real estate rentals - rental income generated from leasing of our state-of-the-art, regulatory compliant cannabis facilities to our cannabis-licensed clients.

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Prior to the third quarter of 2022, we charged additional rental fees based on a percentage of tenant revenues that exceeded specified amounts;

• Management fees - fees for providing our cannabis clients with comprehensive oversight of their cannabis cultivation, production and dispensary operations.

These fees are based on a percentage of such clients' revenue and are recognized after services have been performed.

these incremental rental fees were eliminated in connection with new contract terms with our client.

• Supply procurement - resale of cultivation and production resources, supplies and equipment that we have acquired from top national vendors at discounted prices to our clients and third parties within the cannabis industry.

We recognize this revenue after the delivery and acceptance of goods by the purchaser.

• Management fees - fees for providing our cannabis clients with comprehensive oversight of their cannabis cultivation, production and dispensary operations.

Prior to the third quarter of 2022, these fees were based on a percentage of such client's revenue and were recognized after services have been performed;

these fees were eliminated in connection with new contract terms with our client.

• Licensing fees - revenue from the licensing of our branded products, including Betty's Eddies , Bubby's Baked , Vibations , and Kalm Fusion , to wholesalers and to regulated dispensaries throughout the United States and Puerto Rico.

We recognize this revenue when the products are delivered.

Our revenue for the three and nine months ended September 30, 2022 and 2021 was comprised of the following (in thousands):

Three months ended Nine months ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

Our revenue for the three months ended March 31, 2023 and 2022 was comprised of the following (in thousands):

Three months ended

2023 March 31,

Product revenue:

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Total revenue $ 34,380 $ 31,282

Our total revenue increased $0.7 million in the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Our total product revenue increased $2.5 million, or 8.4%, primarily attributable to higher wholesale revenue arising from the Kind Acquisition.

This increase was partially offset by lower retail sales in Massachusetts due to increased competition.

The decrease in our other revenue was primarily attributable to rent and management fee reductions in connection with one of our clients and the Kind Acquisition, partially offset by higher supply procurement revenue primarily attributable to revenue generated from our cannabis clients in Delaware and, prior to the Kind Acquisition, in Maryland.

Our total revenue increased $7.8 million, or 8.6%, in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Our total product revenue increased $11.4 million, or 14.3%, primarily attributable to higher retail dispensary cannabis sales in Illinois and the inclusion of Kind’s sales in our results since the Kind Acquisition Date.

Similar to our quarter-over-quarter results described above, the decrease in our other revenue was primarily attributable to rent and management fee reductions in connection with one of our clients and the Kind Acquisition, partially offset by higher supply procurement revenue primarily attributable to revenue generated from our cannabis clients in Delaware and, prior to the Kind Acquisition, in Maryland.

Our total revenue increased $3.1 million in the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Our total product revenue increased $6.1 million, or 22.0%, primarily attributable to wholesale revenue arising from the Kind Acquisition, coupled with higher retail sales in Illinois.

These increases were partially offset by

decreases in our other revenue, primarily attributable to rent and management fee reductions in connection with one of our clients and the Kind Acquisition.

Cost of Revenue, Gross Profit and Gross Margin

Our cost of revenue represents the direct costs associated with the generation of our revenue, including licensing, packaging, supply procurement, manufacturing, supplies, depreciation, amortization of acquired intangible assets, and other product-related costs.

Our cost of revenue, gross profit and gross margin for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands, except percentages):

Our cost of revenue, gross profit and gross margin for the three months ended March 31, 2023 and 2022 were as follows (in thousands, except percentages):

Increase (decrease) from prior year

2023 2022 $ %

Three months ended September 30,

Cost of revenue $ 17,748 $ 15,027 $ 2,721 18.1 %

Gross profit $ 16,164 $ 18,181 $ (2,017) (11.1) %

Gross margin 47.7 % 54.7 %

Nine months ended September 30,

Three months ended March 31,

Cost of revenue $ 18,992 $ 14,306 $ 4,686 32.8 %

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Gross margin 44.8 % 54.3 %

Our cost of revenue increased in both the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021.

Our higher cost of revenue in the current year periods was primarily attributable to higher employee-related, facility and supply procurement costs aggregating $2.8 million and $10.2 million, respectively, in the three and nine months ended September 30, 2022.

These higher costs were primarily due to continuing supply chain issues and associated higher shipping costs, coupled with our increased headcount in connection with our recent acquisitions and in-process expansions.

These increases in cost and resulting decreases in gross profit resulted in lower gross margins in both current year periods.

Our cost of revenue increased in the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

Our higher cost of revenue in the current year quarter was primarily attributable to an aggregate of $5.7 million of higher manufacturing, employee-related and facility expenses.

These higher costs were primarily due to our increased headcount and new facilities in connection with our recent acquisitions and in-process expansions.

These increases were partially offset by lower supply procurement and certain inventory-related expenses.

The net increase in cost and resulting decreases in gross profit resulted in lower gross margins in the current year quarter compared to the same prior year period.

Operating Expenses

Our operating expenses are comprised of personnel, marketing and promotion, general and administrative, acquisition-related and other, and bad debt expenses.

Our operating expenses for the three and nine months ended September 30, 2022 and 2021 were as follows (in thousands, except percentages):

Our operating expenses for the three months ended March 31, 2023 and 2022 were as follows (in thousands, except percentages):

Increase (decrease) from prior year

2023 2022 $ %

Three months ended September 30,

Personnel $ 3,746 $ 1,481 $ 2,265 152.9 %

Marketing and promotion 1,402 563 839 149.0 %

General and administrative 5,097 9,481 (4,384) (46.2) %

Acquisition-related and other 143 — 143 100.0 %

Bad debt 40 36 4 11.1 %

$ 10,428 $ 11,561 $ (1,133) (9.8) %

Nine months ended September 30,

Three months ended March 31,

Personnel $ 4,656 $ 3,042 $ 1,614 53.1 %

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$ 10,253 $ 9,927 $ 326 3.3 %

The increase in our personnel expenses in both the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 was primarily due to the hiring of additional staff to support higher levels of projected revenue from existing operations, as well as from the Kind Acquisition.

Personnel costs increased to approximately 11% of revenue in the three months ended September 30, 2022, compared to approximately 5% of revenue in the three months ended September 30, 2021, and approximately 10% of revenue in the nine months ended September 30, 2022, compared to approximately 6% of revenue in the nine months ended September 30, 2021.

The increase in our marketing and promotion expenses in both the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 was primarily attributable to our focused efforts to upgrade our marketing initiatives in order to expand branding and distribution of our licensed products.

Marketing and promotion costs increased to approximately 4% of revenue in three months ended September 30, 2022, compared to approximately 2% of revenue in the three months ended September 30, 2021, and approximately 3% of revenue in the nine months ended September 30, 2022, compared to approximately 1% of revenue in the nine months ended September 30, 2021.

Our general and administrative expenses decreased by approximately $4 million in the three months ended September 30, 2022 compared to the same prior year period.

This decrease was primarily attributable to lower costs in connection with our equity programs in the current year period.

Our general and administrative expenses were essentially unchanged in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The increase in our personnel expenses in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily due to the hiring of additional staff to support higher levels of projected revenue from existing operations, as well as from the Kind Acquisition and, to a lesser extent, our other recent acquisitions.

Personnel costs increased to approximately 14% of revenue in the three months ended March 31, 2023, compared to approximately 10% of revenue in the three months ended March 31, 2022.

The increase in our marketing and promotion expenses in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily attributable to our focused efforts to upgrade our marketing initiatives in order to expand branding and distribution of our licensed products.

Our general and administrative expenses decreased by approximately $2 million in the three months ended March 31, 2023 compared to the same prior year period.

This decrease was primarily attributable to lower costs in connection with our

equity programs and professional fees, partially offset by higher facility and travel and transport expenses in the current year quarter.

Acquisition-related and other expenses include those expenses related to acquisitions and other significant transactions that we would otherwise not have incurred, and include professional and services fees, such as legal, audit, consulting, paying agent and other fees.

We incurred $0.1 million and $0.9 million of acquisition-related and other expenses in the three and nine months ended September 30, 2022, respectively, primarily related to the Kind Acquisition and the recent listing of our common stock on the Canadian Securities Exchange.

We did not record any acquisition-related and other expenses in the three and nine months ended September 30, 2021.

We recorded nominal bad debt expense in both the three and nine months ended September 30, 2022, as well as in the three months ended September 30, 2021.

We recorded $1.9 million in the nine months ended September 30, 2021 due to the higher reserve balances that were required in 2021 for aged trade receivable balances.

The increase in operating expenses, as detailed above, is the primary reason for the decrease in our net income for the nine months ended September 30, 2022, as compared to the same period in 2021.

We incurred $0.2 million of acquisition-related and other expenses in the three months ended March 31, 2023, primarily related to our acquisitions in the first quarter of 2023 and professional fees related to obtaining the Credit Agreement (as described below).

We did not record any acquisition-related and other expenses in the three months ended March 31, 2022.

Interest and Other (Expense) Income, Net

Interest expense primarily relates to interest on mortgages and notes payable.

Interest expense primarily relates to interest on mortgages and notes payable, and, effective in 2023, the Credit Agreement (as described below).

Interest income primarily relates to interest receivable in connection with our notes receivable.

Other (expense) income, net, includes gains (losses) on changes in the fair value of our investments and other investment-related income (expense).

Our net interest expense was virtually unchanged in the three months ended September 30, 2022 compared to the same prior year period.

Our net interest expense decreased $1.4 million in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Higher interest expense was partially offset by higher interest income in the three months ended September 30, 2022 compared to the same prior year period.

The decrease in net interest expense in the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was attributable to $0.6 million of higher interest income, coupled with $0.8 million of lower interest expense.

Our net other expense was $0.3 million and $0.2 million in the three months ended September 30, 2022 and 2021, respectively, and was primarily comprised of losses from the changes in the fair value of our investments.

The three months ended September 30, 2021 also included a nominal loss on the extinguishment of debt.

We recorded net other income of approximately $24,000 in the nine months ended September 30, 2022 and net other expense of $0.6 million in the nine months ended September 30, 2021.

The current year-to-date amount is comprised of $1.0 million of non-cash income from the sale of an investment, virtually offset by a $0.9 million loss from the change in fair value of other investments.

The prior year amount is comprised of a $0.9 million loss from the change in fair value of our investments and a nominal loss on the extinguishment of debt.

These losses were partially offset by a gain of $0.3 million on an asset sale.

Our net interest expense increased $2.3 million in the three months ended March 31, 2023, compared to the same prior year period, primarily due to interest related to the Credit Agreement (as described below), coupled with expense for a fair value adjustment to notes payable in connection with our early repayment of the notes payable for the Kind Acquisition.

We reported $0.9 million of net other expense in the three months ended March 31 2023, primarily due to the write-off of assets in connection with our decision to cancel our plans to expand into Nevada.

We reported net other income of $1.0 million in the three months ended March 31 2022, primarily related to non-cash income from a non-consolidated investment.

Income Tax Provision

We recorded income tax provisions of $7.9 million and $9.0 million in the nine months ended September 30, 2022 and 2021, respectively.

We recorded income tax provisions of $2.5 million and $3.7 million in the three months ended March 31, 2023 and 2022, respectively.

Liquidity and Capital Resources

We had cash and cash equivalents of $11.1 million and $29.7 million at September 30, 2022 and December 31, 2021, respectively.

In addition to the discussions below of our cash flows from operating, investing, and financing activities

included here, please also see our discussion of non-GAAP Adjusted EBITDA in the section “Non-GAAP Measurement” below, which discusses an additional financial measure not defined by GAAP which our management also uses to measure our liquidity.

We had cash and cash equivalents of $21.6 million and $9.7 million at March 31, 2023 and December 31, 2022, respectively.

In addition to the discussions below of our cash flows from operating, investing, and financing activities, please also see our discussion of non-GAAP Adjusted EBITDA in the section “Non-GAAP Measurement” below, which discusses an additional financial measure not defined by GAAP which our management also uses to measure our liquidity.

Credit Agreement

On January 24, 2023,we entered into a Loan and Security Agreement, by and among the Company, subsidiaries of the Company from time-to-time party thereto (collectively with the Company, the “Borrowers”), lenders from time-to-time party thereto (the “Lenders”), and Chicago Atlantic Admin, LLC (“Chicago Atlantic”), as administrative agent for the Lenders (the "Credit Agreement").

Proceeds from the Credit Agreement are designated to complete the build-out of a new cultivation and processing facility in Illinois, complete the build-out of a new processing kitchen in Missouri, expand existing cultivation and processing facilities in Massachusetts and Maryland, fund certain capital expenditures, and repay in full the Kind Therapeutics seller notes incurred in connection with the Kind Acquisition, which repayment occurred on January 24, 2023.

The remaining balance, if any, is expected to be used to fund acquisitions.

Principal, Security, Interest and Prepayments

The Credit Agreement provides for $35.0 million in principal borrowings at our option in the aggregate and further provides the Borrowers with the right, subject to customary conditions, to request an additional incremental term loan in the aggregate principal amount of up to $30.0 million;

provided that the Lenders elect to fund such incremental term loan.

$30.0 million of loan principal was funded at the initial closing and we have the option, during a six-month period

following the initial closing, to draw down an additional $5.0 million.

The loans require scheduled amortization payments of 1.0% of the principal amount outstanding under the Credit Agreement per month commencing in May 2023, and the remaining principal balance is due in full on January 24, 2026, subject to extension to January 24, 2028 under certain circumstances.

The Credit Agreement provides the Borrowers with the right, subject to specified limitations, to (a) incur seller provided debt in connection with future acquisitions, (b) incur additional mortgage financing from third-party lenders secured by real estate currently owned and acquired after the closing date, and (c) incur additional debt in connection with equipment leasing transactions.

The obligations under the Credit Agreement are secured by substantially all of the assets of the Borrowers, excluding specified parcels of real estate and other customary exclusions.

The Credit Agreement provides for a floating annual interest rate equal to the prime rate then in effect plus 5.75%, which rate may be increased by 3.00% upon an event of default or 7.50% upon a material event of default as provided in the Credit Agreement.

At any time, we may voluntarily prepay amounts due under the facility in $5.0 million increments, subject to a three-percent prepayment premium and, during the first 20-months of the term, a “make-whole” payment.

Representations, Warranties, Events of Default and Certain Covenants

The Credit Agreement includes customary representations and warranties and customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to material indebtedness, and events of bankruptcy and insolvency.

The Credit Agreement also includes customary negative covenants limiting our ability to incur additional indebtedness and grant liens that are otherwise not permitted, among others.

Additionally, the Credit Agreement requires us to meet certain financial tests.

At March 31, 2023, we were in compliance with the covenants of the Credit Agreement.

Warrant Issuance

The Credit Agreement provides for 30% warrant coverage against amounts funded under the facility, priced at a 20% premium to the trailing 20-day average price on the closing date of each such funding.

At the initial closing, upon funding of the initial $30.0 million under the facility, we issued to the Lenders an aggregate of 19,148,936 warrants to purchase shares of our common stock at $0.47 per share, exercisable for a five-year period following issuance.

Incremental warrants are issuable upon further draw-downs under the facility.

Cash Flows from Operating Activities

Our primary sources of cash from operating activities are from sales to customers in our dispensaries and cash collections from our wholesale customers.

Our primary sources of cash from operating activities are from sales to customers in our dispensaries and to our wholesale customers.

We expect cash flows from operating activities to be affected by increases and decreases in sales volumes and timing of collections, and by purchases of inventory and shipment of our products.

Our primary uses of cash for operating activities are for personnel costs, purchases of packaging and other materials required for the production and sale of our products, and income taxes.

Our operating activities provided $5.6 million and $28.2 million of cash in the nine months ended September 30, 2022 and 2021, respectively.

The change in cash from operating activities in the current year period compared to the prior year was primarily attributable to $12.6 million of cash utilized to pay income taxes in the current year period, compared to $0.4 million in the same prior year period, coupled with higher costs and operating expenses arising as we continue to increase and expand our sales activities, facilities and footprint both in the states where we currently operate and into other states.

Our operating activities used $4.5 million and provided $8.5 million of cash in the three months ended March 31, 2023 and 2022, respectively.

The change in cash from operating activities in the current year period compared to the prior year was primarily attributable to $5.3 million of cash utilized to pay income taxes in the current year period, compared to $0.1 million in the same prior year period, coupled with higher costs and operating expenses driven by our continued focus on increasing and expanding our sales activities, facilities and footprint both in the states where we currently operate and into other states.

These higher costs primarily relate to personnel, cultivation/manufacturing and facility expenses.

Cash Flows from Investing Activities

Our investing activities used $23.7 million and $13.4 million of cash in the nine months ended September 30, 2022 and 2021, respectively.

The increase in cash usage in the current year period was primarily attributable to $12.7 million of aggregate cash consideration paid for the Kind Acquisition and Green Growth Acquisition in April 2022 and May 2022, respectively.

Our investing activities used $6.9 million and $4.4 million of cash in the three months ended March 31, 2023 and 2022, respectively.

During the three months ended March 31, 2023, we used cash of $3.1 million for capital expenditures, $3.0 million part of the purchase consideration for the Ermont Acquisition, $0.6 million for cannabis licenses and $0.3 million

for advances toward future business acquisitions.

During the three months ended March 31, 2022, we used cash of $4.0 million for capital expenditures, $0.3 million for cannabis licenses and $0.1 million for advances toward future business acquisitions.

Cash Flows from Financing Activities

Our financing activities used $0.4 million of cash in the nine months ended September 30, 2022 and provided $7.7 million of cash in the nine months ended September 30, 2021.

We paid $2.0 million of cash to redeem the outstanding minority interests in one of our majority-owned subsidiaries in June 2022, made $1.0 million of aggregate principal payments on our outstanding mortgages and notes payable, made $0.2 million of distribution payments and $0.2 million of finance lease principal payments.

On August 4, 2022, we entered into a Second Amendment to the Purchase Agreement with Hadron pursuant to which, inter alia, (a) Hadron’s obligation to provide any further funding to the Company and the Company’s obligation to issue any further securities to Hadron was terminated, (b) Hadron’s right to appointment a designee to the Company’s board of directors was eliminated, and (c) certain covenants restricting the Company’s incurrence of new indebtedness were eliminated.

Our financing activities provided $23.3 million of cash in the three months ended March 31, 2023 and used $0.3 million of cash in the three months ended March 31, 2022.

We received proceeds of $29.1 million from the Credit Agreement, of which we used $5.5 million to repay in full the notes previously issued to the sellers of Kind as part of the purchase consideration for the April 2022 Kind Acquisition.

We made $0.3 million of aggregate principal payments on our outstanding mortgages and finance lease and approximately $34,000 of distribution payments.

During the three months ended March 31, 2022, we made $0.2 million of aggregate principal payments on our outstanding mortgages and finance leases and $0.1 million of distribution payments.

Based on our current expectations, we believe our current cash and future funding opportunities will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months.

The rate at which we consume cash is dependent on the cash needs of our future operations, including our contractual obligations at September 30, 2022, and our ability to raise additional cash through financing activities.

Our contractual obligations at September 30, 2022 were primarily comprised of our outstanding mortgages and promissory notes, as well as our operating leases.

Our mortgage and promissory note obligations totaled approximately $26 million at September 30, 2022, with payments aggregating approximately $500,000 in the remainder of 2022, $3 million in 2023, $2 million in 2024, $3 million in 2025, $1 million in 2026 and $17 million thereafter.

Our operating lease obligations totaled approximately $8 million at September 30, 2022, with payments aggregating approximately $300,000 in the remainder of 2022, $1 million in each of the years 2023 through 2026, and $3 million thereafter.

The rate at which we consume cash is dependent on the cash needs of our future operations, including our contractual obligations at March 31, 2023, and our ability to raise additional cash through financing activities.

We anticipate devoting substantial capital resources to continue our efforts to execute our strategic growth plan as described above.

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Reconciliation of Net Income to Adjusted EBITDA (a Non-GAAP Measurement)

The table below reconciles Net income to Adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021 (in thousands):

Three months ended Nine months ended

September 30,

2022 September 30,

2021 September 30,

2022 September 30,

GAAP Net income $ 2,722 $ 2,123 $ 8,859 $ 14,022

Interest expense, net 279 274 551 1,981

Income tax provision 2,484 4,009 7,894 9,026

The table below reconciles Net income to Adjusted EBITDA for the three months ended March 31, 2023 and 2022 (in thousands):

Three months ended

2023 March 31,

GAAP Income from operations $ 5,135 $ 7,049

Depreciation and amortization of property and equipment 986 702

Amortization of acquired intangible assets 557 140

EBITDA (earnings before interest, taxes, depreciation and amortization) 6,831 7,114 20,627 27,046

Stock-based compensation 208 2,471

Settlement of litigation — (266) — (266)

Acquisition-related and other 190 —

Other expense (income), net 251 214 (24) 631

Adjusted EBITDA $ 7,076 $ 10,362

6 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis