What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-09 · 76 added, 61 removed, 197 unchanged (41% of the section changed)

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

We recently received Good Manufacturing Practices ("GMP") certification of our production kitchen, as well as approval to produce and sell high-dose edibles, which we have commenced.

We also commenced adult-use wholesale and retail sales in Maryland.

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

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

• In Ohio, in June 2023, we opened our first medical dispensary in the state, and we intend to explore additional opportunities to grow our operations in Ohio to the maximum allowable by state regulations.

Critical Accounting Policies and Estimates

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

Our inventory is valued at the lower of cost or market, including consideration of factors such as shrinkage, the aging of and future demand for inventory, expected future selling price, what we expect to realize by selling the inventory and the contractual arrangements with customers.

contractual arrangements with customers.

Reserves for excess and obsolete inventory are based upon quantities on hand, projected volumes from demand forecasts, and net realizable value.

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We use the asset and liability method to account for income taxes.

Under this method, deferred income tax assets and liabilities are recorded for the future tax consequences of differences between the tax basis and financial reporting basis of assets and liabilities, measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Deferred tax assets are reduced by a valuation allowance to the extent our management concludes that it is more likely than not that the assets will not be realized.

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 months ended March 31, 2023 and 2022

Three and six months ended June 30, 2023 and 2022

Our main sources of revenue are comprised of the following:

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We recognize this revenue when the products are delivered.

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,

Our revenue for the three and six months ended June 30, 2023 and 2022 was comprised of the following (in thousands):

Three months ended Six months ended

2023 June 30,

2022 June 30,

2023 June 30,

Product revenue:

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Total revenue $ 36,519 $ 32,986 $ 70,899 $ 64,268

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.

Our total revenue increased $3.5 million in the three months ended June 30, 2023 compared to the three months ended June 30, 2022, and $6.6 million in the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Our total product revenue increased $4.3 million, or 13.9%, in the three months ended June 30, 2023 and $10.4 million, or 17.7%, in the six months ended June 30, 2023, compared to the same prior year periods.

These increases in both the quarter and year-to-date 2023 periods were primarily attributable to both wholesale and retail revenue arising from the Kind Acquisition, and higher retail revenue in our Massachusetts dispensaries, primarily attributable to our recent acquisitions there.

These increases were partially offset by decreases in our other revenue, primarily attributable to rent, supply procurement and 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 months ended March 31, 2023 and 2022 were as follows (in thousands, except percentages):

Our cost of revenue, gross profit and gross margin for the three and six months ended June 30, 2023 and 2022 were as follows (in thousands, except percentages):

Increase (decrease) from prior year

2023 2022 $ %

Three months ended March 31,

Three months ended June 30,

Cost of revenue $ 20,143 $ 17,981 $ 2,162 12.0 %

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Gross margin 44.8 % 45.5 %

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.

Six months ended June 30,

Cost of revenue $ 39,135 $ 32,287 $ 6,848 21.2 %

Gross profit $ 31,764 $ 31,981 $ (217) (0.7) %

Gross margin 44.8 % 49.8 %

Our cost of revenue increased in both the three and six months ended June 30, 2023 compared to the same prior year periods.

These increases were primarily attributable to increases in manufacturing, employee-related and facility expenses aggregating $3.7 million and $9.4 million in the three and six months ended June 30, 2023, respectively.

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.

The increases in both current year periods were partially offset primarily by lower supply procurement and certain inventory-related expenses.

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 months ended March 31, 2023 and 2022 were as follows (in thousands, except percentages):

Our operating expenses for the three and six months ended June 30, 2023 and 2022 were as follows (in thousands, except percentages):

Increase (decrease) from prior year

2023 2022 $ %

Three months ended March 31,

Three months ended June 30,

Personnel $ 5,619 $ 3,382 $ 2,237 66.1 %

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$ 12,829 $ 10,510 $ 2,319 22.1 %

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.

Six months ended June 30,

Personnel $ 10,275 $ 6,424 $ 3,851 59.9 %

Marketing and promotion 2,812 1,452 1,360 93.7 %

General and administrative 9,385 11,793 (2,408) (20.4) %

Acquisition-related and other 615 754 (139) (18.4) %

Bad debt (5) 14 (19) (135.7 %)

$ 23,082 $ 20,437 $ 2,645 12.9 %

The increase in our personnel expenses in both the three and six months ended June 30, 2023 compared to the same prior year periods was primarily due to the hiring of additional staff to support higher levels of projected revenue from existing operations, the Kind Acquisition and, to a lesser extent, our other recent acquisitions.

Personnel costs increased to approximately 15% of revenue in the three and six months ended June 30, 2023, compared to approximately 10% of revenue in the three and six months ended June 30, 2022.

The increase in our marketing and promotion expenses in both the three month and six months ended June 30, 2023 compared to the same prior year periods was primarily attributable to our focused efforts to upgrade our marketing initiatives in order to expand branding and distribution of our licensed products.

The decrease in our general and administrative expenses in both the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 was primarily attributable to lower expenses in connection with our equity programs and professional fees, partially offset by higher facility, depreciation and amortization of property and equipment, and travel expenses.

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 $0.2 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.

Our acquisition-related and other expense in the three and six months ended June 30, 2023 primarily related to our acquisitions and professional fees related to obtaining the Credit Agreement (as described below).

Our acquisition-related and other expenses in the three and six months ended June 30, 2022 primarily related to the Kind Acquisition and the listing of our common stock on the Canadian Securities Exchange.

Interest and Other (Expense) Income, Net

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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 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.

Our net interest expense increased $2.4 million and $4.7 million in the three and six months ended June 30, 2023, respectively, compared to the same prior year periods, 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 nominal net other expense in the three months ended June 30, 2023 and $0.9 million of net other expense in the six months ended June 30, 2023.

The expense for the six months ended June 30, 2023 was primarily due to the write-off of assets in the first quarter of 2023 in connection with our decision to cancel our plans to expand into Nevada.

We reported net other expense of $0.7 million in the three months ended June 30, 2022, primarily comprised of losses from the change in the fair value of our investments.

We recorded $0.3 million of net other income in the six months ended June 30, 2022, comprised of $1.0 million of non-cash income from an investment, partially offset by a $0.7 million loss from the change in fair value of our investments.

Income Tax Provision

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

We recorded income tax provisions of $4.4 million and $5.4 million in the six months ended June 30, 2023 and 2022, respectively.

Liquidity and Capital Resources

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

We had cash and cash equivalents of $14.6 million and $9.7 million at June 30, 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.

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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.

Proceeds from the Credit Agreement were 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, was expected to be used to fund acquisitions.

Principal, Security, Interest and Prepayments

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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.

$30.0 million of loan principal was funded at the initial closing and we have the option, during the six-month period following the initial closing, to draw down an additional $5.0 million, which we did not elect to do.

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

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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.

At June 30, 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.

The Credit Agreement provided 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

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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 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.

Our operating activities used $3.2 million and provided $2.2 million of cash in the six months ended June 30, 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 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 $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.

Our investing activities used $13.4 million and $21.1 million of cash in the six months ended June 30, 2023 and 2022, respectively.

During the six months ended June 30, 2023, we used cash of $8.8 million for capital expenditures, $3.0 million as 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.

We also issued $0.9 million of notes receivable to a cannabis-licensed client.

During the six months ended June 30, 2022, we used $12.7 million of cash in the aggregate for purchase consideration in connection with the Kind Acquisition and the Green Growth Acquisition, $7.9 million for capital expenditures, $0.3 million for cannabis licenses and $0.3 million for advances toward future business acquisitions.

These payments were partially offset by $0.1 million of proceeds from notes receivable.

Cash Flows from Financing Activities

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.

Our financing activities provided $21.5 million of cash in the six months ended June 30, 2023 and used $2.9 million of cash in the six months ended June 30, 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.

Excluding the aforementioned repayment of the notes in connection with the Kind Acquisition, we made $1.2 million of aggregate principal payments on our outstanding mortgages and promissory notes, including the repayment in full in May 2023 of our mortgage with South Porte Bank.

We also made $0.6 million of payments toward the outstanding balance of the Credit Agreement, $0.2 million of principal payments of finance leases,

and $0.1 million of distribution payments.

During the six months ended June 30, 2022, we paid $2.0 million to redeem the outstanding minority interests in one of our majority-owned subsidiaries in June 2022, made $0.6 million of aggregate principal payments on our outstanding mortgages and notes payable, made $0.2 million of distribution payments and made $0.1 million of finance lease principal 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 March 31, 2023, and our ability to raise additional cash through financing activities.

The rate at which we consume cash is dependent on the cash needs of our future operations, including our contractual obligations at June 30, 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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In addition to the financial information reflected in this report, which is prepared in accordance with GAAP, we are providing a non-GAAP financial measurement of profitability – Adjusted EBITDA – as a supplement to the preceding discussion of our financial results.

Management defines Adjusted EBITDA as net income, determined in accordance with GAAP, excluding the following:

• interest income and interest expense;

• income tax provision;

Management defines Adjusted EBITDA as income from operations, determined in accordance with GAAP, excluding the following:

• depreciation and amortization of property and equipment;

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• stock-based compensation;

• acquisition-related and other;

• legal settlements;

• other income (expense), net;

• discontinued operations.

• acquisition-related and other.

Management believes that Adjusted EBITDA is a useful measure to assess our performance and liquidity, as it provides meaningful operating results by excluding the effects of expenses that are not reflective of our operating business performance.

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As there are no standardized methods of calculating non-GAAP measurements, our 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 three months ended March 31, 2023 and 2022 (in thousands):

Three months ended

2023 March 31,

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

The table below reconciles income from operations to Adjusted EBITDA for the three and six months ended June 30, 2023 and 2022 (in thousands):

Three months ended Six months ended

2023 June 30,

2022 June 30,

2023 June 30,

GAAP Income from operations $ 3,547 $ 4,495 $ 8,682 $ 11,544

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis