What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-04 · 78 added, 57 removed, 216 unchanged (38% of the section changed)

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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:

During 2023, we have been 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.

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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.

In response to the state's request to open as soon as possible, we are currently operating Thrive Dispensary from a temporary mobile facility while construction on a permanent building is completed at the same site.

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

• In November 2023, we were granted a certificate of occupancy for our processing kitchen in Mt.

Vernon, Illinois, and we have begun manufacturing our branded products for sale through retail and wholesale channels.

We expect our products to available for sale in time for the holidays.

Additionally, we continue construction of the cultivation facility in Mt Vernon, and expect this facility to be completed in early 2024.

• 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.

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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 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.

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.

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.

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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Determining the fair value of stock option awards at the grant date requires judgment regarding certain valuation assumptions, including the volatility of our stock price, expected term of the stock option, risk-free interest rate and expected dividends.

Changes in such assumptions and estimates could result in different fair values and could therefore impact our earnings.

Changes in such assumptions and estimates could

result in different fair values and could therefore impact our earnings.

Such changes, however, would not impact our cash flows.

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

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.

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Results of Operations

Three and six months ended June 30, 2023 and 2022

Three and nine months ended September 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 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,

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

Three months ended Nine months ended

September 30,

2023 September 30,

2022 September 30,

2023 September 30,

Product revenue:

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Total revenue $ 38,800 $ 33,912 $ 109,699 $ 98,180

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.

Our total revenue increased $4.9 million in the three months ended September 30, 2023 compared to the three months ended September 30, 2022, and $11.5 million in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

Our total product revenue increased $5.2 million, or 15.8%, in the three months ended September 30, 2023 and $15.5 million, or 17.0%, in the nine months ended September 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.

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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 six months ended June 30, 2023 and 2022 were as follows (in thousands, except percentages):

Increase (decrease) from prior year

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

Increase from prior year

2023 2022 $ %

Three months ended June 30,

Three months ended September 30,

Cost of revenue $ 21,962 $ 17,748 $ 4,214 23.7 %

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Gross margin 43.4 % 47.7 %

Six months ended June 30,

Nine months ended September 30,

Cost of revenue $ 61,097 $ 50,035 $ 11,062 22.1 %

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Gross margin 44.3 % 49.0 %

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.

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

These increases were primarily attributable to increases materials and employee-related expenses aggregating $4.4 million and $12.8 million in the three and nine months ended September 30, 2023, respectively.

Our higher personnel costs were primarily due to our increased headcount in connection with our recent acquisitions and expanded footprint.

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

The increase in the three months ended September 30, 2023 was also partially offset by lower facility-related expense.

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 six months ended June 30, 2023 and 2022 were as follows (in thousands, except percentages):

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

Increase (decrease) from prior year

2023 2022 $ %

Three months ended June 30,

Three months ended September 30,

Personnel $ 5,916 $ 3,746 $ 2,170 57.9 %

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$ 13,546 $ 10,428 $ 3,118 29.9 %

Six months ended June 30,

Nine months ended September 30,

Personnel $ 16,191 $ 10,170 $ 6,021 59.2 %

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$ 36,628 $ 30,865 $ 5,763 18.7 %

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.

The increase in our personnel expenses in both the three and nine months ended September 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 nine months ended September 30, 2023, compared to approximately 11% and 10% of revenue in the three and nine months ended September 30, 2022, respectively.

The increase in our marketing and promotion expenses in both the three and nine months ended September 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 increase in our general and administrative expenses in the three months ended September 30, 2023 compared to the three months ended September 30, 2022 was primarily attributable to facility-related expense, depreciation and amortization of fixed assets, and amortization of acquired intangible assets, partially offset by lower expense related to our employee equity program.

The decrease in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 was primarily attributable to lower expenses in connection with our equity programs and professional fees, partially offset by higher facility-related expense, depreciation and amortization of property and equipment, and insurance.

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.

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.

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

Our acquisition-related and other expenses in the three and nine months ended September 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 $2.4 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.

Our net interest expense increased $2.2 million and $6.8 million in the three and nine months ended September 30, 2023, respectively, compared to the same prior year periods, primarily due to interest for the Credit Agreement (as described below) and expense related to the fair value adjustment to notes payable in connection with our early repayment of the notes payable for the Kind Acquisition.

We reported net other expense of $0.6 million and $1.6 million in the three and nine months ended September 30, 2023.

The expense for the three months ended September 30, 2023 primarily relates to a $0.7 million term loan payment that we initiated to an account provided in a forged email we received.

We were initially advised by the recipient's bank (Chase Bank) that we had identified the problem before the payment was delivered to the account identified by the email, and that the funds were being held by the bank pending its completion of an internal investigation.

That investigation is still ongoing, and the bank has since indicated that the funds were delivered to the fraudulent recipient's account.

We are awaiting receipt of a formal response from the bank with the results of its investigation and continue to pursue all channels through our bank to recover these funds.

In addition, we initiated, and are pursuing, a claim under our cybersecurity insurance coverage to recover this amount.

We reduced our cash balance and included this amount as a component of Other (expense), net, in our condensed consolidated financial statements as of and for the three and nine months ended September 30, 2023.

If these funds are recovered, either as a result of the bank returning them or recovery under our insurance claim, we will reverse the expense.

We have implemented additional safeguards to protect ourselves from future fraudulent activity;

please see Part II, Item 1A.

Risk Factors for further information.

In addition to the aforementioned payment, the amount for the nine months ended September 30, 2023 also includes 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 $0.3 million in the three months ended September 30, 2022, primarily comprised of losses from the change in the fair value of our investments.

We recorded nominal net other income in the nine months ended September 30, 2022, 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.

Income Tax Provision

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

We recorded income tax provisions of $8.9 million and $7.9 million in the nine months ended September 30, 2023 and 2022, respectively.

Liquidity and Capital Resources

We had cash and cash equivalents of $14.6 million and $9.7 million at June 30, 2023 and December 31, 2022, respectively.

We had cash and cash equivalents of $13.3 million and $9.7 million at September 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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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 the six-month period following the initial closing, to draw down an additional $5.0 million, which we did not elect to do.

$30.0 million of loan principal was funded at the initial closing and we had 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.

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

At June 30, 2023, we were in compliance with the covenants of the Credit Agreement.

At September 30, 2023, we were in compliance with the covenants of the Credit Agreement.

Warrant Issuance

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.

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

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 $3.2 million and provided $2.2 million of cash in the six months ended June 30, 2023 and 2022, respectively.

Our operating activities provided $4.7 million and $5.6 million of cash in the nine months ended September 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.

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Cash Flows from Investing Activities

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.

Our investing activities used $19.6 million and $23.7 million of cash in the nine months ended September 30, 2023 and 2022, respectively.

During the nine months ended September 30, 2023, we used $14.7 million of cash for capital expenditures, $3.0 million as part of the purchase consideration for the Ermont Acquisition, $0.6 million for purchases of cannabis licenses, $0.3 million for advances toward future business acquisitions, and $0.2 million for the purchases of certain investments.

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.

During the nine months

ended September 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, $10.0 million for capital expenditures, $0.8 million for advances toward future business acquisitions and $0.3 million for purchases of cannabis licenses.

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

Cash Flows from Financing Activities

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.

Our financing activities provided $18.5 million of cash in the nine months ended September 30, 2023 and used $0.4 million of cash in the nine months ended September 30, 2022.

Excluding the aforementioned repayment of the notes in connection with the Kind Acquisition, we made $1.3 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.

We also paid $1.8 million for third-party debt issuance costs in connection with the Credit Agreement, and made $1.5 million of payments toward the outstanding balance of the Credit Agreement, $0.5 million of principal payments of finance leases, and $0.1 million of distribution payments.

During the nine months ended September 30, 2022, we paid $2.0 million 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 made $0.2 million of finance lease principal payments.

These amounts were partially offset by $3.0 million of proceeds from a mortgage.

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 June 30, 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 September 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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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,

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

Three months ended Nine months ended

September 30,

2023 September 30,

2022 September 30,

2023 September 30,

GAAP Income from operations $ 3,292 $ 5,736 $ 11,974 $ 17,280

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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