What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-09 · 117 added, 141 removed, 153 unchanged (63% of the section changed)

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We develop, operate, manage and optimize state-of-the-art, regulatory-compliant facilities for the cultivation, production and dispensing of medicinal and adult-use cannabis.

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

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.

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

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

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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").

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 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.

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

• 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.

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.

• 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, and in October 2023, we announced the opening of Thrive Dispensary in Casey.

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.

During 2024, we are continuing to focus on executing our strategic growth plan, with priority on activities that include the following:

• Completing the acquisition and consolidation of the client cannabis businesses we developed, managed and advised prior to becoming a seed to sale multi-state operator.

There is one remaining business that we continue to manage and intend to acquire - Delaware operator First State Compassion Center ("FSCC").

Delaware's current cannabis regulations prevent such an acquisition.

• Increasing revenue organically in states where we currently do business by developing additional assets and increasing our product distribution within those states.

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• Expanding our footprint into high-growth legal cannabis states through new license applications and/or acquisitions of existing cannabis businesses.

• Increasing product brand revenue by introducing new, innovative products that consumers want, expanding our award-winning brands to include new effects or to fill additional need-state opportunities, and by identifying qualified licensing partners that will expand our distribution into new markets.

In November 2023, we announced the closing of a $58.7 million secured credit facility with a United States chartered bank at a lower rate relative to both our previous outstanding debt with Chicago Atlantic Admin, LLC (“Chicago Atlantic”) and recent transactions announced by other cannabis companies.

This debt refinancing enabled us to pay off our term loan with Chicago Atlantic, pay off the mortgage on our New Bedford and Middleborough, Massachusetts facilities with Bank of New England, and reduce the principal outstanding on the note we issued to the sellers in connection with our acquisition of the operating assets of Ermont, Inc.

Our new credit facility has allowed us to unencumber our operating assets in Illinois, Ohio, and Delaware, as well as our branded products, providing additional levers for future loans at attractive rates if we choose to increase our borrowings.

Additionally, the credit facility bolsters our ability to continue to execute our strategic plan, particularly as it relates to growing the Company through mergers and acquisitions.

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 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.

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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.

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Business Combinations and Asset Purchases

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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.

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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.

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Results of Operations

Three and nine months ended September 30, 2023 and 2022

Three months ended March 31, 2024 and 2023

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.

• Product sales (retail and wholesale) - direct sales of cannabis and cannabis-infused products primarily by our retail dispensaries and wholesale operations in multiple states.

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

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Rental income is generally a fixed amount per month that escalates over the respective lease terms.

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

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.

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• 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.

• Licensing fees - revenue from the licensing of our branded products, including Betty's Eddies , Bubby's Baked , Vibations and Kalm Fusion , to wholesalers and 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, 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,

Our revenue for the three months ended March 31, 2024 and 2023 was comprised of the following (in thousands):

Three months ended March 31, 2024

Increase (decrease) from prior year

Product revenue:

Product revenue - retail $ 24,121 $ 23,593 $ 71,640 $ 68,121

Product revenue - wholesale 13,643 9,009 35,050 23,029

Product sales - retail

$ 22,346 $ 23,183 $ (837) (3.6) %

Product sales - wholesale

14,505 10,376 4,129 39.8 %

Total product revenue 36,851 33,559 3,292 9.8 %

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Total revenue $ 37,933 $ 34,380 $ 3,553 10.3 %

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.

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.

Our total revenue increased $3.6 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Our total product revenue increased $3.3 million, or 9.8%, in the three months ended March 31, 2024 compared to the same prior year period.

This increase was primarily attributable to higher wholesale revenue in all of our wholesale locations, particularly in Maryland, which accounted for approximately 70% of this increase.

Net lower retail revenue, particularly in Illinois, partially offset the increase in wholesale revenue.

Our retail operations in Massachusetts, Maryland and Ohio all reported higher retail revenue in the three months ended March 31, 2024 compared to the same prior year period.

The increase in other revenue in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily attributable to management fees from Allgreens.

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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, 2023 and 2022 were as follows (in thousands, except percentages):

Increase from prior year

Our cost of revenue, gross profit and gross margin for the three months ended March 31, 2024 and 2023 were as follows (in thousands, except percentages):

Three months ended March 31, Increase from prior year

2024 2023 $ %

Three months ended September 30,

Cost of revenue $ 21,461 $ 18,992 $ 2,469 13.0 %

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Gross margin 43.4 % 44.8 %

Nine months ended September 30,

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

Gross profit $ 48,602 $ 48,145 $ 457 0.9 %

Gross margin 44.3 % 49.0 %

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 cost of revenue increased in the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

This increase was primarily attributable to increases in materials and employee-related expenses aggregating $4.8 million.

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.

These increases were partially offset primarily by decreases in certain inventory-related and supply procurement 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 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 September 30,

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

Marketing and promotion 1,585 1,402 183 13.1 %

General and administrative 6,135 5,097 1,038 20.4 %

Acquisition-related and other 32 143 (111) (77.6) %

Bad debt (122) 40 (162) (405.0 %)

Our operating expenses for the three months ended March 31, 2024 and 2023 were as follows (in thousands, except percentages):

Three months ended March 31, Increase (decrease) from prior year

2024 2023 $ %

Nine months ended September 30,

Personnel $ 6,465 $ 4,656 $ 1,809 38.9 %

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$ 14,451 $ 10,253 $ 4,198 40.9 %

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.

The increase in our personnel expenses in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily due to the hiring of additional staff to support higher levels of projected revenue from existing operations and our recent acquisitions.

Personnel costs increased to approximately 17% of revenue in the three months ended March 31, 2024 compared to approximately 14% of revenue in the three months ended March 31, 2023.

The increase in our marketing and promotion expenses in the three months ended March 31, 2024 compared to the three months ended March 31, 2023 was primarily attributable to our continued focus on upgrading 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 March 31, 2024 compared to the three months ended March 31, 2023 was primarily attributable to higher facility-related expense, depreciation and amortization of fixed assets, and employee travel and related 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.

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

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 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.

Our acquisition-related and other expense in the three months ended March 31, 2024, primarily related to the acquisitions of MedLeaf and Allgreens, which were both consummated in April 2024.

Our acquisition-related and other expense in the three months ended March 31, 2023 primarily related to our acquisitions and professional fees incurred to obtain the CA Credit Agreement (as described below).

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Interest expense primarily relates to interest on mortgages and notes payable as well as the CREM Loan (as described below) in 2024 and the CA Term Loan (as described below) in 2023.

Interest income primarily relates to our notes receivable.

Our net interest expense decreased $0.8 million in the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to lower non-cash interest expense in the current year quarter.

Non-cash interest expense in the three months ended March 31, 2023 primarily related to the CA Term Loan.

We reported net other expense of approximately $20,000 and $0.9 million in the three months ended March 31, 2024 and 2023, respectively.

The expense in the three months ended March 31, 2024 related to the change in the fair value of our investments.

The expense in the three months ended March 31, 2023 was primarily due to the write-off of assets in connection with our decision to cancel our plans to expand into Nevada.

Income Tax Provision

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

We recorded income tax provisions of $1.7 million and $2.5 million in the three months ended March 31, 2024 and 2023, respectively.

Our income tax provisions are impacted by Section 280E of the Internal Revenue Code, which prohibits the deduction of certain ordinary business expenses.

Liquidity and Capital Resources

We had cash and cash equivalents of $13.3 million and $9.7 million at September 30, 2023 and December 31, 2022, respectively.

We had cash and cash equivalents of $15.2 million and $14.6 million at March 31, 2024 and December 31, 2023, 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 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.

CA 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 “CA Borrowers”), lenders from time-to-time party thereto (the “CA Lenders”), and Chicago Atlantic Admin, LLC (“Chicago Atlantic”), as administrative agent for the Lenders (the "CA Credit Agreement").

Proceeds from the CA 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

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 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.

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.

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 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 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.

The CA Credit Agreement provided for $35.0 million in principal borrowings at our option in the aggregate and further provided the CA 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 CA Lenders elect to fund such incremental term loan.

$30.0 million of loan principal was funded at the initial closing (the "CA Term Loan") 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 required scheduled amortization payments of 1.0% of the principal amount outstanding under the CA Credit Agreement per month commencing in May 2023, and the remaining principal balance was due in full on January 24, 2026, subject to extension to January 24, 2028 under certain circumstances.

The CA Credit Agreement provided the CA 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 CA Credit Agreement were secured by substantially all of the assets of the CA Borrowers, excluding specified parcels of real estate and other customary exclusions.

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The CA Credit Agreement provided for a floating annual interest rate equal to the prime rate then in effect plus 5.75%, which rate could 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 could 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.

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

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

We were in compliance with the CA Credit Agreement covenants at all times while the Term Loan was outstanding.

The CA 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 CA 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.

On November 16, 2023 (the "Payoff Date"), we repaid and retired the CA Term Loan (the "Term Loan Payoff") using proceeds from a new $58.7 million loan entered into on the same day (described below).

The Term Loan Payoff amount totaled $32.7 million, comprised of $28.5 million for the outstanding principal, $3.7 million for the make-whole payment, $0.2 million for accrued unpaid interest and $0.3 million for transaction-related fees.

We recognized a loss of $10.2 million in connection with the Term Loan Payoff.

On November 16, 2023, Mari Holdings MD LLC, Hartwell Realty Holdings LLC, Kind Therapeutics USA, LLC, ARL Healthcare Inc., and MariMed Advisors, Inc., each a wholly-owned direct or indirect subsidiary of the Company (collectively, the "CREM Borrowers") entered into a Loan Agreement (the "CREM Loan Agreement"), by and among the CREM Borrowers, and Needham Bank, a Massachusetts co-operative bank (the "CREM Lender") pursuant to which the CREM Lender loaned to the CREM Borrowers an aggregate principal amount of $58.7 million (the "CREM Loan Transaction").

The Company has fully guaranteed the obligations of the CREM Borrowers under the CREM Loan Transaction and pledged to the CREM Lender its equity ownership in each CREM Borrower.

The CREM Lender has a first priority security interest in all of the CREM Borrowers' operating assets in Maryland and Massachusetts and first priority mortgages on the CREM Borrowers' properties owned in Maryland and Massachusetts.

The CREM Loan Transaction matures in ten years and has an interest rate for the initial five years of 8.43% per annum.

The interest rate will reset after five years to the FHLB Rate (the Classic Advance Rate for Fixed Rate advances for a period of five years for an amount greater than or equal to the loan amount, as such rate is defined and published by the Federal Home Loan Bank of Boston), plus 3.50%.

We will make interest-only payments for the first twelve months of the term of the loan, with payments thereafter based upon a twenty-year amortization schedule.

The CREM Lender initially released $52.8 million to the CREM Borrowers (the "Initial CREM Distribution").

The remaining proceeds of $5.9 million will be held in escrow to complete the expansion of our Hagerstown, Maryland cultivation facility (the "Hagerstown Facility").

Any unused proceeds will be released to us after completion of the Hagerstown Facility expansion.

We used $46.8 million of the Initial CREM Distribution to fully repay certain of our outstanding debt.

These payments were comprised of $32.7 million to repay the Term Loan, $11.9 million to repay the mortgage with Bank of New England for our New Bedford, MA and Middleborough, MA properties (the "BNE Mortgage"), and $2.2 million to reduce the outstanding balance of the note we issued in connection with the Ermont Acquisition.

Concurrent with the repayment of the BNE Mortgage, we refinanced these properties through the CREM Loan and accordingly, effective November 16, 2023, the mortgage on these properties is held by Needham Bank, which mortgage matures in 2033 and which outstanding amount is included as a component of the CREM Loan amount in our consolidated balance sheet at December 31, 2023.

During the three months ended March 31, 2024, we received $1.0 million of the amount previously held back by the CREM Lender.

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The CREM Loan 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 CREM Loan Agreement also includes customary negative covenants limiting the CREM Borrowers' (but not the Company's) ability to incur additional indebtedness and grant liens that are otherwise not permitted, among others.

The CREM Loan Agreement also requires the CREM Borrowers to meet certain periodic financial tests.

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 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.

Our operating activities provided $3.2 million and used $4.5 million of cash in the three months ended March 31, 2024 and 2023, 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 arising from expanding our sales activities, facilities and geographic footprint, both in the states where we currently operate and to expand into other states.

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

Cash Flows from Investing Activities

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 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.

Our investing activities used $4.3 million and $6.9 million of cash in the three months ended March 31, 2024 and 2023, respectively.

During the three months ended March 31, 2024, we used $3.4 million of cash for capital expenditures, $0.5 million for advances toward future business acquisitions, $0.3 million for purchases of cannabis licenses and $0.1 million for the purchase of certain investments.

During the three months ended March 31, 2023 we used $3.1 million for capital expenditures, $3.0 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.

Cash Flows from Financing Activities

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.

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 Kind Acquisition in April 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 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.

Our financing activities provided $1.6 million of cash in the three months ended March 31, 2024 and $23.3 million of cash in the three months ended March 31, 2023.

During the three months ended March 31, 2024, we received $1.0 million of additional proceeds from the CREM Loan and $1.2 million of proceeds from the refinancing of our retail facility in Mt.

Vernon, Illinois.

We made $0.5 million of aggregate principal payments on our outstanding mortgages, promissory notes and finance leases and approximately $45,000 of distribution payments.

During the three months ended March 31, 2023, we received proceeds of $29.1 million from the CA Credit Agreement, of which we used $5.5 million to repay in full the notes issued in connection with our 2022 acquisition of Kind Therapeutics USA, made $0.3 million of aggregate principal payments on our outstanding mortgages and finance leases and approximately $34,000 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, 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 March 31, 2024, 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.

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

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Adjusted EBITDA is used by many investors and analysts themselves, along with other metrics, to compare financial results across accounting periods and to those of peer companies.

As there are no standardized methods of calculating non-GAAP measurements, 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.

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 they may not be directly comparable to similarly titled measures used by others.

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 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,

The table below reconciles income from operations to Adjusted EBITDA for the three months ended March 31, 2024 and 2023 (in thousands):

Three months ended

2024 March 31,

GAAP Income from operations $ 2,021 $ 5,135

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We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue, expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

In the opinion of management, inflation has not had a material effect on our financial condition or results of operations.

In the opinion of management, inflation has impacted the Company through increased costs of ingredients, nutrients and packaging.

We recently negotiated with certain of our suppliers to reduce our costs for future purchases of ingredients, nutrients and packaging, all of which have increased significantly as a result of current economic conditions.

In the opinion of management, our financial condition and results of its operations are not materially impacted by seasonal sales.

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Recent Accounting Pronouncements

We have reviewed all recently issued, but not yet effective, accounting pronouncements, and we do not believe the future adoption of any such pronouncements will have a material impact on our financial condition or results of operations.

Quantitative and Qualitative Disclosure About Market Risk

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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