What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-08 compared with 2024-05-09 · 100 added, 61 removed, 209 unchanged (44% of the section changed)

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

We completed two acquisitions during the three months ended June 30, 2024 that we accounted for as asset purchases.

On April 9, 2024, we acquired 100% of the membership interests of Allgreens Dispensary, LLC ("Allgreens"), which held a conditional adult-use cannabis dispensary license in Illinois.

On April 5, 2024, we acquired 100% of the membership interests of Our Community Wellness & Compassionate Care Center, Inc.

("MedLeaf"), which held a retail dispensary license in Maryland.

The MedLeaf dispensary has been closed since July 1, 2023.

We will commence retail sales upon receiving regulatory approvals, which we expect will occur later in 2024.

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

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• 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").

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.

• 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 customer needs, 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.

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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

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

Business Acquisitions

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

Whether an acquisition is classified as a business combination or asset acquisition can have a significant impact on how we record the transaction.

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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 months ended March 31, 2024 and 2023

Three and six months ended June 30, 2024 and 2023

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, 2024 and 2023 was comprised of the following (in thousands):

Three months ended March 31, 2024

Our revenue for the three and six months ended June 30, 2024 and 2023 was comprised of the following (in thousands):

Increase (decrease) from prior year

Three months ended June 30,

Product revenue:

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Total revenue $ 40,438 $ 36,519 $ 3,919 10.7 %

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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Six months ended June 30,

Product revenue:

Product sales - retail

$ 45,969 $ 47,519 $ (1,550) (3.3) %

Product sales - wholesale

30,373 21,407 8,966 41.9 %

Total product revenue 76,342 68,926 7,416 10.8 %

Other revenue:

Real estate rentals 657 939 (282) (30.0) %

Supply procurement 697 804 (107) (13.3) %

Management fees 598 54 544 1007.4 %

Licensing fees 77 176 (99) (56.3) %

Total other revenue 2,029 1,973 56 2.8 %

Total revenue $ 78,371 $ 70,899 $ 7,472 10.5 %

Our total revenue increased $3.9 million in the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Our total product revenue increased $4.1 million, or 11.7%, in the three months ended June 30, 2024 compared to the same prior year period.

This increase was primarily attributable to higher revenue in each of our wholesale locations, particularly in Maryland.

Our retail operations in Maryland, Massachusetts and Ohio all reported higher retail revenue in the three months ended June 30, 2024 compared to the same prior year period;

however, these increases were partially offset by lower retail revenue in most of our Illinois dispensaries.

The decrease in other revenue in the three months ended June 30, 2024 compared to the three months ended June 30, 2023 was primarily attributable to lower real estate rentals and licensing fees, partially offset by management fees from Allgreens.

Our total revenue increased $7.5 million in the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

The $7.4 million, or 10.8%, increase in our total product revenue was primarily attributable to higher revenue in each of our wholesale locations, particularly in Maryland.

Our retail operations in Illinois reported lower revenue in the aggregate;

however, this decrease was partially offset by higher net sales in our Massachusetts dispensaries and in Maryland.

Our other revenue was relatively unchanged in the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

The increase in management fees principally related to Allgreens prior to the Allgreens Acquisition Date.

This increase was offset by reductions to our remaining other revenue sources.

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, 2024 and 2023 were as follows (in thousands, except percentages):

Three months ended March 31, Increase from prior year

Our cost of revenue, gross profit and gross margin for the three and six months ended June 30, 2024 and 2023 were as follows (in thousands, except percentages):

Increase from prior year

2024 2023 $ %

Three months ended June 30,

Cost of revenue $ 23,529 $ 20,143 $ 3,386 16.8 %

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Gross margin 41.8 % 44.8 %

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.

Six months ended June 30,

Cost of revenue $ 44,990 $ 39,135 $ 5,855 15.0 %

Gross profit $ 33,381 $ 31,764 $ 1,617 5.1 %

Gross margin 42.6 % 44.8 %

Our cost of revenue increased in both the three- and six-month periods ended June 30, 2024 compared to the same periods in the prior year.

These increases were primarily attributable to increases in materials and employee-related expenses aggregating approximately $6 million and $11 million, respectively, in the three and six months ended June 30, 2024.

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

These increases were partially offset primarily by decreases in certain inventory-related and supply procurement expenses.

These increases were partially offset primarily by decreases in 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, 2024 and 2023 were as follows (in thousands, except percentages):

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

Our operating expenses for the three and six months ended June 30, 2024 and 2023 were as follows (in thousands, except percentages):

Increase (decrease) from prior year

2024 2023 $ %

Three months ended June 30,

Personnel $ 6,958 $ 5,619 $ 1,339 23.8 %

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$ 15,953 $ 12,829 $ 3,124 24.4 %

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.

Six months ended June 30,

Personnel $ 13,423 $ 10,275 $ 3,148 30.6 %

Marketing and promotion 3,618 2,812 806 28.7 %

General and administrative 12,944 9,385 3,559 37.9 %

Acquisition-related and other 434 615 (181) (29.4) %

Bad debt (15) (5) (10) 200.0 %

$ 30,404 $ 23,082 $ 7,322 31.7 %

The increase in our personnel expenses in both the three- and six-month periods ended June 30, 2024 compared to the three- and six-month periods ended June 30, 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 both the three- and six-month periods ended June 30, 2024, compared to approximately 15% of revenue in both the three- and six-month periods ended June 30, 2023.

The increase in our marketing and promotion expenses in both the three- and six-month periods ended June 30, 2024, compared to the three- and six-month periods ended June 30, 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 June 30, 2024 compared to the three months ended June 30, 2023 was primarily attributable to higher facility and related expenses, depreciation and amortization of fixed assets, and professional fees (i.e., legal, accounting and consulting).

The increase in our general and administrative expenses in the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was primarily attributable to higher facility and related expenses, depreciation and amortization of fixed assets, and professional fees.

These increases were primarily attributable to the addition of new facilities and related fixed assets, coupled with higher professional fees, primarily legal fees in connection with our acquisitive and financing activities.

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 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.

Our acquisition-related and other expense in both the three and six months ended June 30, 2024 primarily related to the acquisitions of MedLeaf and Allgreens, which were both consummated in April 2024, and non-cash expense for warrants to purchase our common stock issued to an entity in consideration for introductory and other services rendered in connection with certain funding and acquisitive transactions.

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

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

Our net interest expense decreased $0.8 million in the three months ended June 30, 2024 compared to the three months ended June 30, 2023, and $1.6 million in the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

These decreases were primarily due to lower non-cash interest expense in the current year periods, coupled with lower interest rates on our CREM Loan compared to our previous financing facility.

Other Expense, Net

We reported net other expense of approximately $30,000 and $50,000 in the three and six months ended June 30, 2024, respectively, and approximately $10,000 and $910,000 in the three and six months ended June 30, 2023, respectively.

The expense in the six months ended June 30, 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 $1.7 million and $2.5 million in the three months ended March 31, 2024 and 2023, respectively.

We recorded income tax provisions of $2.6 million and $4.4 million in the six months ended June 30, 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 $15.2 million and $14.6 million at March 31, 2024 and December 31, 2023, respectively.

We had cash and cash equivalents of $10.2 million and $14.6 million at June 30, 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.

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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 “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.

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.

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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.

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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).

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 date (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.

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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 CREM Loan Transaction is for a term of 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").

The CREM Lender initially released $52.8 million to the CREM Borrowers (the "Initial CREM Distribution"), with the remaining proceeds of $5.9 million placed into 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.

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

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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During the six months ended June 30, 2024, we received $2.9 million of the amount previously held back by the CREM Lender.

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.

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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 $3.2 million and used $4.5 million of cash in the three months ended March 31, 2024 and 2023, respectively.

Our operating activities provided $6.4 million and used $3.2 million of cash in the six months ended June 30, 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.

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Cash Flows from Investing Activities

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.

Our investing activities used $13.8 million and $13.4 million of cash in the six months ended June 30, 2024 and 2023, respectively.

During the six months ended June 30, 2024, we used $8.3 million of cash for capital expenditures, $4.3 million for purchase consideration in connection with the MedLeaf Acquisition and Allgreens Acquisition, $0.6 million for purchases of cannabis licenses and $0.5 million for advances toward future business acquisitions.

During the six months ended June 30, 2023 we used $8.8 million of cash 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.

Cash Flows from Financing Activities

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.

Our financing activities provided $3.0 million of cash in the six months ended June 30, 2024 and $21.5 million of cash in the six months ended June 30, 2023.

During the six months ended June 30, 2024, we received $2.9 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 $1.1 million of aggregate principal payments on our outstanding mortgages, promissory notes and finance leases, and approximately $83,000 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.

During the six months ended June 30, 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 (the "Kind Acquisition") and made approximately $81,000 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 CA Credit Agreement and $0.2 million of principal payments of finance leases.

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, 2024, 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, 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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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 months ended March 31, 2024 and 2023 (in thousands):

Three months ended

2024 March 31,

The table below reconciles income from operations to Adjusted EBITDA for the three and six months ended June 30, 2024 and 2023 (in thousands):

Three months ended Six months ended

2024 June 30,

2023 June 30,

2024 June 30,

GAAP Income from operations $ 956 $ 3,547 $ 2,977 $ 8,682

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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

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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