What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-11 compared with 2022-05-11 · 82 added, 45 removed, 150 unchanged (46% of the section changed)

33 unchanged sentences

The duration and impact of the COVID-19 pandemic, as well as the effectiveness of government and central bank responses, remains unclear at this time.

During 2021, the Company’s revenue, gross profit and operating income were not negatively impacted by COVID-19 and the Company generally maintained the consistency of its operations.

During 2021 and thus far in 2022, the Company’s revenue, gross profit and operating income were not negatively impacted by COVID-19 and the Company generally maintained the consistency of its operations.

However, the uncertain nature of the spread of COVID-19 may impact its business operations for reasons including the potential quarantine of Goodness Growth employees or those of its supply chain partners.

Three months ended March 31, 2022, Compared to Three months ended March 31, 2021

Three months ended June 30, 2022, Compared to Three months ended June 30, 2021

We derived our revenue from cultivating, processing, and distributing cannabis products through our eighteen dispensaries in four states and our wholesale sales to third parties in four states.

For the three months ended March 31, 2022, 79% of our revenue was generated from retail dispensaries and 21% from wholesale business.

For the three months ended March 31, 2021, 79% of our revenue was generated from retail business and 21% from wholesale business.

For the three months ended March 31, 2022, Minnesota operations contributed approximately 45% of revenues, New York contributed 22%, Arizona contributed 6%, New Mexico contributed 6%, and Maryland contributed 21%.

For the three months ended March 31, 2021, Minnesota operations contributed approximately 40% of revenues, New York contributed 24%, Arizona contributed 26%, New Mexico contributed 5%, and Maryland contributed 5%.

Revenue for the three-months ended March 31, 2022 was $15,638,572, an increase of $2,448,683 or 19% compared to revenue of $13,189,889 for the three-months ended March 31, 2021.

The increase is primarily attributable to increased revenue contributions from the retail businesses in Minnesota and Maryland of $1.4 million and $1.9 million respectively, partially offset by the lack of first quarter 2022 retail revenues in Arizona, which was divested in the fourth quarter of 2021.

Key revenue drivers are the opening of the Maryland dispensaries in 2021, and increased patient demand in Minnesota, which is partially the result of the addition of cannabis flower to the Minnesota medical program in March of 2022.

Retail revenue for the three months ended March 31, 2022 was $12,412,223 an increase of $2,038,593 or 20% compared to retail revenue of $10,373,630 for the three months ended March 31, 2021 primarily due to revenue contributions from Minnesota and Maryland.

Wholesale revenue for the three months ended March 31, 2022 was $3,226,349, an increase of $410,090 compared to wholesale revenue of $2,816,259 for the three months ended March 31, 2021.

The increase in revenue contributions was

primarily due to increased wholesale demand in Minnesota and Maryland, partially offset by declining revenues in Arizona.

For the three months ended June 30, 2022, 81% of our revenue was generated from retail dispensaries and 19% from wholesale business.

For the three months ended June 30, 2021, 79% of our revenue was generated from retail business and 21% from wholesale business.

For the three months ended June 30, 2022, Minnesota operations contributed approximately 48% of revenues, New York contributed 18%, Arizona contributed 6%, New Mexico contributed 11%, and Maryland contributed 17%.

For the three months ended June 30, 2021, Minnesota operations contributed approximately 38% of revenues, New York contributed 31%, Arizona contributed 14%, New Mexico contributed 5%, and Maryland contributed 12%.

Revenue for the three-months ended June 30, 2022 was $21,090,148, an increase of $6,859,248 or 48% compared to revenue of $14,230,900 for the three-months ended June 30, 2021.

The increase is primarily attributable to increased revenue contributions from the retail businesses in Minnesota and New Mexico of $4.6 million and $1.7 million respectively, partially offset by the lack of second quarter 2022 retail revenues in Arizona, which was divested in the fourth quarter of 2021.

Key revenue drivers are the increased patient demand in Minnesota driven by the addition of cannabis flower to the Minnesota medical program in March of 2022, and the commencement of recreational marijuana sales in New Mexico on April 1, 2022.

Retail revenue for the three months ended June 30, 2022 was $17,041,492 an increase of $5,739,995 or 51% compared to retail revenue of $11,301,497 for the three months ended June 30, 2021 primarily due to revenue contributions from Minnesota and New Mexico.

Wholesale revenue for the three months ended June 30, 2022 was $4,048,656, an increase of $1,119,253 compared to wholesale revenue of $2,929,403 for the three months ended June 30, 2021.

The increase in revenue contributions was primarily due to increased wholesale demand in Maryland, and the sale of our remaining Arizona inventory.

Three Months Ended

1 unchanged sentence

Total Revenue

AZ Retail and OH Revenue

Total Revenue excluding AZ Retail and OH

Total Revenue excluding AZ

Not Meaningful

Cost of Goods Sold and Gross Profit

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Cost of goods sold are determined from costs related to the cultivation and processing of cannabis and cannabis-derived products as well as the cost of finished goods inventory purchased from third parties.

Cost of goods sold for the three months ended March 31, 2022 was $13,149,894, an increase of $5,575,846 compared to the three months ended March 31, 2021 of $7,574,048, driven by higher throughput and sales, as well as an increase in inventory valuation adjustments of $3,398,917.

Gross profit for the three months ended March 31, 2022 was $2,488,678, representing a gross margin of 16%.

This is compared to gross profit for the three months ended March 31, 2021 of $5,615,841 or a 43% gross margin.

The decrease in margin was driven by an increase in inventory valuation adjustments of $3,398,917 compared to the three months ended March 31, 2021.

Excluding inventory valuation adjustments, margins were relatively flat.

These inventory valuation adjustments were driven by substantial write downs of Arizona inventory to net realizable value.

Cost of goods sold for the three months ended June 30, 2022 was $10,723,122, an increase of $3,405,111 compared to the three months ended June 30, 2021 of $7,318,011, driven by higher production volume and sales.

Gross profit for the three months ended June 30, 2022 was $10,367,026, representing a gross margin of 49%.

This is compared to gross profit for the three months ended June 30, 2021 of $6,912,889 or a 49% gross margin.

The increase in gross profit was driven by higher sales, while maintaining margins.

Our current production capacity has not been fully realized and we expect future gross profits to increase with revenue growth reflective of higher demand, increased product output and new product development.

8 unchanged sentences

We expect general and administrative expenses as a percentage of sales to decrease as we realize revenue growth organically and through positive regulatory developments in our core markets.

Total expenses for the three months ended March 31, 2022 were $10,248,838 a decrease of $211,776 compared to total expenses of $10,460,614 for the three months ended March 31, 2021.

The decrease in total expenses was attributable to a decrease in stock-based compensation expenses of approximately $1.4 million partially offset by an increase general and administrative expenses of $1.2 million which was driven by an increase in professional fees related to the merger and salaries.

Operating Loss before Income Taxes

Operating loss before other income (expense) and provision for income taxes for the three months ended March 31, 2022 was $(7,760,160), an increase of $2,915,387 compared to $(4,844,773) for the three months ended March 31, 2021.

Total expenses for the three months ended June 30, 2022 were $10,058,841 a decrease of $101,610 compared to total expenses of $10,160,451 for the three months ended June 30, 2021.

The decrease in total expenses was attributable to a decrease in stock-based compensation expenses of $310,072.

Operating Income (Loss) before Income Taxes

Operating income (loss) before other income (expense) and provision for income taxes for the three months ended June 30, 2022 was $308,185 an increase of $3,555,747 compared to an operating loss of ($3,247,562) for the three months ended June 30, 2021.

Total Other Income (Expense)

Total other expense for the three months ended March 31, 2022 was $(8,546,622), a change of $8,014,251 compared to other expense of $(532,371) for the three months ended March 31, 2021.

This change is primarily attributable to the loss on impairment of long-lived assets of $5,313,176 and increased interest expense driven by the Credit Facility.

Total other expense for the three months ended June 30, 2022 was $(5,446,261), a change of $2,591,848 compared to other expense of $(2,854,413) for the three months ended June 30, 2021.

This change is primarily attributable to increased interest expense driven by the Credit Facility.

Provision for Income Taxes

Income tax expense is recognized based on the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end.

For the three months ended March 31, 2022, tax recoveries totaled $1,740,000 compared to a tax expense of $1,500,000 for the three months ended March 31, 2021.

The decrease in tax expense is primarily attributable to the increase in inventory valuation adjustments, which drove lower margins compared to the prior year quarter.

For the three months ended June 30, 2022, tax expense totaled $1,045,000 compared to a tax expense of $910,000 for the three months ended June 30, 2021.

The increase in tax expense is primarily attributable to increased gross profit partially offset the recognition of deferred tax assets related to property, plant, and equipment impairments.

Six months ended June 30, 2022 Compared to Six months ended June 30, 2021

We derived our revenue from cultivating, processing, and distributing cannabis products through our eighteen dispensaries in four states and our wholesale sales to third parties in five states.

For the six months ended June 30, 2022, 80% of the revenue was generated from retail business and 20% from wholesale business.

For the six months ended June 30, 2021, 79% of the revenue was generated from retail dispensaries and 21% from wholesale business.

For the six months ended June 30, 2022, Minnesota operations contributed approximately 47% of revenues, New York contributed 20%, Arizona contributed 6%, New Mexico contributed 9%, and Maryland contributed 18%.

For the six months ended June 30, 2021, Minnesota operations contributed approximately 39% of revenues, New York contributed 27%, Arizona contributed 21%, New Mexico contributed 5%, and Maryland contributed 8%.

Revenue for the six months ended June 30, 2022 was $36,728,720, an increase of $9,307,931 or 34% compared to revenue of $27,420,789 for the six months ended June 30, 2021.

The increase is primarily attributable to increased revenue contributions from the retail businesses in Minnesota, New Mexico, and Maryland, partially offset by the lack of Arizona retail revenues, which was divested in the fourth quarter of 2021.

Key revenue drivers are the acquisition of the Charm City dispensary in Maryland in the fourth quarter of 2021, increased patient demand in Minnesota, which is the result of the addition of cannabis flower to the Minnesota medical program in March of 2022, and the and the commencement of recreational marijuana sales in New Mexico on April 1, 2022.

Retail revenue for the six months ended June 30, 2022 was $29,453,715, an increase of $7,769,098 or 36% compared to retail revenue of $21,684,617 for the six months ended June 30, 2021 primarily due to revenue contributions from Minnesota, New Mexico, and Maryland, partially offset by the lack of Arizona retail revenues.

Wholesale revenue for the six months ended June 30, 2022 was $7,275,005, an increase of $1,538,833 compared to wholesale revenue of $5,736,172 for the six months ended June 30, 2021.

The increase in revenue contributions was primarily due to increased wholesale demand in Minnesota and Maryland, partially offset by declining revenues in Arizona.

Six Months Ended

Total Wholesale

Total Revenue

AZ and OH Revenue

Total Revenue excluding AZ and OH

Not Meaningful

Cost of Goods Sold and Gross Profit

Cost of goods sold for the six months ended June 30, 2022 was $23,873,016, an increase of $8,980,957 compared to the six months ended June 30, 2021 of $14,892,059, driven by higher production volume and sales.

Gross profit for the six months ended June 30, 2022 was $12,855,704, representing a gross margin of 35%.

This is compared to gross profit for the six months ended June 30, 2021 of $12,528,730 or a 46% gross margin.

The decrease in margin was driven by an increase in inventory valuation adjustments of $3,413,788 compared to the six months ended June 30, 2021.

Excluding inventory valuation adjustments, margins were relatively flat.

These inventory valuation adjustments were driven by substantial write downs of Arizona inventory to net realizable value.

However, we expect gradual price compression as markets mature that could place downward pressure on our retail and wholesale gross margins.

Total Expenses

Total expenses for the six months ended June 30, 2022 were $20,307,678, a decrease of $313,387 compared to total expenses of $20,621,065 for the six months ended June 30, 2021.

The decrease in total expenses was attributable to a decrease in stock-based compensation expenses of approximately $1.7 million partially offset by increase general and administrative expenses of $1.6 million which was driven by an increase in professional fees related to the merger and salaries.

Operating Loss before Income Taxes

Operating loss before other income (expense) and provision for income taxes for the six months ended June 30, 2022 was $(7,451,974), a decrease of $640,361 compared to $(8,092,335) for the six months ended June 30, 2021.

Total Other Expense

Total other expenses for the six months ended June 30, 2022 were $13,992,884, an increase of $10,606,100 compared to $3,386,784 for the six months ended June 30, 2021.

This increase is primarily attributable to the loss on impairment of long-lived assets of $5,367,915 and increased interest expense driven by the Credit Facility.

Provision for Income Taxes

Income tax expense is recognized based on the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end.

For the six months ended June 30, 2022, tax recoveries totaled $695,000 compared to a tax expense of $2,410,000 for the six months ended June 30, 2021.

The increase in tax recoveries is primarily attributable to the recognition of deferred tax assets related to property, plant, and equipment impairments.

NON-GAAP MEASURES

5 unchanged sentences

Three Months Ended

Six Months Ended

Net income (loss)

6 unchanged sentences

Stock-based compensation

Gain on disposal of assets

Gain (loss) on disposal of assets

Adjusted EBITDA (non-GAAP)

17 unchanged sentences

The fair value of these warrants at the time of issuance was $5,395,759 (Note 16) which is treated as a deferred financing cost.

On November 18, 2021, the Company and lender amended the Credit Facility to provide for an additional loan of $4,200,000 with a cash interest rate of 15% per annum and PIK interest of 2% and no warrants were issued in connection

with this loan.

Cash received net of $156,900 in financing costs was $4,043,100.

10 unchanged sentences

We expect to be reimbursed by Verano for the $1,075,000 in deferred financing fees netted against the proceeds received pursuant to the Arrangement Agreement, and as such these are fees are included in our receivables balance (Note 5) as of March 31, 2022.

During the three months ended June 30, 2022, the Company drew $14,000,000 in principal debt from the Delayed Draw Loans.

Proceeds received, net of deferred financing fees of $528,938, were $13,471,062.

Unless otherwise specified, all deferred financing costs are treated as a contra-liability, to be netted against the outstanding loan balance and amortized over the remaining life of the loan.

3 unchanged sentences

Cash Used in Operating Activities

Net cash used in operating activities was $6.8 million for the three months ended March 31, 2022, an increase of $1.8 million as compared to the three months ended March 31, 2021.

The increase is primarily attributed to a net build in working capital items.

Net cash used in operating activities was $9.8 million for the six months ended June 30, 2022, a decrease of $7.6 million as compared to the six months ended June 30, 2021.

The decrease is primarily attributed to more favorable changes in working capital items.

Cash Used in Investing Activities

Net cash used in investing activities was $2.2 million for the three months ended March 31, 2022, compared to net cash used in investing activities of $5.4 million for the three months ended March 31, 2021.

Net cash used in investing activities was $3.7 million for the six months ended June 30, 2022, compared to net cash used in investing activities of $11.5 million for the six months ended June 30, 2021.

The decrease is primarily attributable to decreased property, plant, and equipment additions relative to the prior year quarter.

Cash Provided by Financing Activities

Net cash provided by financing activities was $2.4 million for the three months ended March 31, 2022, a decrease of $21.4 million as compared to the three months ended March 31, 2021.

The decrease was principally due to the receipt of approximately $23 million in net proceeds from the Credit Facility in the first quarter of 2021, compared to the receipt of approximately $3 million in net proceeds in the first quarter of 2022.

Net cash provided by financing activities was $15.4 million for the six months ended June 30, 2022, a decrease of $7.3 million as compared to the six months ended June 30, 2021.

The decrease was principally due to the receipt of approximately $23 million in net proceeds from the Credit Facility in the first six months of 2021, compared to the receipt of approximately $16 million in net proceeds in the first six months of 2022.

Lease Transactions

As of March 31, 2022, we have entered into lease agreements for the use of buildings used in cultivation, production and/or sales of cannabis products in Arizona, Maryland, Minnesota, Nevada, New Mexico, New York, and Puerto Rico.

As of June 30, 2022, we have entered into lease agreements for the use of buildings used in cultivation, production and/or sales of cannabis products in Arizona, Maryland, Minnesota, Nevada, New Mexico, New York, and Puerto Rico.

The lease agreements for all of the retail space used for our dispensary operations are with third-party landlords and remaining duration ranges from 1 to 6 years.

These agreements are short-term facility leases that require us to make

monthly rent payments as well as funding common area costs, utilities and maintenance.

These agreements are short-term facility leases that require us to make monthly rent payments as well as funding common area costs, utilities and maintenance.

In some cases, we have received tenant improvement funds to assist in the buildout of the space to meet our operating needs.

As of March 31, 2022, we operated 18 retail locations secured under these agreements.

As of June 30, 2022, we operated 18 retail locations secured under these agreements.

We have also entered into sale and leaseback arrangements for our cultivation and processing facilities in Minnesota and New York with a special-purpose real estate investment trust.

3 unchanged sentences

Finance Leases

March 31, 2022

June 30, 2022

Total minimum lease payments

6 unchanged sentences

Outstanding Share Data

As of May 9, 2022, we had 84,551,625 shares issued and outstanding, consisting of the following:

As of August 9, 2022, we had 85,101,227 shares issued and outstanding, consisting of the following:

(a) Subordinate voting shares

14 unchanged sentences

Options, Warrants, and Convertible Promissory Notes

As of March 31, 2022, we have 26,261,054 employee stock options outstanding, 1,094,200 RSUs, as well as 3,037,649 SVS warrants denominated in C$ and 11,888 MVS warrants related to financing activities.

As of June 30, 2022, we have 26,187,660 employee stock options outstanding, 1,094,200 RSUs, as well as 3,037,649 SVS warrants denominated in C$ and 11,888 MVS warrants related to financing activities.

Off-Balance Sheet Arrangements

6 unchanged sentences

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