What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-06 compared with 2024-05-07 · 83 added, 46 removed, 133 unchanged (49% of the section changed)

13 unchanged sentences

Overview of the Company

Goodness Growth is a cannabis company whose mission is to provide safe access, quality products and value to its customers while supporting its local communities through active participation and restorative justice programs.

Vireo Growth is a cannabis company whose mission is to provide safe access, quality products and value to its customers while supporting its local communities through active participation and restorative justice programs.

The Company is evolving with the industry and is in the midst of a transformation to being significantly more customer-centric across its operations, which include cultivation, manufacturing, wholesale and retail business lines.

6 unchanged sentences

The Company may not be successful in these efforts.

Three months ended March 31, 2024, Compared to Three months ended March 31, 2023

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 two states.

For the three months ended March 31, 2024, 81% of our revenue was generated from retail dispensaries and 19% from the wholesale business.

For the three months ended March 31, 2023, 86% of our revenue was generated from retail business and 14% from wholesale business.

For the three months ended March 31, 2024, Minnesota operations contributed approximately 46% of revenues, New York contributed 12%, and Maryland contributed 42%.

For the three months ended March 31, 2023, Minnesota operations contributed approximately 56% of revenues, New York contributed 18%, New Mexico contributed 6%, and Maryland contributed 20%.

Revenue for the three-months ended March 31, 2024, was $24,087,315, an increase of $4,998,892 or 26% compared to revenue of $19,088,423 for the three-months ended March 31, 2023.

Three months ended June 30, 2024, Compared to Three months ended June 30, 2023

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

For the three months ended June 30, 2024, 83% of our revenue was generated from retail dispensaries and 17% from the wholesale business.

For the three months ended June 30, 2023, 85% of our revenue was generated from retail business and 15% from wholesale business.

For the three months ended June 30, 2024, Minnesota operations contributed approximately 49% of revenues, New York contributed 10%, and Maryland contributed 41%.

For the three months ended June 30, 2023, Minnesota operations contributed approximately 57% of revenues, New York contributed 17%, New Mexico contributed 5%, and Maryland contributed 21%.

Revenue for the three months ended June 30, 2024, was $25,108,247, an increase of $4,911,691 or 24% compared to revenue of $20,196,556 for the three-months ended June 30, 2023.

The increase is primarily attributable to increased revenue contributions from the Maryland business driven by the commencement of adult-use sales on July 1, 2023, partially offset by the decrease in New Mexico revenues, which was divested in June of 2023.

Retail revenue for the three months ended March 31, 2024, was $19,599,440 an increase of $3,127,641 or 19% compared to retail revenue of $16,471,799 for the three months ended March 31, 2023, primarily due to increased revenue contributions from the Maryland business driven by the commencement of adult-use sales on July 1, 2023, partially offset by the decrease in New Mexico revenues, which was divested in June of 2023.

Wholesale revenue for the three months ended March 31, 2024, was $4,487,875, an increase of $1,871,251 compared to wholesale revenue of $2,616,624 for the three months ended March 31, 2023.

Retail revenue for the three months ended June 30, 2024, was $20,819,019 an increase of $3,675,920 or 21% compared to retail revenue of $17,143,099 for the three months ended June 30, 2023, primarily due to increased revenue contributions from the Maryland business driven by the commencement of adult-use sales on July 1, 2023, partially offset by the decrease in New Mexico revenues, which was divested in June of 2023.

Wholesale revenue for the three months ended June 30, 2024, was $4,289,228, an increase of $1,235,771 compared to wholesale revenue of $3,053,457 for the three months ended June 30, 2023.

The increase was primarily due to increased revenue contributions from the Maryland business driven by the commencement of adult-use sales on July 1, 2023.

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Not Meaningful

Cost of Goods Sold and Gross Profit

Gross profit reflects total net revenue less cost of goods sold.

Cost of goods sold represents the costs attributable to producing bulk materials and finished goods, which includes direct materials, labor, and certain indirect costs such as

depreciation, insurance and utilities.

Cost of Sales and Gross Profit

Gross profit reflects total net revenue less cost of sales.

Cost of sales represents the costs attributable to producing bulk materials and finished goods, which includes direct materials, labor, and certain indirect costs such as depreciation, insurance, utilities and valuation adjustments.

Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes.

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, 2024, was $11,842,888, an increase of $2,274,677 compared to the three months ended March 31, 2023, of $9,568,211.

Gross profit for the three months ended March 31, 2024, was $12,244,427, representing a gross margin of 51%.

This is compared to gross profit for the three months ended March 31, 2023, of $9,520,212 or a 50% gross margin.

Cost of sales 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 and valuation adjustments.

Cost of sales for the three months ended June 30, 2024, was $11,557,604, an increase of $692,344 compared to the three months ended June 30, 2023, of $10,865,260.

Gross profit for the three months ended June 30, 2024, was $13,550,643, representing a gross margin of 54%.

This is compared to gross profit for the three months ended June 30, 2023, of $9,331,296 or a 46% gross margin.

The increase was primarily attributable to increased profit and margin contributions in Maryland driven by the commencement of Maryland adult-use sales on July 1, 2023.

We believe 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.

We believe our current production capacity has not been fully realized and we expect future operations to benefit from increased revenue growth reflective of higher demand, increased product output and new product development.

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

Total Expenses

Total expenses other than the cost of goods sold consist of selling costs to support customer relationships, marketing, and branding activities.

Total expenses other than the cost of sales consist of selling costs to support customer relationships, marketing, and branding activities.

It also includes a significant investment in the corporate infrastructure required to support ongoing business.

1 unchanged sentence

In the short-term as a percentage of sales, we expect selling costs to remain relatively flat.

However, as positive regulatory developments in our core markets occur, we expect selling costs as a percentage of sales to decrease via growth in our retail and wholesale channels.

However, as anticipated positive regulatory developments in our core markets occur, we expect selling costs as a percentage of sales to decrease via growth in our retail and wholesale channels.

General and administrative expenses also include costs incurred at the corporate offices, primarily related to personnel costs, including salaries, benefits, and other professional service costs, as well as corporate insurance, legal and professional fees associated with being a publicly traded company.

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, 2024, were $7,484,983 a decrease of $1,666,723 compared to total expenses of $9,151,706 for the three months ended March 31, 2023.

The decrease in total expenses is primarily attributable to a decrease in salaries and wages and stock-based compensation expense.

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

Total expenses for the three months ended June 30, 2024, were $7,756,621 a decrease of $2,616,719 compared to total expenses of $10,373,340 for the three months ended June 30, 2023.

The decrease in total expenses is primarily attributable to a decrease in stock-based compensation expense.

Operating Income before Other Income (Expense) and Income Taxes

Operating income before other income (expense) and provision for income taxes for the three months ended March 31, 2024, was $4,759,444 an increase of $4,390,938 compared to operating income of $368,506 for the three months ended March 31, 2023.

Operating income before other income (expense) and provision for income taxes for the three months ended June 30, 2024, was $5,794,022 an increase of $6,836,066 compared to operating loss of $1,042,044 for the three months ended June 30, 2023.

Total Other Expense

Total other expense for the three months ended March 31, 2024, was $7,525,904, an increase of $413,428 compared to other expense of $7,112,476 for the three months ended March 31, 2023.

Total other expense for the three months ended June 30, 2024, was $6,022,433, an increase of $1,328,093 compared to other expense of $4,694,340 for the three months ended June 30, 2023.

This change is primarily attributable to an increased interest expenses partially offset by the gain on warrants held of $1,602,412 .

1 unchanged sentence

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, 2024, tax expense totaled $3,945,000 compared to tax expense of $1,662,000 for the three months ended March 31, 2023.

For the three months ended June 30, 2024, tax expense totaled $440,000 compared to tax expense of $1,592,871 for the three months ended June 30, 2023.

Six months ended June 30, 2024, Compared to six months ended June 30, 2023

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

For the six months ended June 30, 2024, 82% of our revenue was generated from retail dispensaries and 18% from the wholesale business.

For the six months ended June 30, 2023, 86% of our revenue was generated from retail business and 14% from wholesale business.

For the six months ended June 30, 2024, Minnesota operations contributed approximately 48% of revenues, New York contributed 11%, and Maryland contributed 41%.

For the six months ended June 30, 2023, Minnesota operations contributed approximately 57% of revenues, New York contributed 17%, New Mexico contributed 5%, and Maryland contributed 21%.

Revenue for the six months ended June 30, 2024, was $49,195,562, an increase of $9,910,852 or 25% compared to revenue of $39,284,980 for the six months ended June 30, 2023.

The increase is primarily attributable to increased revenue

contributions from the Maryland business driven by the commencement of adult-use sales on July 1, 2023, partially offset by the decrease in New Mexico revenues, which was divested in June of 2023.

Retail revenue for the six months ended June 30, 2024, was $40,418,459 an increase of $6,803,560 or 20% compared to retail revenue of $33,614,899 for the six months ended June 30, 2023, primarily due to increased revenue contributions from the Maryland business driven by the commencement of adult-use sales on July 1, 2023, partially offset by the decrease in New Mexico revenues, which was divested in June of 2023.

Wholesale revenue for the six months ended June 30, 2024, was $8,777,103, an increase of $3,107,022 compared to wholesale revenue of $5,670,081 for the six months ended June 30, 2023.

The increase was primarily due to increased revenue contributions from the Maryland business driven by the commencement of adult-use sales on July 1, 2023.

Six Months Ended

Total Wholesale

Total Revenue

Total Revenue excluding NM and AZ

Cost of Sales and Gross Profit

Cost of sales for the six months ended June 30, 2024, was $23,400,492, an increase of $2,967,021 compared to the six months ended June 30, 2023, of $20,433,471.

Gross profit for the six months ended June 30, 2024, was $25,795,070, representing a gross margin of 52%.

This is compared to gross profit for the six months ended June 30, 2023, of $18,851,509 or a 48% gross margin.

The increase was primarily attributable to increased profit and margin contributions in Maryland driven by the commencement of Maryland adult-use sales on July 1, 2023.

Total Expenses

Total expenses for the six months ended June 30, 2024, were $15,241,603 a decrease of $4,283,442 compared to total expenses of $19,525,045 for the six months ended June 30, 2023.

The decrease in total expenses is primarily attributable to a decrease in salaries and wages and stock-based compensation expense.

Operating Income before Other Income (Expense) and Income Taxes

Operating income before other income (expense) and provision for income taxes for the six months ended June 30, 2024, was $10,553,467 an increase of $11,227,003 compared to operating loss of $673,536 for the six months ended June 30, 2023.

Total Other Expense

Total other expense for the six months ended June 30, 2024, was $13,548,337, an increase of $1,741,520 compared to other expense of $11,806,817 for the six months ended June 30, 2023.

This change is primarily attributable to an increased interest expenses.

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, 2024, tax expense totaled $4,385,000 compared to tax expense of $3,254,871 for the six months ended June 30, 2023.

NON-GAAP MEASURES

7 unchanged sentences

Three Months Ended

Six Months Ended

Net income (loss)

1 unchanged sentence

Depreciation & Amortization

Depreciation and amortization included in cost of goods sold

Depreciation and amortization included in cost of sales

EBITDA (non-GAAP)

8 unchanged sentences

In 2019, the Company’s promissory note payable in the amount of $1,010,000 was modified to increase the amount payable to $1,110,000.

The Company repaid the note in full during the three months ended March 31, 2024.

The Company repaid the note in full during the six months ended June 30, 2024.

On November 19, 2021, the Company signed a promissory note payable in the amount of $2,000,000 in connection with the acquisition of Charm City Medicus, LLC.

1 unchanged sentence

On November 19, 2023, the Company and lender amended the note.

Per the terms

of the amendment, the interest rate was modified to 15%, and the Company paid off $1,000,000 of principal.

Per the terms of the amendment, the interest rate was modified to 15%, and the Company paid off $1,000,000 of principal.

The remaining principal balance of $1,000,000 is due on November 19, 2024, and the note is secured by 25% of the membership interests in Vireo Health of Charm City, LLC.

2 unchanged sentences

prime rate plus 10.375%, payable monthly in cash, and (b) 2.75% per annum paid in kind (“PIK”) interest payable monthly.

In connection with the Credit Facility, the Company also pays a monthly credit monitoring fee in the amount of $130,400 which is included in interest expense in the consolidated statements of loss and comprehensive loss for the three months ended March 31, 2024 and 2023.The Credit Facility matures on March 31, 2024.

On November 18, 2021, the Company and lenders 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% per annum and a maturity date of November 29, 2024.

Obligations under the Credit Facility are secured by substantially all the assets of the Company.

On January 31, 2022, Goodness Growth and certain of its subsidiaries, as borrowers (collectively, “ Borrowers ”), entered into a Third Amendment to the Credit Facility (the “ Third Amendment ”) providing for additional delayed draw term loans of up to $55 million (the “ Delayed Draw Loans ”).

On January 31, 2022, Vireo Growth and certain of its subsidiaries, as borrowers (collectively, “ Borrowers ”), entered into a Third Amendment to the Credit Facility (the “ Third Amendment ”) providing for additional delayed draw term loans of up to $55 million (the “ Delayed Draw Loans ”).

The cash interest rate on the Delayed Draw Loans under the Third Amendment is equal to the U.S.

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The Company has the potential to extend the maturity date on its Delayed Draw Loans up to January 31, 2026 with the satisfaction of certain financial performance-related conditions.

On April 30, 2024, the Company executed a short-term extension of the maturity date on the Credit Facility with the Agent.

The Credit Facility was extended until June 14, 2024, with no change to any other terms of the existing agreement.

On June 14, 2024, another short-term extension was executed which extended the maturity date on the Credit Facility to July 31, 2024, also with no change to any other terms of the existing agreement.

On May 21, 2024, the Company executed a $1,200,000 term loan with the Agent to assist with the purchase of a site for a new dispensary location.

The loan bears interest at a rate of 12.0% per annum and is due on May 28, 2027.

Financing costs of $68,600 were incurred in connection with the closing of the loan.

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.

As of March 31, 2024, $201,015 (December 31, 2023 - $1,524,531) of deferred financing costs remain unamortized.

As of June 30, 2024, $66,694 (December 31, 2023 - $1,524,531) of deferred financing costs remain unamortized.

Convertible Notes

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The initial tranche's principal amount of Convertible Notes outstanding in the amount of $2,000,000, plus all PIK and all other accrued but unpaid interest thereunder, is convertible into Subordinate Voting Shares of the Company at the option of the holders at any time by written notice to the Company, at a conversion price equal to $0.145.

For each future tranche advanced, the principal amount of Convertible Notes outstanding, plus all paid-in-kind interest and all other accrued but unpaid interest thereunder, is convertible into Subordinate Voting Shares of the Company at the option of the holders at any time by written notice to the Company, at a conversion price equal to the lesser of $0.145 or a 20.0% premium over the 30-day volume weighted average price of the Company’s Subordinate Voting Shares calculated on the day prior to the date on which each tranche is advanced, if permitted by the Canadian Securities Exchange.

For each future tranche advanced, the principal amount of Convertible Notes outstanding, plus all PIK interest and all other accrued but unpaid interest thereunder, is convertible into Subordinate Voting Shares of the Company at the option of the holders at any time by written notice to the Company, at a conversion price equal to the lesser of $0.145 or a 20.0% premium over the 30-day volume weighted average price of the Company’s Subordinate Voting Shares calculated on the day prior to the date on which each tranche is advanced, if permitted by the CSE.

The lenders also have the right to advance any remaining undrawn funds on the convertible loan facility to the Company at any time.

6 unchanged sentences

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.

As of March 31, 2024 $967,587 (December 31, 2023 - $1,083,697) of deferred financing costs remain unamortized.

As of June 30, 2024 $851,477 (December 31, 2023 - $1,083,697) of deferred financing costs remain unamortized.

Cash Used in Operating Activities

Net cash used in operating activities was $1.2 million for the three months ended March 31, 2024, a decrease of $2.6 million as compared to $3.8 million for the three months ended March 31, 2023.

Net cash used in operating activities was $1.2 million for the six months ended June 30, 2024, a decrease of $1.0 million as compared to $2.2 million for the six months ended June 30, 2023.

The decrease is primarily attributed to increased gross profit.

Cash Used in Investing Activities

Net cash used in investing activities was $1.0 million for the three months ended March 31, 2024, an increase of $0.3 million compared to net cash used in investing activities of $0.7 million for the three months ended March 31, 2023.

Net cash used in investing activities was $4.2 million for the six months ended June 30, 2024, an increase of $2.0 million compared to net cash used in investing activities of $2.2 million for the six months ended June 30, 2023.

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

Cash Used in Financing Activities

Net cash used in financing activities was $1.1 million for the three months ended March 31, 2024, a change of $0.8 million as compared to $0.3 million used in financing activities in the three months ended March 31, 2023.

The change was principally due to repayment of a $1.0 million promissory note during the three months ended March 31, 2024.

Net cash provided by financing activities was $0.7 million for the six months ended June 30, 2024, a change of $0.2 million as compared to $0.5 million provided by financing activities in the six months ended June 30, 2023.

The change was principally due to the issuance of shares during the six months ended June 30, 2024.

Lease Transactions

As of March 31, 2024, we have entered into lease agreements for the use of buildings used in cultivation, production and/or sales of cannabis products in Maryland, Minnesota, and New York.

As of June 30, 2024, we have entered into lease agreements for the use of buildings used in cultivation, production and/or sales of cannabis products in Maryland, Minnesota, and New York.

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.

1 unchanged sentence

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, 2024, we operated 14 retail locations secured under these agreements.

As of June 30, 2024, we operated 14 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, 2024

June 30, 2024

Total minimum lease payments

6 unchanged sentences

Outstanding Share Data

As of May 3, 2024, we had 111,362,081 shares issued and outstanding, consisting of the following:

As of July 31, 2024, we had 114,905,722 shares issued and outstanding, consisting of the following:

(a) Subordinate voting shares

9 unchanged sentences

Options, Warrants, and Convertible Promissory Notes

As of March 31, 2024, we had 29,945,511 employee stock options outstanding, 2,543,011 RSUs outstanding, 3,037,649 Subordinate Voting Share compensation warrants denominated in C$ related to financing activities, and 16,400,000 Subordinate Voting Share compensation warrants outstanding.

As of June 30, 2024, we had 29,843,198 employee stock options outstanding, 2,500,916 RSUs outstanding, 3,037,649 Subordinate Voting Share compensation warrants denominated in C$ related to financing activities, and 16,200,000 Subordinate Voting Share compensation warrants outstanding.

Off-Balance Sheet Arrangements

5 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