Marimed, Inc. (OTCQX:MRMD) Q2 2022 Earnings Conference Call August 9, 2022 8:00 AM ET
Company Participants
Steve West – VP, IR
Jon Levine – Co-Founder, Chief Administration Officer, Secretary & Director
Timothy Shaw – COO
Susan Villare – CFO
Conference Call Participants
Eric Lauriers – Craig-Hallum
Glenn Mattson – Ladenburg Thalmann & Co.
Andrew Semple – Echelon Wealth Partners
Aaron Grey – Alliance Global Partners
Operator
Good morning. My name is Pam, and I will be your conference operator today. At this time, I would like to welcome everyone to the MariMed Inc. Second Quarter 2022 Financial Results Conference Call. [Operator Instructions].
Thank you. I would now like to turn the conference call over to Mr. Steve West, Vice President of Investor Relations for MariMed. Please go ahead.
Steve West
Good morning, everyone, and welcome to MariMed’s Second Quarter 2022 Conference Call. Joining me today are Jon Levine, our Chief Administrative Officer; Tim Shaw, our Chief Operating Officer; and Susan Villare, our Chief Financial Officer. Bob Fireman, our Chief Executive Officer, sends his regrets, as he has a family matter to attend to and cannot join us this morning.
This call is being recorded and will be archived on our Investor Relations website at ir.marimedinc.com.
Today’s call contains forward-looking statements subject to various risks, uncertainties and other factors that could cause actual results to differ materially from those forward-looking statements. These risks and uncertainties are discussed in our documents filed with the SEC, including our most recent Form 10-K and Form 10-Q. Any forward-looking statements reflect the management’s expectations as of today’s date, and we assume no obligation to update them other than as may be required by applicable securities laws.
In addition, we will present non-GAAP financial information on this call. Reconciliations to applicable GAAP financial measures are included in our earnings release, as well as in the supplemental slides, which are available on our Investor Relations website.
Now for your future scheduling purposes, our third quarter 2022 earnings release is tentatively scheduled to be issued after the market closes on November 7, 2022, and our subsequent analyst call will be held the morning of November 8, 2022.
I will now turn the call over to Jon.
Jon Levine
Thank you, Steve, and good morning, everyone. I am pleased to report MariMed had another solid quarter of financial and operational results. Our revenue grew versus last year. More importantly, our revenue grew 5% sequentially, and we reported positive adjusted EBITDA for the tenth consecutive quarter. Additionally, we delivered on several facets of our growth plan during the second quarter and already into the third.
First, we closed our acquisition of Kind Therapeutics, a Maryland wholesale cannabis operation, which will soon be vertical with the opening of a new medical dispensary in Annapolis.
Second, we closed on an acquisition of our craft grow license in Illinois and purchased a 40,000 square foot building in Mt. Vernon, which we will retrofit as a cultivation and processing facility for the distribution of our award-winning branded products. Once complete, we will be a vertical in Illinois, enabling us to improve our margins.
Third, in Ohio, which is the seventh most populous state, we began development of a new medical dispensary in Tiffen, with the license we are awarded in the state lottery. We plan to open in early 2023.
And fourth, we completed a licensing partnership to produce and distribute our Betty’s Eddies fruit chews in Maine adult market, which complements our existing license deal to sell Betty’s in the Maine medical market. Maine’s tourism attracts millions of visitors every year.
Our momentum continues in the third quarter. We announced a significant expansion of the kitchen in our Hagerstown, Maryland processing facility, enabling us to bring our entire portfolio of award-winning brands to the state and time for adult-use sales, which is expected to be adopted by the voters this fall.
We launched Betty’s Eddies ice cream and Nature’s Heritage live flower in Massachusetts. We have launched a new line of gummies in Maryland out of our expanded kitchen. We also partnered with a social equity applicant in Connecticut, which was selected to receive a cultivation and processing license. This award is pending the final approval from the state. And we completed our dual listing on the Canadian Security Exchange, which we believe will increase liquidity and give easier access to retail investors in Canada, as well as institutional investors throughout North America. We have already seen the benefit of this dual listing with new institutional investors taking equity positions in MariMed.
Finally, we announced yesterday the acquisition of our fifth dispensary in Illinois. We are thrilled to add another dispensary to our successful Thrive retail dispensary base. We remain focused on financial discipline, building great brands and executing our strategic growth plan. Our core retail business has never been stronger, and our wholesale business is picking up despite the pricing pressures.
With that, I now turn the call over to Tim for his operational update. Thank you.
Timothy Shaw
Thank you, Jon. Beginning with retail, we had a 12% growth in revenue versus last year. Our transactions increased 16% versus last year, while our average ticket declined by approximately 3%. We’re consistently working on new strategies and marketing programs to increase revenue and improve the sales experience of our customers.
In Massachusetts, we have recently extended store hours and are offering home delivery. So our customers have more convenient access to our products. We also initiated billboard campaign in Massachusetts to attract more commuters going to and from the cape during the summer months.
Our Thrive dispensaries in Illinois continue to do exceedingly well, and we’re implementing new marketing programs in the second half of the year to maintain and drive new customer traffic. We are still awaiting regulatory approvals before we can begin operations at our new dispensaries in Maryland and Massachusetts. But we remain optimistic both will be operational in the coming months.
Our wholesale revenues increased 31% sequentially primarily due to the addition of Kind’s Maryland wholesale revenue. Fortunately, our commitment to high-quality flower has enabled us to retain our premium pricing. For our customers who are more price-sensitive due to the tough economic times, we have launched a value line of products, including vapes, flower, pre-rolls and concentrates.
In Maryland, the oversupply of cannabis flower has led to significant price compression and ultimately affected our sales. The good news is edibles and other derivative products are holding up well. The expansion and upgrading of our kitchen in Maryland to nearly 7,000 square feet provides the ability to produce all of our award-winning branded products, which are already contributing to increased sales.
On the development front, we experienced construction delays on our new cultivation and processing facilities in Illinois. We are pushing as fast as possible on the Illinois facility and hope to have the kitchen operational in early 2023. Additionally, in Massachusetts, we will be starting the initial expansion of our cultivation and processing facility this fall. This will increase our canopy by approximately 50%. The final expansion phase will begin in 2023, and will ultimately more than double our current flower production.
Let me now update you on some more recent product launches. Last week, we launched our THC infused ice cream at our Panacea dispensary under the Betty’s Eddies brand in partnership with Emack & Bolio’s ice cream. I encourage you to try it. It is the best ice cream I’ve ever tasted.
We also launched our live flower product under the Nature’s Heritage brand in Massachusetts. We’re utilizing new proprietary fresh cure process, which includes flash freezing the flower right at harvest. The process delivers the freshest, most colorful, flavorful, smooth smoking buds available. Additionally, the process eliminates 2 to 3 weeks of drying versus traditional flower, which results in increased production and lower costs.
That concludes my operational review. I will now turn the call over to Susan, she’ll do our financial results and provide an update on our financial outlook.
Susan Villare
Thank you, Tim, and good morning, everyone. It is a real pleasure to be with you all today. I would like to start with a brief recap of our financial results for this past quarter. Total revenue was $3 million, which increased 5% sequentially. As Tim discussed, this sequential growth was driven by our strong dispensary operations and our wholesale business.
Non-GAAP gross margin was 46% compared to 54% last quarter. Our decline in gross margin was due to several factors. First, we underwent a significant change in our business model once we closed the Maryland Kind acquisition. We had lower management and rental income at 100% margin, which was replaced by wholesale revenue at a lower margin. Second, we experienced higher costs for raw materials and freight due to significant inflation. Third, we wrote-off some old inventory on certain discontinued products such as hemp.
And last, we brought several new machines online this past quarter, which required extensive testing and fine-tuning before they could be operational. This included our machine for live flower and new equipment to increase production of Betty’s Eddies fruit chews, Vibations drink mixes and our new Betty’s Eddies ice cream. This did result in under absorption of certain fixed costs, which we don’t anticipate will continue in the second half of the year.
We believe our second quarter gross margin was low watermark for the company and expect margins to sequentially improve and climb above 50% by our fourth quarter this year.
Moving to our non-GAAP OpEx. We continue to be very disciplined with our discretionary spending. Our spend decreased $300,000 sequentially and was $7 million this past quarter. Our adjusted EBITDA was $8.9 million, which does represent a 24% margin.
Now turning to the balance sheet. We ended the second quarter with $7.9 million of cash and equivalents. The sequential decline in our cash balance was primarily a result of net cash payments for acquisitions, as well as income tax payments. Despite the decline in cash on hand, our working capital remained positive at $8.3 million. Our ability to generate cash remains a strength of MariMed as illustrated in our year-to-date positive cash flow from operations, and we do remain on track to be cash flow positive for the full year.
Now I’d like to provide an update on our full year 2022 guidance. We are revising our annual revenue guidance to be in the range of $135 million to $140 million. This represents a year-over-year growth rate of 11% to 15%. More than 2/3 of the reduction was a direct result of delays in both construction and regulatory approvals. Our full year non-GAAP gross margin outlook is now at approximately 50%. Our adjusted non-GAAP EBITDA guidance is now in the range of $35 million to $40 million, which represents a margin of 26% to 29%. And finally, we are lowering our CapEx target from $25 million to $18 million due to the delays in our construction projects.
That concludes my prepared remarks. I will now turn the call over to Jon for his concluding remarks.
Jon Levine
Thank you, Susan. We are incredibly proud of our amazing financial performance at MariMed these past 2 years, and we did it while successfully transforming our company from being consultants into vertically integrated key-to-sale MSO. The fact is we still reported some of the strongest financials in the industry. Actually, despite the number of headwinds facing the industry, we increased traffic at every 1 of our dispensaries versus the first quarter. This is a testament to great dispensary operations, the culture we maintain and the great products we create. All of that said, we had said before that 2022 would be a foundational year at MariMed, a year in which we would be investing to position ourselves as a company to accelerate revenue, earnings growth in 2023.
We are very excited about the new assets we will have under running to help drive new revenue next year. In fact, across all facets of our growth plan, we have been making great progress. It’s important to point out that without any significant acquisitions, if we just focus on growing our current footprint, we estimate that we can generate over $350 million in revenue over time.
Bottom line is this, we are not sitting idly by and allowing forces outside of our goal to derail us. We took decisive action in both our retail and wholesale businesses to address the macro forces working against the industry. We will continue to operate in an efficient and financial disciplined manner that is what has made us profitable, have positive cash flow, have essentially no debt and a solid balance sheet with the ability to raise capital.
We have a great foundation of revenue-producing assets will allow us to continue to grow organically or allow us to be capable of acquiring great new businesses to accelerate our growth.
To summarize, over the last 2 years, MariMed’s financial performance has established credibility among investors and industry analysts. We are financially solid employed for continued long-term growth and success. We are optimistic as ever in our future as we plan to have another breakout year in 2023. We will continue to put the pedal to the metal and grow our company to be the leader in the cannabis industry.
Before I close, let me thank all the MariMed employees around the country for all of their hard work and dedication.
Operator, you may open the lines for questions.
Question-and-Answer Session
Operator
[Operator Instructions]. Your first question comes from Eric Lauriers with Craig-Hallum Capital Group.
Eric Lauriers
First one for me. On the margin headwinds, can you just help us understand the impact of pricing pressures versus cost increases? And then to the extent that you have the data, can you talk about how your premium over average pricing has fared throughout these headwinds?
Susan Villare
Sure. This is Susan. Thank you for the question. So yes, in my prepared remarks, we went over what had transpired with the margins. And I would say pricing is probably about 25% of the compression and the remaining 75% was really due to the Kind acquisition that we closed, which is a wholesale margins versus 100%. And then we did have a tremendous amount of equipment that we brought online that took a bit more of overhead than we had previously. So that we’ve had more overhead that was underabsorbed. And then last but not least, we did have some old hemp inventory, et cetera, that we had written off, which we don’t anticipate going forward. But I think in the guidance we’ve provided, we will get to at least 50% by Q4 of this year.
Tim, do you want to talk about the pricing?
Timothy Shaw
Yes, this is Tim. Thanks for your question, Eric. As far as our pricing on our premium products, we’re staying well above what the average is in all markets. So we’re feeling slight pressure, but we’re still holding to be specific around $3,800 a pound, down from $4,200 in the market. So we’re doing much better than most, but we are feeling some pressure.
Eric Lauriers
Yes, certainly, still impressive figures there. Last question for me. So in Maryland with the expanded kitchen, how should we think about this in terms of near-term volumes? I guess, do you expect to buy more from the spot market now that you have this kitchen up and running and just sort of help drive volumes in the near term? Or is this more about sort of increasing margins and vertical sales mix until adult use starts?
Jon Levine
This is Jon. I’d be happy to answer first, and I’ll let Tim pick up after. We’re using the expansion of the kitchen to expand our branded products into the Maryland market. We’re bringing in the Bubby’s and the Vibations. We’ll eventually bring the ice cream. We have launched a new gummy in the market. This is all by having the bigger kitchen and the ability to expand our revenue through these branded products, but also that will help us increase our margins overall.
I’ll let Tim talk more to the specifics, though.
Timothy Shaw
Thanks, Jon. Yes, another important piece to add about the Maryland kitchen. We’ve built this kitchen to GMP specs. We’re going through a certification to be GMP certified. Maryland has a regulation that requires you to be GMP certified to be able to participate in higher dose edibles out of the kitchen. There’s only 2, maybe 3 companies that are participating in this currently, and we’re noticing that they’re having a much higher velocity with those products prior to these regulations. Some of the higher dose Betty’s was a large portion of our portfolio in sell-through. So we look forward to regaining our market lead with our Betty’s high-dose products once we are certified to do so.
Operator
Your next question comes from Glenn Mattson with Ladenburg.
Glenn Mattson
So curious — congratulations on getting another Illinois dispensary, curious on just kind of the dynamics around that deal. Maybe if you could share what you paid for or just kind of the environment for acquiring an asset like that, especially as you think about continuing to grow that footprint in light of all the licenses that are coming online.
Jon Levine
Sure. Thank you, Glenn, for the question. Yes. No, we’re seeing a bunch of licenses coming on the market there has been a big price reduction. I can’t speak to the specifics of that 1 deal that we just announced as we have not filed all the paperwork yet. But the prices are coming more in line with what we feel is good for the market, and that we’re getting these at a price where we’ll be able to get into the market quickly, expand our revenue in a growing market in Illinois, and we’re very excited about it, and we have some other ones that we are presently looking at.
Glenn Mattson
Great. Just as a follow-up, can you give us a background on how things are going in your home market in Massachusetts? The market has been under pressure for some time. Is it continuing to kind of deteriorate a little bit? Or is it — do you have a sense of any timing as to when you can see an improvement there and just the pricing and the general supply/demand dynamics?
Jon Levine
Tim, I’ll let you answer this part.
Timothy Shaw
Glenn, this is Tim Shaw. Massachusetts continues to be a strong market for us. We’ve done a great job with creating some highly sought-after products, very strong in the market with our Nature’s Heritage, our Betty’s Eddies. And we’ve brought in a new line of products, a value brand that is really helping to capture some of the folks that are having — feeling the price compression with inflation and looking for the most value. So we’re trying to capture that extra demographic that we haven’t necessarily paid enough attention to in the past. The market is being flooded with more and more flower and other products coming online. However, ours have continued to fare very well.
And we have the dispensary in Beverly coming online. We’re just awaiting regulatory approval. Once that happens, we’ll also have another outlet where we’ll have full seed-to-sale vertical for our products. So that should be very helpful for our margins also.
Operator
Your next question comes from Andrew Semple with Echelon Capital Markets.
Andrew Semple
Just wanted to go back to the guidance. Maybe it would help if you could clarify some of the states and some of the specific assets where you are seeing some of those delays in construction and regulatory approvals and where CapEx is potentially being pushed back to 2023.
Jon Levine
Sure. Thank you very much, Andrew. Nice to talk to you again. The markets that we’ve been building out and running into construction delays and regulatory approval happens to be Massachusetts and Maryland, where we have been trying to build up this kitchen which we just completed. We have been waiting for the dispensary sign off. We’ve got in our CO, and we’re waiting on our approval to open by the state. And the same is in Massachusetts that we have the CO, but as usual, in Massachusetts, it’s taking months to get the final inspections and then you still have to get the regulatory approvals.
And those 3 locations were slightly delayed due to construction supplies being in shortage and having to wait. The Annapolis got delayed by an additional 2, 3 weeks with the inspector requiring 1 additional emergency shutoff that took us 2 weeks to get before we can get our final CO. It’s just an example of what’s going on out there. I have worked with Susan and Tim. We’re going to be delayed on being able to open our cultivation and processing center in Illinois, which will make us fully vertical, but that’s mostly due to the timing of what we’re being told for supplies to be able to come in to complete this as timely as we are used to.
So we’re seeing supply chain issues throughout the country, but those are the major projects that have delayed our CapEx.
Andrew Semple
I appreciate the additional color there. That’s very helpful. And then just returning maybe to the topic of margins for a little bit. You listed several factors behind the pressure within the current quarter. Would you be able to rank those in terms of which had the largest impact within the current quarter? And then secondly, it felt like some of those factors, such as inventory and new machine testing among others, would appear to be temporary. Would there be any lingering impacts from the more temporary aspects of that margin pressure into the third quarter?
Susan Villare
Yes. No, thanks. This is Susan. So yes, I think that as far as magnitude, the largest was really all of this equipment that was coming online. So it was a tremendous amount for us to test, and we also had the Kind closed. So we were busy with that kitchen. So those are really behind us. They’re fully operational, all the machines that we purchased. And then we reviewed all of the inventory that we have, et cetera. Everything is moving off the shelves every month, but we did have some lingering old hemp inventory that was kind of one-off. So there is nothing else there that would be impacting margins.
So at this point, we are very streamlined operationally. The new equipment should actually make us much more efficient. And with the 2 new dispensaries coming online from seed to sale, that should drive the margins very nicely. So we do believe it is a temporary quarter that we had these unusual events that we don’t expect to happen in the second half of the year.
Andrew Semple
Great, great. And then a third question here, if I may. Just quickly, I want to touch on some of the new product launches, ice cream and live flower, some pretty innovative products. As you go out and build the wholesale demand for some of these products, is there really an education factor that has to happen? Or are you seeing demand build nicely and organically on its own?
Timothy Shaw
This is Tim, Andrew. It’s a little bit of both. We launched at our own dispensary, which is helpful, and we have a very strong staff that has been trained deeply into these new products. Our brand ambassador team is treating this kind of like a tour, and we’re launching into these new facilities with support in H1 to help bring brand awareness and the education to make sure that we have, not just the first purchase, but the second purchase. So there’s definitely a little bit of both happening for both launches, and they’ve both been successful thus far.
Operator
[Operator Instructions]. Your next question comes from Aaron Grey with Alliance Global Partners.
Aaron Grey
So first question for me. You guys mentioned some value brands in certain markets, always had a historical focus on premium. So obviously, you want to still focus on premium, but just kind of acknowledging where the consumer sits today. Can you maybe talk about how you’re potentially seeing the value, brand potentially evolving for you guys, maybe in the near term, certain markets as we deal with the wallet constrained consumer? And how you’d want to kind of allocate that within the brand portfolio in the near and longer term?
Timothy Shaw
Great. Thank you, Aaron. This is Tim. Yes, the value brand is becoming more and more important to our portfolio. It’s really become a high-velocity product we launched with the vape pen — disposable vape pen at a very competitive price. And it has — in both Maryland and Massachusetts, it has proven to be successful, and we’re dovetailing from that product and putting flower and pre-rolls and soon to have concentrates, keeping all of our new equipment running, buying cheap trend from the market and putting that product back into the market at a value price. And it’s really helped to complement some of our premium brands rather than hurt the premium brands. There’s different dispensaries in different locations that have a different demographic, and we’ve been able to really navigate and maximize where each 1 of the products live and belong. So it’s been an incremental help for our portfolio.
Aaron Grey
Okay. Great. And then second for me. You obviously got to touched a couple of times in terms of getting more vertical, you’re going to have the operations come online in Illinois. But just some of the commentary we’ve heard from some of the MSOs around — with their own products, getting more verticals on some of their own and within their own retail stores. Does that cause any need to accelerate it with your own? I know that Illinois is not really the same case because you already have retail and you’ll be bringing on wholesale. But in terms of any of your more wholesale end markets, are you seeing any impact there to where it might be getting any harder to get on shelf and more need to get vertical? Or are you not really noticing on your end right now?
Jon Levine
Go ahead, Tim.
Timothy Shaw
I was just going to say, it’s always important to get the full vertical. It’s great. It’s much better margins, obviously, to have your own place. Our products, we’ve been — we make some of the highest quality craft cannabis at scale, and we continue to have a large demand for the product. There is definitely pressure out there. We’ve been able to hold strong. So I don’t know if that really answers the question. Yes, it’s very important to get the other dispensaries open to help with margins, but we haven’t seen much of a decrease in the demand for our branded products.
Jon Levine
And Aaron, this is Jon. I’ll just add in. Part of our growth strategy is to build out in each of the states that we’re in as their limited licenses. So it’s very important for us to grab some more dispensaries in each of those states so that we can keep the margins up and to expand our brands in each of those states. We do have award-winning brands in each, and that they’re always up there at the top. And I just think getting into our own dispensaries and building out and getting to the number that were allowed in each of these limited states will help us maintain margin and increase margin.
Operator
There are no further questions. Please proceed.
Jon Levine
Thank you, operator, and I thank everybody for joining us today.
Timothy Shaw
Thank you, operator, and thank you, everyone.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
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