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Operator
Good morning, my name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the MariMed Inc. 4th Quarter 2022 Financial Results Conference Call. All lines are being placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number 1 on your telephone keypad. If you would like to withdraw your question, please press the star and then the number two. Thank you. I will now turn the line over to Steve West, Vice President of Investor Relations, to begin the conference.
Michelle
Good morning, everyone, and welcome to Merriman's fourth quarter and full year 2022 earnings call. Joining me on the call today are John Levine, our Chief Executive Officer, Tim Shaw, our Chief Operating Officer, and Susan Valera, our Chief Financial Officer. This call is being recorded and will be archived on our investor relations website. Today's call contains forward-looking statements. Actual events or results may differ materially from these forward-looking statements and are subject to various risks and unknowns. A discussion of these risks and other factors is contained in our SEC filings and our earnings release, which are available on our website. Any forward-looking statements reflect management's expectations as of today and we assume no obligation to update them unless required by law. Additionally, we will refer to certain non-GAAP financial information. A reconciliation of these non-GAAP financial measures is included in our earnings release and our supplemental slides. Finally, our first quarter 2023 earnings release is tentatively scheduled to be issued after the market closes on May 8, 2023, and our subsequent analyst call will be held the morning of May 9, 2023. I will now turn the call over to John.
John Levine
Thank you Steve and good morning everyone. I'm pleased to report that Merrimet had a another solid quarter of financial and operational results. Our revenue continues to grow year over year and quarter over quarter. We invested in our core foundation throughout 2022. Positioning us for long term growth. We reported our 12th consecutive quarter of positive adjusted EBITDA. And we are very proud to share that for the third consecutive year, we generated positive cash flow from operations. Quite simply, Maramed has set itself apart as one of the most financially sound companies in the cannabis industry. From an organic perspective, Maramed constantly outperformed competition throughout 2022 in terms of sales growth in the markets where we operate. In addition to our strong organic growth, we were very active in M&A with the acquisition and consolidation of our Maryland vertical operation, which allowed us to open our dispensary in Annapolis in the fourth quarter. The acquisition of an Illinois craft grow license and dispensary license, and the acquisition of a Missouri processing and distribution license. We also completed the construction of an adult use dispensary in Beverly, Mass. And finally, we applied for and we were awarded a new medical dispensary license in Ohio. We are very excited for Ohio and Missouri. Two newest high growth markets, Merrimed was also very active in marketing in new product development in 2022. We launched in-house a full suite of high-quality products at affordable pricing, which has already grown into one of the largest brands in our portfolio. We also launched Vibations, a high-energy drink mix, which gives customers a convenient and affordable way to enjoy cannabis as a beverage. And we continue appealing to our core high-end customers by innovating our award-winning premium brands with new products, such as Betty Zeddy's Ice Cream and Nature's Heritage Life Flower. Looking forward, in 2023, Maramed will continue to focus on going deeper in our core footprint by expanding our existing facilities and into new ones. Our 35 million credit facility provides us with capital necessary to accelerate our growth. Susan and Tim will give more detail, but we expect meaningful acceleration of growth in the back half of 2023, which should continue to build throughout 2024. We continue to have one of the strongest balance sheets in the industry. In addition to growing our existing footprint, we are well positioned to grow through transformational acquisitions if we choose to. Our philosophy and approach have always been that any transaction must be accretive and improve long-term shareholder value. I am very excited for the next couple of years as MarinMed strengthens its position as a leading cannabis company. With that, I will turn the call over to Tim for his operational update.
Steve
Thank you, John, and good morning, everyone. Let me start my operations review with our retail business, where we increased revenue 5% sequentially compared to the third quarter. Throughout the year, we increased advertising, launched a new customer loyalty program, expanded our operating hours, and invested in technologies to improve the customer experience across our entire retail base. According to BDSA data, Our key states experienced declining or slowing revenue growth in 2022. However, I am pleased to report that we outperformed the industry in every quarter this past year. We took the bull by the horns and all of our proactive traffic driving initiatives clearly paid off. Now let's talk about our wholesale business. Wholesale sales increased 9% sequentially in the fourth quarter, driven by our strong performance in Massachusetts, which grew sequentially for the fourth consecutive quarter. Maryland also had a strong quarter and grew 31% sequentially. We continue to see strong demand for our branded products in both Massachusetts and Maryland, and we are investing accordingly to keep our outsized growth in these states on track. According to BDSA data, Nature's Heritage finished the year as the number one flower brand in the state of Massachusetts. We literally do not have enough capacity to meet the demand for a very special premium flower. Looking ahead, I'd like to talk about some of our plans for 23. We have eight, yes, eight construction projects planned across five states, making this the most active year of construction in our company's history. In Maryland, now that adult use sales have been approved, we will continue the expansion of our cultivation facility and prepare our Annapolis Medical Dispensary for recreational sales. We recently received GMP certification for our Hagerstown kitchen and are awaiting a regulatory approval to reintroduce high dose Betty's Eddies, which were our top seller prior to the law change in 21. We are continuing to build our craft cultivation and processing facility in Mount Vernon, Illinois, which will allow us to begin selling our branded edible products at our retail stores and through wholesale channels. In addition, your construction and adult use dispensary in Casey, Illinois, which is located in the state's eastern central region and will be our fifth dispensary in the state. We believe 23 will be a big year for us in Massachusetts. We are waiting for final approval to open our adult use dispensary in Beverly. We are also awaiting final approval to close on our recently announced acquisition of a medical cannabis operation in Quincy, the seventh largest city in the state. We are applying for an adult use license for the Quincy dispensary and plan to immediately expand the site to accommodate the anticipated increased customer traffic. We plan to offer delivery service out of this new dispensary to the city as well as surrounding areas, including Boston. We will also plan to repurpose the Quincy Cultivation Facility for our phenol hunting processes, which is currently done in New Bedford, Massachusetts. This will provide us with much needed increased capacity to expand the grow for our Nature's Heritage flower. Moving on to Missouri, which just began adult use sales in February, we have started construction of a new processing kitchen, which will allow us to manufacture and wholesale our entire portfolio of branded edibles, vapes, and pre-rolls. Finally, in Ohio, we are building a medical dispensary in Tiffin, which will be our first foray into this rapidly expanding medical program. We believe our wholesale and retail operations are well equipped with the necessary processes and personnel. We intend to continue increasing our sales and marketing efforts to support our operations. For example, we are exploring recent developments such as Twitter's announcement to allow cannabis advertising. Before turning the call over to Susan, I'd like to extend my congratulations to John for his well-deserved appointment as CEO. John took on the role on an interim basis when my dear friend Bob passed away. And I can tell you, he did it flawlessly. keeping our team spirits high, and making sure we stayed laser focused on our growth plan. I know I speak for the other members of our leadership team when I say we know John will continue to do an unbelievable job. And I'll turn it over to Susan.
John
Thank you, Tim, and good morning, everyone. I'd like to start with a brief recap of our fourth quarter and full year 2022 financial results. Total revenue was $35.8 million in the fourth quarter, which increased 15% year-over-year and increased 6% sequentially. For the full year 2022, we reported revenue of $134 million, which was up 10% versus the full year 2021. To give some context, fiscal 2022 marked the fifth consecutive year of double-digit revenue growth. Our year-over-year growth, both in the fourth quarter and in the full year, was driven by our retail and wholesale operations, partially offset by lower revenue from other sources, such as rental income and management fees from the consolidation of our Maryland operations. Moving to gross margin, our non-GAAP gross margin for the fourth quarter was 44% compared to 50% in a comparable period in 2021. Non-GAAP gross margin for the full year was 48% compared to 55% in fiscal 2021. Fourth quarter and full year gross margins declined due to inflation in our input costs, increased headcount, and a shift away from higher margin management fees after we consolidated our Maryland operations in April 2022. We are focused on driving margins back up to 50% once our in-play assets are fully operational. Moving now to non-GAAP operating expenses. Our non-GAAP operating expenses for the fourth quarter was $12.5 million compared to $7.8 million in a comparable period in 2021. Non-GAAP operating expenses for the full year 2022 was $35.5 million compared to $25.6 million last year. The increase in non-GAAP operating expenses for both the fourth quarter and the full year were due to planned increases in both personnel expenses and marketing programs to support our strategic growth initiative. Our adjusted EBITDA for the fourth quarter was $4.5 million compared to $8.3 million in the comparable period in 2021. For the full year 2022, our adjusted EBITDA was $32.4 million compared to $42.8 million in 2021. Our adjusted EBITDA in the fourth quarter and full year decline versus the previous periods due primarily to a one-time non-cash bad debt reserve of $3.7 million, as well as planned increases in operating expenses to support our growth plan. Now turning to our balance sheet, we ended the year with $9.7 million of cash and equivalents. After closing our recently announced credit facility, our cash balance was approximately $30 million, which included paying off our kind seller note and our cash taxes for 2022. Our net working capital increased to $17.6 million at the end of the fourth quarter, compared to $13.6 million at the end of the third quarter. I would like to now turn to our 2023 financial outlook. As you know, new cannabis operations are 100% dependent on obtaining regulatory approvals. and we have tried to incorporate a high degree of conservatism in our assumptions. Our full year 2023 financial outlook has the following embedded assumptions. We assume competition in Illinois will increase due to numerous social equity dispensaries and Missouri adult use sales coming online. We assume stable pricing conditions in Massachusetts and stabilizing pricing conditions in Maryland. We projected no revenue from adult use sales in Maryland, which could commence in the back half of the year and would be upside to our guidance. Additionally, we assume no acquisitions other than what we have already communicated. As it relates to our 2023 operating expenses, we are pushing very fast this year to open several new revenue generating assets, which means initial spending will increase at a faster pace than our revenue growth. Our full-time headcount will increase from approximately 600 employees to 800 at the end of 2023. This is needed to staff all these new and expanded facilities months ahead of their official opening. We plan to expand our product manufacturing capacity in both Massachusetts and in Maryland. We also plan to ramp up new wholesale businesses in Illinois and Missouri. Accordingly, we plan to increase our sales and marketing expenditures at a faster rate than our revenue growth. So considering all these factors, our 2023 outlook is as follows. Revenue of at least $150 million. Non-GAAP gross margin consistent with full year 2022, which was 48%. Non-GAAP adjusted EBITDA of at least $35 million. $30 million of CAPEX spend. Within our outlook, I also want to point out some specific line items for your modeling purposes. We currently expect to pay 10 to 12 million in taxes and approximately 7 million in interest expense for the full year 2023. We do expect modest revenue growth in the first half of the year and more meaningful growth in the back half of the year as these investments in new and expanded facilities come online. That concludes my review of our financial results and outlook. So at this time, I'd like to turn the call back to John for his concluding remarks.
John Levine
Before I close, I want to take a few moments to recognize my brother and dearest friend, Bob Fireman, the co-founder of Maramed and our former CEO and chairman. Bob was a pioneer in the industry, always giving of his time to help anyone. It didn't matter if they were a competitor. He just wanted to help people. His passing was hard on everyone at Merrimid, but especially me. I loved and respected Bob very much. Bob's lasting legacy at Merrimid is that we created one of the most financially sound companies in the industry with a family-like culture that fosters respect and passion from the top to bottom. Together, we assembled a robust executive team and developed a proven strategic growth plan and roadmap for us to follow and achieve continued success. We will miss him terribly, but we are all fully committed to carrying on his legacy to grow Merrimet into the leading cannabis operator we always envisioned. I am incredibly proud of our company working together from top to bottom to deliver the highest quality product to our patients and customers. While we expect 2023 to continue to be a challenge for consumers, we believe there is a light at the end of the tunnel with respect to rising inflation and interest rates. Good and bad economies come and go. They are never consistent. What will remain consistent is Meramed's focus on what we do best. Her operational and financial discipline has provided us with some of the best fundamentals in the industry. I am a diehard sports fan, and I can't wait for the NCAA tournament to begin. Forgive the comparison, but if cannabis had its own version of March Madness, I think Maramed would be the Cinderella story. We earned our way into the tournament, but no one gave us a shot to win. I watch our team every day, and I know that we have what it takes to win the championship. In all seriousness, assuming no delays, 2023 should be another year of accelerating revenue growth, with 2024 reflecting the full impact of all investments we made over the past two years. As Bob always said, I would encourage you to continue to watch the Merrimid story. We'd like to thank all the Merrimet employees for their hard work and dedication. It's your efforts that keep us at the top player in the industry. Operator, open the line for questions.
Operator
Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the billing process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. The first question comes from Andrew Sample of Echelon Capital Markets. Please go ahead.
Andrew Sample
Hi there. Good morning, and thanks for taking my questions. First of all, congrats on the quarter. Also, just want to echo my respect for Bob. I know that's a sentiment felt across the industry and the investor base. So moving ahead to my questions, I just want to start with gross margins in the quarter. Could you maybe spend a little bit more time breaking down the largest drivers behind the impacts there? I noted in the prepared remarks, you mentioned higher costs and a decline in high margin management service revenue in the quarter. Could you maybe speak to the proportional impact of those items and whether any other factors may have been at play?
John
Sure. Thank you. This is Susan. And, yeah, I mean, there was really nothing other than, you know, we are ramping a lot of the facilities that we've talked about. And so as we're kind of pushing in automation and also getting ahead of that, we did have a little bit more overhead than we will, you know, once the volumes ramp up. Additionally, when we were going through that, we did have, you know, some reviews of different reserves, and we do, you know, standard stuff that you do at year end. But, you know, we are on track to be, you know, driving to 48% and better, you know, for the full year next year. So we are focused on that. And, you know, it was a great quarter for revenue. And, you know, with lower margin, you know, on the wholesale retail compared to the higher margins on the management fees, it was just really a shift. That was it.
Andrew Sample
Great. And it's good to hear your confidence for the gross margin levels improving from Q4 in the year ahead. I'd be curious to hear where you're expecting the largest drivers of margin expansion relative to Q4 to come from in 2023 and how timing-wise those drivers might play out throughout the year.
John
Yeah, I mean, a lot does depend on, you know, the opening of some of these dispensaries we announce. So we're hopeful that we will have Beverly and Quincy online. So that will be a big driver there. So we will have, you know, the full footprint of dispensaries. And then additionally, as we're ramping the wholesale operations, once they get live, Illinois is a big push for us. But we will be hiring people probably two months before we're actually selling products. So I would say you'd see really healthy margins in the back half of the year. but I think we are at a low watermark for Q4 that they will be improving in Q1 and Q2.
Andrew Sample
Great. I'd be interested to hear some color on what's happening with Delaware. The higher margin management service revenues were down a bit quarter over quarter, and I think that mostly pertains to that state. Could you elaborate on market dynamics in that state, and how should we be thinking about Delaware and management service revenues into 2023?
John Levine
Yeah, thank you, Andrew. This is John Levine. Thank you for your opening comments about Bob also. Delaware is a strong market still. We've just been working with the group in Delaware to improve some of their margins, again, because the market throughout the U.S. has had price reduction. So we've been working with them on their margins. So we have had to work with them to reduce some of our fees on a short-term basis. to help them rebuild and revamp some of their services. We expanded in 2022 into the kitchen where we brought in all of our product lines, and they're doing very good. It's just that the ramp up and the cost to start that did affect them, so we've been working with them.
Andrew Sample
Understood, and that's helpful. Well, thank you very much for taking my questions, and I'll get back into queue.
Operator
Thank you. The next question comes from Aaron Gray, Alliance Global Partners. Please go ahead.
Aaron Gray
All right. Thank you. First and foremost, I am very sad to hear Bob's passing. I've had nothing but great interactions with him over the years, and he'll certainly be missed within the industry. So, you know, on to my questions. I would kind of go back a little bit to the gross margin. I just want to dig a little bit into Massachusetts specifically, where I think you guys talked about stable pricing conditions in that state. obviously one that's seen a little bit more pricing pressure in 2022. So just wanted to know in terms of what's kind of driving expectations for stabilization, especially with some of the neighboring states of Connecticut and Rhode Island beginning adult use sales. Thank you.
John Levine
Thanks, Aaron. I'll let Susan speak more to the margins on the individual states. Yes, there was pricing pressure within Massachusetts, but that pressure Really, we didn't follow the market down. We've been able to stabilize our prices still at a very high level as our quality of products demand the upper pricing. So we're considered a top shelf. Nature's Heritage was the number one selling flower in Massachusetts. So our product has been able to maintain the higher prices on the market. And I'll let Susan speak to the margins.
John
Yeah, and then just to add on that, I'm looking at the Massachusetts, and we kind of track, obviously, each of the states in the industry, and we saw mass of our competitors drop this quarter by 3% their revenue and year-over-year by 1%, and we were, you know, in the quarter up 2% and year-over-year 6%. So as John said and Tim, you know, we are selling out of natures. We are holding the prices, and we think we have a premium, you know, product portfolio to offer.
John Levine
Your question about Rhode Island and Connecticut and what kind of an effect it's having, we, as you know, have a partner in the Slater Center in Rhode Island, and their adult use has started down there. And they're seeing sales, but there's not a big increase in sales of people coming across. They still do a lot more medical program down there. So we're not seeing a huge effect. I think that it's a very competitive market. Our stores are not near the Rhode Island border, but we have customers that are on the Rhode Island and Connecticut border and some that are in the New York border, and you will see some start of the reduction of sales in those areas, but I don't see it being a big effect because they're very competitive here in Massachusetts to those states.
Aaron Gray
Okay, great. Thanks for that, Culler. That's really helpful. And the second question for me, I know you guys mentioned potentially utilizing Twitter now and branding has been big for you guys. So just wanted to get some further color maybe just with, you know, the rule change from Twitter. You know, how exactly you'll be able to utilize that, you know, to further advertise for the company or your brand, just incremental color, exactly how you plan to do it on a state-by-state basis. Thank you.
John Levine
Yeah, Aaron, I believe we made it in the statement that we're putting more money into our marketing group to really push our brands forward. Our marketing department has done a lot of great work and are prepared now to actually be able to put real commercials on a Twitter-type basis with some fun type of videos and other things. We just find it as a better means of communication to the consumer, and we're excited about the fact that that market's starting to open.
Aaron
All right, great. Thank you very much for the call, and I'll jump back to the queue.
spk01
Thank you.
Operator
Once again, ladies and gentlemen, if you do have a question, please press star 1 at this time. The next question comes from John DeCourcy of ETIG. Please go ahead.
John DeCourcy
Hey, guys. Good morning. Congratulations on the continued execution here. Just to follow up on the Massachusetts pricing environment, kind of two questions there is, Number one, how will the mix shift with the opening of the Beverly store, knock on wood, as well as the Quincy store in the near term? How is that mix shift? What's that going to look like from wholesale to retail, and how is that going to impact your margins since you guys seemingly wouldn't get the same boost from vertical integration that others get just because you're doing so well with the wholesale side of things?
John Levine
Thank you, John, and good morning, Peter. I'm going to let Tim Shaw speak about the mix, and Susan can add in anything on the margin. Tim, do you want to take away that answer? Sure.
Steve
Thanks, John. Appreciate your call. The mix going between our retail and our wholesale is the exact reason why we are expanding in our cultivation and production areas in Massachusetts. The Quincy acquisition, which we announced recently... allows us to take all of our r d out of our production floor so phenol hunting takes up space during production our r d in the kitchen and in the lab takes up space time and effort that we're going to now be able to move to our quincy location allowing us to produce more out of our new bedford facility that's going to partially allow us to sustain a wholesale revenue while fulfilling the needs of our new dispensaries. Okay. Great.
John
And I think just to add to that on the margin basis, I think, you know, we did announce the Quincy where Tim's going to be moving to pheno hunting. So we will have a few rooms that we'll be able to add grow. that I think both the revenue and the margins will increase. So we do have a very strong following. We sell to over 200 dispensaries in Massachusetts. And, you know, we're delighted that, you know, Quincy, where we are, they haven't really held their product but for the last few months, and it's been really well received. And, you know, folks on the North Shore are really excited to get you know, our award-winning products. So we are ramping production that will, you know, continue to have plenty to supply the three new dispensaries, or two and one existing. And so, yeah, it's a good time to be amassed from AirMed.
John DeCourcy
Okay, great. And then, you know, you guys talk about the heritage flower share gains and continued strength there. Just about every one of your peers is talking about a trade-down effect to more value-oriented purchasing. How is it that that, you know, it seems like this premium product is kind of offset is negating that trend in this inflationary environment. How sustainable is that? And, you know, how are you guys achieving that? Great question.
John Levine
We made for a statement. We opened up in the statement that we launched our in-house brand, which is our entry point product, which has taken off. like a bullet, and it's one of the top products that we have. Then we have Nature's Heritage, which is the top shelf line, which helps us maintain the higher pricing. So we're able to compete at both levels. We're working on maybe a mid-level so that we can have the whole market covered. But our success in being able to keep up our revenue and our wholesale businesses has been the success of adding in-house to our Nature's line without giving up the quality.
John DeCourcy
Okay. And is it performing similarly in other states or just Massachusetts where it's, you know, really outperforming?
John Levine
No, we're doing that in every market that we're going into. Tim can talk to each of the markets if he'd like.
Steve
Yes. So Massachusetts is definitely, Nature's is held in the highest regard in that state. Maryland, as you know, we just took over ownership of Kind Therapeutics. there was a few years that we didn't have the controls in that market, and we lost some market share. However, the brand is clawing its way back to top tier in the state, and we look forward to adult use coming on board, and we are very confident we'll be back in the top tier this year.
John DeCourcy
Okay, great.
Aaron
And I'll hop back into Keith.
spk01
Thank you. Once again, ladies and gentlemen, if you do have a question, please press star 1 at this time.
Aaron
There are no further questions at this time.
Operator
Ladies and gentlemen, this does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.
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