MRMD Q1 FY2026 earnings call

• Overall Operational Results

  • Delivered positive adjusted EBITDA of $3.6 million and positive operating cash flow in Q1 2026, driven by operational discipline and strong brand performance amid ongoing industry-wide adverse market dynamics.
  • Maintains market-leading brand positions across core markets: Zetty Zetty's is the top-selling edible across Illinois, Massachusetts, Maryland, and Delaware; Vydations Powder Drink Mix holds a top five market share.
  • Gross margins held steady at ~40% supported by strong brand positioning, disciplined cost management, and vertical integration efficiencies; operating expenses declined $500,000 year-over-year, driving improved year-over-year profitability.
  • Ended the quarter with $7.9 million in cash and cash equivalents after $800,000 in targeted capital expenditures; the balance sheet after preferred stock restructuring has sufficient liquidity for near-term growth plans.

• Growth Initiatives

  • Pennsylvania: Licensing partner awaits state approval for product and packaging; adult use sales are expected to commence soon, with licensing revenue projected to begin early 2027.
  • New York: Construction of the processing kitchen in the Bronx with a licensed partner is underway, with licensing revenue also projected to start early 2027.
  • Maine: Distribution expansion of Betty's Eddies continues after Q4 2025 commercial launch, with a capital-efficient licensing model.
  • Massachusetts: The state retail dispensary cap increased from 3 to 6 stores per operator; the company is actively pursuing opportunities to add new stores in the state.
  • Ohio: A new Thrive retail location in the Columbus area will open before the end of 2026.
  • M&A and licensing remain core focused growth avenues, with a continued strategy of increasing the mix of own-branded products in company-owned retail stores.

• Federal Cannabis Rescheduling

  • The recent rescheduling of medical cannabis is the largest federal drug reform in U.S. history, and will eliminate 280E-related taxes for the medical portion of the business, which represented 20% of Q1 2026 retail revenue.
  • Implementation details remain unclear, and the company is currently completing DEA registration while waiting for additional regulatory guidance on 280E tax relief; management expects an immediate positive tax impact once implementation is finalized.

Overall Q1 2026 total revenue was $39.5 million, an increase of 4.2% year-over-year and a 5.2% sequential decrease quarter-over-quarter. Gross profit reached $15.8 million with a 40.1% gross margin, and adjusted EBITDA was $3.6 million with a 9% EBITDA margin. Operating income was $1.4 million.

Wholesale segment: Revenue grew 4% year-over-year and decreased 1% sequentially. It achieved 84% penetration across available storefronts in core markets on a trailing 12-month basis. Segment performance by market:

• Delaware: Wholesale sales up 13% sequentially and 373% year-over-year (pro forma), holds the number one overall market share position.
• Massachusetts: Wholesale revenue up 1% year-over-year and down 4% sequentially, outperformed the state industry with multiple top-ranked branded products.
• Maryland: Wholesale revenue down 12% year-over-year and 8% sequentially, due to resolved isolated production issues; core brands still hold top 3 positions in their categories.
• Illinois: Wholesale revenue up 22% year-over-year and 25% sequentially, with newer branded products entering top 50 rankings for the first time.

Retail segment: Revenue grew 5% year-over-year and decreased 7% sequentially. 80% of total retail revenue came from the loyalty program, which grew active membership 10% quarter-over-quarter to 398,000 members; member average baskets are 2% higher than non-member baskets. Performance by market:

• Delaware: Retail revenue down 12% sequentially and up 24% year-over-year (pro forma), in line with expected seasonal declines.
• Massachusetts: Retail revenue down 9% year-over-year and 10% sequentially, with a $2 per basket decrease in average order volume.
• Maryland: Retail revenue down 5% year-over-year and up 24% sequentially, with the Upper Marlboro store continuing to outperform expectations.
• Illinois: Retail revenue down 10% year-over-year and 2% sequentially, primarily driven by average order value pressure.

Management maintained its existing core growth strategy, with no major upward or downward revisions to prior financial guidance:

• Licensing revenue from Pennsylvania and New York is projected to start in early 2027, with the company working to accelerate this timeline where possible.
• The new Thrive dispensary location in Columbus, Ohio, is on track to open before the end of 2026.
• The isolated production issues that reduced Maryland wholesale revenue in Q1 have been fully resolved, with recovery already underway in the current quarter.

• Ongoing industry-wide price compression, particularly for commodity categories including traditional flower, vapes, and pre-rolls, which puts downward pressure on margins in most core markets.
• Retail revenue per store erosion across all markets as total store counts increase, which pressures same-store sales results.
• Implementation details for medical cannabis rescheduling and 280E tax relief remain unclear, with no certainty on the timing or magnitude of the tax benefit.
• Federal banking reform has not changed following rescheduling, so banks and payment processors still treat the industry as illegal, limiting access to traditional financial services.
• Intense competition in core markets such as Massachusetts and Maryland, which makes market share retention and growth more challenging.

Q: How has medical cannabis rescheduling changed Merrimed's M&A and growth strategy, specifically between asset-light licensing and outright acquisition of assets, for entering new markets vs. expanding depth in existing markets? / A: Rescheduling has not meaningfully changed the core strategy. The cap increase for retail dispensaries in Massachusetts is the main driver of new expansion plans; the company will now pursue up to 6 total stores in the state, prioritizing locations with reasonable competition levels. For other states, the company will continue evaluating both licensing partnerships and outright license acquisitions on a case-by-case basis. Since only medical cannabis has been rescheduled, 280E tax disadvantages still apply to adult-use only operations, so near-term expansion will prioritize medical-focused opportunities until adult-use rescheduling occurs.

Q: Is pricing beginning to stabilize across your core markets, and what is the outlook for price compression? / A: Price trends vary by category and market. Delaware currently has the least price compression, while Illinois still sees aggressive pricing from new producers entering the market. Massachusetts pricing has partially stabilized but remains very competitive, and Maryland's wholesale flower market still faces significant downward price pressure from large local producers. Edibles and innovative premium categories (infused pre-rolls, rosin) are largely protected from compression, while commodity categories (traditional flower, vapes, standard pre-rolls) still face ongoing downward pressure.

Q: What was the isolated production issue in Maryland, and has it been fully resolved? / A: The issue was turnover of key production personnel at the Maryland facility. It has been fully resolved, and the company has already recovered production output, with wholesale results expected to rebound in the current quarter.

Q: Has the volume of inbound M&A opportunities increased following the rescheduling announcement? / A: There has been no increase in inbound M&A interest tied directly to rescheduling, because the change only applies to medical cannabis and has not altered federal banking rules for the industry. The only increase in available deals is tied to Massachusetts' recent retail licensing cap change, which has created more acquisition opportunities in that state.