UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer |
|
|
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
N/A |
|
N/A |
|
N/A |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
☒ |
|
Accelerated filer |
|
☐ |
|
|
|
|
|
|
|
|
Non-accelerated filer |
|
☐ |
|
Smaller reporting company |
|
|
|
|
|
|
|
|
|
Emerging growth company |
|
|
|
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of August 3, 2023, the registrant had
TRULIEVE CANNABIS CORP.
Table of Contents
|
|
Page |
PART I. |
|
|
Item 1. |
1 |
|
|
Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 |
1 |
|
2 |
|
|
3 |
|
|
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 |
4 |
|
6 |
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 |
Item 3. |
36 |
|
Item 4. |
37 |
|
|
|
|
PART II. |
OTHER INFORMATION |
|
Item 1. |
40 |
|
Item 1A. |
40 |
|
Item 2. |
41 |
|
Item 3. |
41 |
|
Item 4. |
41 |
|
Item 5. |
41 |
|
Item 6. |
42 |
|
|
43 |
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking words such as “may”, “will”, “would”, “could”, “should”, “believes”, “estimates”, “projects”, “potential”, “expects”, “plans”, “intends”, “anticipates”, “targeted”, “continues”, “forecasts”, “designed”, “goal”, or the negative of those words or other similar or comparable words. Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical facts may be deemed to be forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, results of operations and future growth prospects. The forward-looking statements contained herein are based on certain key expectations and assumptions, including, but not limited to, with respect to expectations and assumptions concerning receipt and/or maintenance of required licenses and third party consents and the success of our operations, are based on estimates prepared by us using data from publicly available governmental sources, as well as from market research and industry analysis, and on assumptions based on data and knowledge of this industry that we believe to be reasonable. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and discussed elsewhere in this Quarterly Report on Form 10-Q and in “Part I, Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 and in “Part II, Item 1A – Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Quarterly Report on Form 10-Q.
ii
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
TRULIEVE CANNABIS CORP.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except per share data)
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
ASSETS |
|
|
|
(Audited) |
|
||
Current Assets: |
|
|
|
|
|
||
Cash and cash equivalents |
$ |
|
|
$ |
|
||
Restricted cash |
|
|
|
|
|
||
Accounts receivable, net |
|
|
|
|
|
||
Inventories, net |
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
|
|
|
|
||
Notes receivable - current portion |
|
|
|
|
|
||
Assets associated with discontinued operations |
|
|
|
|
|
||
Total current assets |
|
|
|
|
|
||
Property and equipment, net |
|
|
|
|
|
||
Right of use assets - operating, net |
|
|
|
|
|
||
Right of use assets - finance, net |
|
|
|
|
|
||
Intangible assets, net |
|
|
|
|
|
||
Goodwill |
|
|
|
|
|
||
Notes receivable, net |
|
|
|
|
|
||
Other assets |
|
|
|
|
|
||
Long-term assets associated with discontinued operations |
|
|
|
|
|
||
TOTAL ASSETS |
$ |
|
|
$ |
|
||
LIABILITIES |
|
|
|
|
|
||
Current Liabilities: |
|
|
|
|
|
||
Accounts payable and accrued liabilities |
$ |
|
|
$ |
|
||
Income tax payable |
|
|
|
|
|
||
Deferred revenue |
|
|
|
|
|
||
Notes payable - current portion |
|
|
|
|
|
||
Private placement notes - current portion, net |
|
|
|
|
|
||
Operating lease liabilities - current portion |
|
|
|
|
|
||
Finance lease liabilities - current portion |
|
|
|
|
|
||
Construction finance liabilities - current portion |
|
|
|
|
|
||
Contingencies |
|
|
|
|
|
||
Liabilities associated with discontinued operations |
|
|
|
|
|
||
Total current liabilities |
$ |
|
|
$ |
|
||
Long-term liabilities: |
|
|
|
|
|
||
Notes payable, net |
|
|
|
|
|
||
Private placement notes, net |
|
|
|
|
|
||
Warrant liabilities |
|
|
|
|
|
||
Operating lease liabilities |
|
|
|
|
|
||
Finance lease liabilities |
|
|
|
|
|
||
Construction finance liabilities |
|
|
|
|
|
||
Deferred tax liabilities |
|
|
|
|
|
||
Other long-term liabilities |
|
|
|
|
|
||
Long-term liabilities associated with discontinued operations |
|
|
|
|
|
||
TOTAL LIABILITIES |
$ |
|
|
$ |
|
||
(see Note 20) |
|
|
|
|
|
||
SHAREHOLDERS' EQUITY |
|
|
|
|
|
||
Common stock, par value; shares authorized. |
$ |
— |
|
|
$ |
— |
|
Additional paid-in-capital |
|
|
|
|
|
||
Accumulated deficit |
|
( |
) |
|
|
( |
) |
Non-controlling interest |
|
( |
) |
|
|
( |
) |
TOTAL SHAREHOLDERS' EQUITY |
|
|
|
|
|
||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY |
$ |
|
|
$ |
|
||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
TRULIEVE CANNABIS CORP.
Condensed Consolidated Statements of Operations (Unaudited)
(in thousands, except per share data)
|
Three Months Ended |
|
Six Months Ended |
|
||||||||
|
June 30, 2023 |
|
June 30, 2022 |
|
June 30, 2023 |
|
June 30, 2022 |
|
||||
Revenue, net |
$ |
|
$ |
|
$ |
|
|
|
||||
Cost of goods sold |
|
|
|
|
|
|
|
|
||||
Gross profit |
|
|
|
|
|
|
|
|
||||
Expenses: |
|
|
|
|
|
|
|
|
||||
Sales and marketing |
|
|
|
|
|
|
|
|
||||
General and administrative |
|
|
|
|
|
|
|
|
||||
Depreciation and amortization |
|
|
|
|
|
|
|
|
||||
Impairments and disposals of long-lived assets, net |
|
|
|
|
|
|
|
|
||||
Impairment of goodwill |
|
|
|
|
|
|
|
|
||||
Total expenses |
|
|
|
|
|
|
|
|
||||
(Loss) income from operations |
|
( |
) |
|
|
|
( |
) |
|
|
||
Other (expense) income: |
|
|
|
|
|
|
|
|
||||
Interest expense |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Change in fair value of derivative liabilities - warrants |
|
|
|
|
|
|
|
|
||||
Other income, net |
|
|
|
|
|
|
|
|
||||
Total other expense, net |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
(Loss) income before provision for income taxes |
|
( |
) |
|
|
|
( |
) |
|
|
||
Provision for income taxes |
|
|
|
|
|
|
|
|
||||
Net loss from continuing operations |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Net loss from discontinued operations, net of tax (provision) benefit of $( |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Net loss |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Less: Net loss attributable to non-controlling interest from continuing operations |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Less: Net loss attributable to non-controlling interest from discontinued operations |
|
( |
) |
|
|
|
( |
) |
|
|
||
Net loss attributable to common shareholders |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|
|
|
|
|
|
|
|
|
||||
Net loss per share - Continuing operations: |
|
|
|
|
|
|
|
|
||||
Basic and diluted |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
Net loss per share - Discontinued operations: |
|
|
|
|
|
|
|
|
||||
Basic and diluted |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
Weighted average number of common shares used in computing net loss per share: |
|
|
|
|
|
|
|
|
||||
Basic and diluted |
|
|
|
|
|
|
|
|
||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
TRULIEVE CANNABIS CORP.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(in thousands, except per share data)
|
Multiple Voting Shares |
|
Subordinate Voting Shares |
|
Total Common Shares |
|
Additional Paid-in-Capital |
|
Accumulated (Deficit) Earnings |
|
Non-Controlling Interest |
|
Total |
|
|||||||
Balance, January 1, 2022 (audited) |
|
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||
Share-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
||
Exercise of stock options |
|
— |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
|
||||
Shares issued for cash - warrant exercise |
|
— |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
|
||||
Shares issued under share compensation plans |
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||
Tax withholding related to net share settlements of equity awards |
|
— |
|
|
( |
) |
|
( |
) |
|
( |
) |
|
— |
|
|
— |
|
|
( |
) |
Conversion of Multiple Voting to Subordinate Voting Shares |
|
( |
) |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Shares issued for PurePenn, Pioneer, and Solevo earnouts |
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||
Distribution |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
Divestment of variable interest entity |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
|
( |
) |
Balance, March 31, 2022 |
|
|
|
|
|
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||
Share-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
||
Exercise of Stock options |
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||
Shares issued for cash - warrant exercise |
|
— |
|
|
|
|
|
|
|
|
— |
|
|
— |
|
|
|
||||
Subordinate Voting Shares issued under share compensation plans |
|
— |
|
|
|
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
||
Conversion of Multiple Voting to Subordinate Voting Shares |
|
( |
) |
|
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
|
( |
) |
Balance, June 30, 2022 |
|
|
|
|
|
|
$ |
|
$ |
|
$ |
( |
) |
$ |
|
||||||
|
Multiple Voting Shares |
|
Subordinate Voting Shares |
|
Total Common Shares |
|
Additional Paid-in-Capital |
|
Accumulated Deficit |
|
Non-Controlling Interest |
|
Total |
|
|||||||
Balance, January 1, 2023 (audited) |
|
|
|
|
|
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
|||||
Share-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
||
Distribution |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
Value of shares earned for purchase of variable interest entity |
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
||
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
|
( |
) |
Balance, March 31, 2023 |
|
|
|
|
|
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
|||||
Share-based compensation |
|
— |
|
|
— |
|
|
— |
|
|
|
|
— |
|
|
— |
|
|
|
||
Termination of purchase of variable interest entity |
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
— |
|
|
— |
|
|
( |
) |
Deconsolidation and divestment of variable interest entities |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
||
Net loss |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
) |
|
( |
) |
|
( |
) |
Balance, June 30, 2023 |
|
|
|
|
|
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
|||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
TRULIEVE CANNABIS CORP.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
|
Six Months Ended |
|
|
Six Months Ended |
|
||
Cash flow from operating activities |
|
|
|
|
|
||
Net loss |
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
||
Depreciation and amortization |
|
|
|
|
|
||
Depreciation included in cost of goods sold |
|
|
|
|
|
||
Non-cash interest expense, net |
|
|
|
|
|
||
Impairment and disposal of long-lived assets, net |
|
|
|
|
|
||
Impairment of goodwill |
|
|
|
|
— |
|
|
Amortization of operating lease right of use assets |
|
|
|
|
|
||
Accretion of construction finance liabilities |
|
|
|
|
|
||
Share-based compensation |
|
|
|
|
|
||
Change in fair value of derivative liabilities - warrants |
|
( |
) |
|
|
( |
) |
Non-cash change in contingencies |
|
( |
) |
|
|
|
|
Allowance for credit losses |
|
|
|
|
|
||
Deferred income tax expense |
|
( |
) |
|
|
( |
) |
Loss from disposal of discontinued operations |
|
|
|
|
— |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Inventories |
|
|
|
|
( |
) |
|
Accounts receivable |
|
( |
) |
|
|
( |
) |
Prepaid expenses and other current assets |
|
|
|
|
|
||
Other assets |
|
|
|
|
( |
) |
|
Accounts payable and accrued liabilities |
|
( |
) |
|
|
( |
) |
Income tax payable |
|
( |
) |
|
|
( |
) |
Other current liabilities |
|
( |
) |
|
|
( |
) |
Operating lease liabilities |
|
( |
) |
|
|
( |
) |
Deferred revenue |
|
( |
) |
|
|
( |
) |
Other long-term liabilities |
|
|
|
|
|
||
Net cash used in operating activities |
|
( |
) |
|
|
( |
) |
Cash flow from investing activities |
|
|
|
|
|
||
Purchases of property and equipment |
|
( |
) |
|
|
( |
) |
Purchases of property and equipment related to construction finance liabilities |
|
— |
|
|
|
( |
) |
Capitalized interest |
|
( |
) |
|
|
( |
) |
Acquisitions and divestments, net of cash |
|
|
|
|
( |
) |
|
Purchases of internal use software |
|
( |
) |
|
|
( |
) |
Cash paid for license |
|
( |
) |
|
|
— |
|
Proceeds from sale of long-lived assets |
|
|
|
|
|
||
Proceeds from sale of held for sale assets |
|
|
|
|
|
||
Proceeds received from notes receivable |
|
|
|
|
|
||
Net cash used in investing activities |
|
( |
) |
|
|
( |
) |
Cash flow from financing activities |
|
|
|
|
|
||
Proceeds from debt financings, net of discounts |
|
— |
|
|
|
|
|
Proceeds from construction finance liabilities |
|
— |
|
|
|
|
|
Proceeds from equity exercises |
|
— |
|
|
|
|
|
Payments on notes payable |
|
( |
) |
|
|
( |
) |
Payments on private placement notes |
|
— |
|
|
|
( |
) |
Payments on finance lease obligations |
|
( |
) |
|
|
( |
) |
Payments on construction finance liabilities |
|
( |
) |
|
|
( |
) |
Payments for debt issuance costs |
|
— |
|
|
|
( |
) |
Payments for taxes related to net share settlement of equity awards |
|
— |
|
|
|
( |
) |
Distributions |
|
( |
) |
|
|
( |
) |
Net cash (used in) provided by financing activities |
|
( |
) |
|
|
|
|
Net decrease in cash and cash equivalents |
|
( |
) |
|
|
( |
) |
Cash, cash equivalents, and restricted cash, beginning of period |
|
|
|
|
|
||
Cash and cash equivalents of discontinued operations, beginning of period |
|
|
|
|
|
||
Less: cash and cash equivalents of discontinued operations, end of period |
|
( |
) |
|
|
( |
) |
Cash, cash equivalents, and restricted cash, end of period |
$ |
|
|
$ |
|
||
4
TRULIEVE CANNABIS CORP.
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
(in thousands)
|
Six Months Ended |
|
|
Six Months Ended |
|
||
Supplemental disclosure of cash flow information |
|
|
|
|
|
||
Cash paid during the period for |
|
|
|
|
|
||
Interest |
$ |
|
|
$ |
|
||
Income taxes, net of refunds |
$ |
|
|
$ |
|
||
Other noncash investing and financing activities |
|
|
|
|
|
||
ASC 842 lease additions - operating and finance leases |
$ |
|
|
$ |
|
||
Purchases of property and equipment in accounts payable and accrued liabilities |
$ |
|
|
$ |
|
||
Noncash partial extinguishment of construction finance liability |
$ |
|
|
$ |
— |
|
|
*The condensed consolidated statements of cash flows include continuing operations and discontinued operations for the six months ended June 30, 2023 and 2022.
|
Six Months Ended |
|
|
Six Months Ended |
|
|
||
Beginning of period: |
|
|
|
|
|
|
||
Cash and cash equivalents |
$ |
|
(1) |
$ |
|
(3) |
||
Restricted cash |
|
|
|
|
|
|
||
Cash, cash equivalents and restricted cash |
$ |
|
|
$ |
|
|
||
|
|
|
|
|
|
|
||
End of period: |
|
|
|
|
|
|
||
Cash and cash equivalents |
$ |
|
(2) |
$ |
|
(4) |
||
Restricted cash |
|
|
|
|
— |
|
|
|
Cash, cash equivalents and restricted cash |
$ |
|
|
$ |
|
|
||
(1) Excludes $
(2) Excludes $
(3) Excludes $
(4) Excludes $
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Trulieve Cannabis Corp., ("Trulieve" and, together with its subsidiaries and variable interest entities, the "Company," "our," or "us") has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and, therefore, do not include all financial information and footnotes required by GAAP for complete financial statements. In management's opinion, the condensed consolidated financial statements include all adjustments of a normal recurring nature necessary to fairly present the Company's financial position as of June 30, 2023, and the results of its operations and cash flows for the periods ended June 30, 2023 and 2022. The results of the Company's operations for the six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the full 2023 fiscal year.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for Trulieve Cannabis Corp. and the notes thereto, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the Securities and Exchange Commission ("SEC") on March 8, 2023 (the "2022 Form 10-K").
Discontinued Operations
During the three months ended June 30, 2023, the Company determined to exit our operations in Massachusetts which represented a strategic shift in the business. The related assets and liabilities associated with the Company's discontinued operations are classified as discontinued operations on the condensed consolidated balance sheets and the results of our discontinued operations have been presented as discontinued operations within the condensed consolidated statements of operations for all periods presented. Unless specifically noted otherwise, footnote disclosures reflect the results of continuing operations only. The results of discontinued operations are presented in Note 16. Discontinued Operations.
Reclassifications
Certain reclassifications have been made to the condensed consolidated financial statements of prior periods and of the accompanying notes to conform to the current period presentation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company’s significant accounting policies are more fully described in Note 3. Summary of Significant Accounting Policies in the consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022. There have been no material changes to the Company’s significant accounting policies.
Prepaid and other current assets
During the three months ended June 30, 2023, escrow of $
Fair Value of Financial Instruments
The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels, and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 – |
Observable inputs based on unadjusted quoted prices in active markets for identical assets or liabilities; |
Level 2 – |
Inputs other than quoted prices in active markets, which are observable for the asset or liability, either directly or indirectly; and |
Level 3 – |
Unobservable inputs for which there is little or no market data requiring the Company to develop its own assumptions. |
6
The fair values of financial instruments by class are as follows as of June 30, 2023 and December 31, 2022:
|
June 30, 2023 |
|
December 31, 2022 |
|
||||||||||||||||||||
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||||||
|
(in thousands) |
|
||||||||||||||||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Money market funds (1) |
$ |
|
$ |
— |
|
$ |
— |
|
$ |
|
$ |
|
$ |
— |
|
$ |
— |
|
$ |
|
||||
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Interest rate swap (2) |
$ |
— |
|
$ |
|
$ |
— |
|
$ |
|
$ |
— |
|
$ |
|
$ |
— |
|
$ |
|
||||
Warrant liabilities (3) |
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
|
$ |
— |
|
$ |
|
||
There have been
Deferred Revenue
During the three months ended March 31, 2023, the Company terminated the loyalty program associated with dispensaries acquired with the acquisition of Harvest Health & Recreation, Inc. ("Harvest") in October 2021. As a result of the termination of the loyalty program at certain dispensaries, the Company recorded a reduction in the accrual of $
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment, definite life intangible assets, and right-of-use assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable.
During the three months ended March 31, 2023, the Company determined that certain long-lived assets, including intangible assets, in Massachusetts were impaired due to the competitive environment in the Massachusetts cannabis industry. The Company utilized a cost approach for its impairment testing of property and equipment resulting in an impairment of $
During the three months ended June 30, 2023, the Company did not identify any events or changes in circumstances providing indication of impairment, other than the Company discontinuing its operations in Massachusetts in the normal course of business.
Impairment of Goodwill
The Company operates as one operating segment and reporting unit and therefore, evaluates goodwill for impairment as one singular reporting unit annually during the fourth quarter or more often when an event occurs, or circumstances indicate the carrying value may not be recoverable.
7
The determination of the fair value of the reporting unit requires us to make significant estimates and assumptions. Due to the inherent uncertainty involved in making these estimates, actual future results could differ. Changes in assumptions regarding future results or other underlying assumptions could have a significant impact on the fair value of the reporting unit.
The discounted cash flow model, or the income approach, reflects our estimates of future cash flows and other factors including estimates of future operating performance, including future revenue, long-term growth rates, gross margins, capital expenditures, discount rates and the probability of achieving the estimated cash flows, among others.
In addition to the income approach, the Company also employs the market approach in its goodwill impairment testing. Under the market approach, the Company estimates the fair value based upon multiples of comparable public companies. Significant estimates in the market approach include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment, as well as assessing comparable market multiples in estimating the fair value of the reporting unit.
During the three months ending March 31, 2023, the Company continued to experience a decline in its stock price resulting in the total market value of its common stock outstanding ("market capitalization") being less than the carrying value of the reporting unit. Management believes this decline in market value is due to a variety of factors, as further described below. In light of the circumstances and indicators of potential impairment described above, management performed an interim quantitative goodwill impairment test as of March 31, 2023. Management first considered whether any impairment was present for the Company’s long-lived assets, concluding that no such impairments were present after conducting an undiscounted cash flow recoverability test, except for in the Massachusetts market as detailed above. In comparing the estimated fair value of the reporting unit to its carrying value, the Company utilized a weighted average valuation using the discounted cash flow model and the market approach. The results of the Company’s interim test for impairment as of March 31, 2023 concluded that the estimated fair value of the reporting unit exceeded the carrying value, resulting in no impairment.
During the three months ended June 30, 2023, the Company continued to experience a declined stock price resulting in the market capitalization being less than the carrying value of the reporting unit. The Company updated the March 31, 2023 valuation, as of June 30, 2023, with no impairment identified finding all inputs, including but not limited to future operating performance, gross margins, probability of achieving cash flows, and multiples of comparable public companies, either maintained consistency or trended positively for the three months ended June 30, 2023. Furthermore, the Company performed a sensitivity test on the income approach updating for the exit of the Massachusetts operations identifying the Massachusetts exit accretive to earnings as the Massachusetts assets were underperforming. However, the Company concluded the sustained stock price decline as a triggering event to perform an interim quantitative goodwill impairment test, as of June 30, 2023, specific to the stock price decline and resulting market capitalization of the Company. As the sole risk to the value of goodwill is the stock price, the Company concluded it most appropriate to transition to a market approach. The results of the Company’s interim test for impairment as of June 30, 2023, utilizing a market approach, indicated that the reporting unit's fair value fell below the carrying value. Based on the results of the goodwill impairment procedures, the Company recorded a $
The Company finds the June 30, 2023 goodwill impairment is a result of the cannabis equity market including the reduced number of custodians to service cannabis equity holdings, negative investor sentiment due to lack of progress on federal reform, and more challenging macroeconomic conditions driving lower cannabis stock prices as of June 30, 2023. The Company finds this is not a negative indicator of historic or current operating results and not a negative indicator of future performance as the Company has taken steps to shed underperforming assets while focusing on cash conservation which is reflective in the results of operations as of June 30, 2023. Additionally, the resulting non-cash charge has no impact on the Company’s compliance with debt covenants, its cash flows, or available liquidity.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of June 30, 2023 and December 31, 2022:
|
June 30, 2023 |
|
December 31, 2022 |
|
||
|
(in thousands) |
|
||||
Trade receivables |
$ |
|
$ |
|
||
Less: allowance for credit losses |
|
( |
) |
|
( |
) |
Accounts receivable, net |
$ |
|
$ |
|
||
8
NOTE 4. NOTES RECEIVABLE
Notes receivable consisted of the following as of June 30, 2023 and December 31, 2022:
|
June 30, |
|
December 31, |
|
Stated Interest Rate |
|
Maturity Date |
|||
|
(in thousands) |
|
|
|
|
|||||
Promissory note acquired in October 2021 (1) |
$ |
|
$ |
|
|
% |
||||
Promissory note dated November 15, 2021 (2) |
|
|
|
|
|
% |
||||
Notes receivable |
|
|
|
|
|
|
|
|||
Less: discount on notes receivable |
|
( |
) |
|
( |
) |
|
|
|
|
Total notes receivable, net of discount |
|
|
|
|
|
|
|
|||
Less: current portion of notes receivable |
|
( |
) |
|
( |
) |
|
|
|
|
Notes receivable, net |
$ |
|
$ |
|
|
|
|
|||
During the three and six months ended June 30, 2023, the Company recorded interest income related to notes receivable of $
Stated maturities of the notes receivable are as follows as of June 30, 2023:
Year |
Expected principal payments |
|
|
|
(in thousands) |
|
|
Six months ending December 31, 2023 |
$ |
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
Thereafter |
|
|
|
Total |
|
|
|
Less: discount on notes receivable |
|
( |
) |
Total |
$ |
|
|
NOTE 5. INVENTORIES
Inventories are stated at the lower of cost or market. Costs associated with abnormal production volume are expensed as incurred.
|
June 30, 2023 |
|
December 31, 2022 |
|
||
|
(in thousands) |
|
||||
Raw material |
|
|
|
|
||
Cannabis plants |
$ |
|
$ |
|
||
Packaging and supplies |
|
|
|
|
||
Total raw material |
|
|
|
|
||
Work in process |
|
|
|
|
||
Finished goods-unmedicated |
|
|
|
|
||
Finished goods-medicated |
|
|
|
|
||
Total inventories, net |
$ |
|
$ |
|
||
9
NOTE 6. PROPERTY AND EQUIPMENT
As of June 30, 2023 and December 31, 2022, property and equipment consisted of the following:
|
June 30, 2023 |
|
December 31, 2022 |
|
||
|
(in thousands) |
|
||||
Land |
$ |
|
$ |
|
||
Buildings and improvements |
|
|
|
|
||
Furniture and equipment |
|
|
|
|
||
Vehicles |
|
|
|
|
||
Total |
|
|
|
|
||
Less: accumulated depreciation |
|
( |
) |
|
( |
) |
Total property and equipment |
|
|
|
|
||
Construction in progress |
|
|
|
|
||
Total property and equipment, net |
$ |
|
$ |
|
||
The Company incurred the following expense related to property and equipment during the three and six months ended June 30, 2023:
|
|
Three Months Ended June 30, |
Six Months Ended June 30, |
||
|
Statement of Operations |
2023 |
2022 |
2023 |
2022 |
|
|
(in thousands) |
|||
Capitalized interest |
Interest expense |
$( |
$( |
$( |
$( |
Depreciation expense |
Cost of goods sold and Depreciation and amortization |
||||
Total |
|
$ |
$ |
$ |
$ |
|
|
Three Months Ended June 30, |
Six Months Ended June 30, |
||
|
Statement of Operations |
2023 |
2022 |
2023 |
2022 |
|
|
(in thousands) |
|||
Loss on impairment |
Impairments and disposals of long-lived assets, net |
$ |
$ |
$ |
$ |
Loss on disposal |
Impairments and disposals of long-lived assets, net |
||||
Total |
|
$ |
$ |
$ |
$ |
NOTE 7. INTANGIBLE ASSETS
The Company's definite-lived intangible assets consisted of the following as of June 30, 2023 and December 31, 2022:
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||||||
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
Net Book Value |
|
|
Gross Carrying Amount |
|
Accumulated Amortization |
|
Net Book Value |
|
||||||
|
(in thousands) |
|
|
(in thousands) |
|
||||||||||||||
Licenses |
$ |
|
$ |
|
$ |
|
|
$ |
|
$ |
|
$ |
|
||||||
Trademarks |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Internal use software |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Tradenames |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Customer relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Total |
$ |
|
$ |
|
$ |
|
|
$ |
|
$ |
|
$ |
|
||||||
Amortization expense was $
10
During the three and six months ended June 30, 2023, the Company recorded a gain on sale of intangible assets of $
The following table outlines the estimated future amortization expense related to intangible assets as of June 30, 2023:
Year |
Estimated |
|
|
|
(in thousands) |
|
|
Six Months Ending December 31, 2023 |
$ |
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
Thereafter |
|
|
|
|
$ |
|
|
As of June 30, 2023, the weighted average amortization period remaining for intangible assets was
NOTE 8. HELD FOR SALE
As of June 30, 2023, the Company had $
|
(in thousands) |
|
|
Held for sale assets as of December 31, 2022 |
$ |
|
|
Assets moved to held for sale |
|
|
|
Non-cash settlement |
|
( |
) |
Impairments |
|
( |
) |
Assets sold |
|
( |
) |
Held for sale assets as of June 30, 2023 |
$ |
|
|
|
|
|
|
Held for sale liabilities as of December 31, 2022 |
$ |
— |
|
Liabilities moved to held for sale |
|
( |
) |
Liabilities settled associated with held for sale assets |
|
|
|
Held for sale liabilities as of June 30, 2023 |
$ |
— |
|
During the three and six months ended June 30, 2023, the Company recorded a loss on the impairment and disposal of held for sale assets of $
11
June 30, 2022, respectively, which is recorded to impairment and disposal of long-lived assets, net within the condensed consolidated statements of operations.
NOTE 9. NOTES PAYABLE
As of June 30, 2023 and December 31, 2022, notes payable consisted of the following:
|
June 30, 2023 |
|
December 31, 2022 |
|
Stated Interest Rate |
|
Effective Interest Rate |
Maturity Date |
Net Book Value of Collateral |
|
|||
|
(in thousands) |
|
|
|
|
|
|
|
|||||
Promissory notes dated |
$ |
|
$ |
|
(4) |
$ |
|
||||||
Promissory note dated |
|
|
|
|
(4) |
$ |
|
||||||
Promissory notes dated |
|
|
|
|
(4) |
$ |
|
||||||
Promissory note dated |
|
|
|
|
(4) |
(5) |
|
||||||
Promissory notes acquired in October 2021 |
|
|
|
|
(6) |
(4) |
(6) |
(6) |
(6) |
|
|||
Promissory note of consolidated variable-interest entity dated |
|
|
|
|
(4) |
|
— |
|
|||||
Total notes payable |
|
|
|
|
|
|
|
|
|
|
|||
Less: debt discount |
|
( |
) |
|
( |
) |
|
|
|
|
|
|
|
Less: current portion of notes payable |
|
( |
) |
|
( |
) |
|
|
|
|
|
|
|
Notes payable, net (7) |
$ |
|
$ |
|
|
|
|
|
|
|
|||
12
During the three and six months ended June 30, 2023, the Company incurred interest expense related to these notes payable of $
The Company's notes payable described above are subordinated to the private placement notes. See Note 10. Private Placement Notes for further details.
As of June 30, 2023, stated maturities of notes payable are as follows:
|
(in thousands) |
|
|
Six months ended December 31, 2023 |
$ |
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
Thereafter |
|
|
|
Total |
$ |
|
|
NOTE 10. PRIVATE PLACEMENT NOTES
June and November Notes
In 2019, the Company completed two private placement arrangements (the “June Notes” and the “November Notes”), each comprised of
2026 Notes
On October 6, 2021, the Company closed its private placement of
13
As of June 30, 2023 and December 31, 2022, private placement notes payable consisted of the following:
|
June 30, 2023 |
|
December 31, 2022 |
|
Stated Interest Rate |
Effective Interest Rate |
Maturity Date |
||
|
(in thousands) |
|
|
|
|
||||
2026 Notes - Tranche One |
$ |
|
$ |
|
|||||
2026 Notes - Tranche Two |
|
|
|
|
|||||
June Notes |
|
|
|
|
|||||
November Notes |
|
|
|
|
|||||
Total private placement notes |
|
|
|
|
|
|
|
||
Less: Unamortized debt discount and issuance costs |
|
( |
) |
|
( |
) |
|
|
|
Less: current portion of private placement notes, net |
|
( |
) |
|
— |
|
|
|
|
Private placement notes, net |
$ |
|
$ |
|
|
|
|
||
The private placement notes contain customary restrictive covenants pertaining to our management and operations, including, among other things, limitations on the amount of debt that may be incurred and the ability to pledge assets, as well as financial covenant requirements, that the Company comply with certain indebtedness to consolidated EBITDA (as defined) requirements and a fixed charge ratio coverage, measured from time to time when certain conditions are met.
During the three and six months ended June 30, 2023, the Company incurred interest expense related to private placement notes of $
Stated maturities of the principal portion of private placement notes outstanding as of June 30, 2023, are as follows:
Year |
(in thousands) |
|
|
Six months ending December 31, 2023 |
$ |
— |
|
2024 |
|
|
|
2025 |
|
— |
|
2026 |
|
|
|
2027 |
|
— |
|
Thereafter |
|
— |
|
Total private placement notes |
$ |
|
|
NOTE 11. LEASES
The Company leases real estate used for dispensaries, cultivation and production facilities, and corporate offices. Lease terms for real estate generally range from to
Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease agreements for some locations provide for rent escalations and renewal options. Certain real estate leases require payment for taxes, insurance and maintenance which are considered non-lease components. The Company accounts for real estate leases and the related fixed non-lease components together as a single component.
The Company recorded a loss on disposal of right of use assets of less than $
14
The following table provides the components of lease cost recognized within the condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022:
|
|
Three Months Ended |
|
Six Months Ended June 30, |
|
||||||||
|
Statement of Operations |
2023 |
|
2022 |
|
2023 |
|
2022 |
|
||||
|
|
(in thousands) |
|
||||||||||
Operating lease cost |
Cost of goods sold, sales and marketing, general and administrative |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Finance lease cost: |
|
|
|
|
|
|
|
|
|
||||
Amortization of lease assets |
Cost of goods sold and Depreciation and amortization |
|
|
|
|
|
|
|
|
||||
Interest on lease liabilities |
Interest expense |
|
|
|
|
|
|
|
|
||||
Finance lease cost |
|
|
|
|
|
|
|
|
|
||||
Variable lease cost |
Cost of goods sold, sales and marketing, general and administrative |
|
|
|
|
|
|
|
|
||||
Short term lease expense |
Cost of goods sold, sales and marketing, general and administrative |
|
|
|
|
|
|
|
|
||||
Total lease cost |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||
Other information related to operating and finance leases is as follows:
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
||||
|
(in thousands) |
|
||||||||||
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
|
|
|
||||
Operating cash flows from operating leases |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Operating cash flows from finance leases |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Financing cash flows from finance leases |
$ |
|
$ |
|
$ |
|
$ |
|
||||
ASC 842 lease additions and modifications: |
|
|
|
|
|
|
|
|
||||
Operating leases |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Finance leases |
$ |
|
$ |
|
$ |
|
$ |
|
||||
|
June 30, 2023 |
|
December 31, 2022 |
|
||
Weighted average discount rate: |
|
|
|
|
||
Operating leases |
|
% |
|
% |
||
Finance leases |
|
% |
|
% |
||
Weighted average remaining lease term (in years): |
|
|
|
|
||
Operating leases |
|
|
|
|
||
Finance leases |
|
|
|
|
||
15
Future minimum lease payments under the Company's non-cancellable leases as of June 30, 2023 are as follows:
|
Operating Leases |
|
Finance Leases |
|
||
|
(in thousands) |
|
||||
Six months ending December 31, 2023 |
$ |
|
$ |
|
||
2024 |
|
|
|
|
||
2025 |
|
|
|
|
||
2026 |
|
|
|
|
||
2027 |
|
|
|
|
||
Thereafter |
|
|
|
|
||
Total undiscounted lease liabilities |
|
|
|
|
||
Less: Interest |
|
( |
) |
|
( |
) |
Total present value of minimum lease payments |
|
|
|
|
||
Lease liabilities- current portion |
|
( |
) |
|
( |
) |
Lease liabilities |
$ |
|
$ |
|
||
Lease Guarantees
In accordance with ASC 460, Guarantees, the Company has determined that it meets the guarantor requirements under certain contractual agreements.
During the three months ending June 30, 2023, the Company determined it was no longer the primary beneficiary of one its variable interest entities. The Company guarantees two cannabis dispensary leases of the variable interest entity. Under both leases, nonperformance by the tenant results in the Company becoming obligated to fulfill the lease conditions. The leases have a term of approximately
NOTE 12. CONSTRUCTION FINANCE LIABILITIES
When the Company enters into sale-leaseback transactions, it assesses whether a contract exists and whether there is a performance obligation to transfer control of the asset when determining whether the transfer of an asset shall be accounted for as a sale of the asset. If control is not transferred, based on the nature of the transaction, and therefore does not meet the requirements for a sale under the failed-sale-leaseback accounting model, the Company is deemed to own this real estate and reflects these properties on its consolidated balance sheets in property and equipment, net and depreciates them over the assets' useful lives. The liabilities associated with these leases are recorded to construction finance liabilities - current portion and construction finance liabilities on the condensed consolidated balance sheets. During the three and six months ended June 30, 2023, the Company recorded interest expense of $
Ben Bostic
In October 2019, the Company sold property in Florida in exchange for cash of $
McKeesport
In October 2019, the Company acquired a failed sales-leaseback transaction of a cannabis cultivation facility in Pennsylvania. The initial term of the lease is
16
Alachua
In October 2021, the Company acquired a failed sales-leaseback transaction of a cannabis cultivation and processing facility in Florida. The lease originated in January 2021 and has an initial term of
Hancock
In October 2021, the Company acquired a failed sales-leaseback transaction of a cannabis cultivation and processing facility in Maryland. The lease originated in August 2021 and has an initial term of
Future minimum lease payments for the construction finance liabilities as of June 30, 2023, are as follows:
Year |
(in thousands) |
|
|
Six months ending December 31, 2023 |
$ |
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
Thereafter |
|
|
|
Total future payments |
|
|
|
Less: Interest |
|
( |
) |
Total present value of minimum payments |
|
|
|
Construction finance liabilities - current portion |
|
( |
) |
Construction finance liabilities |
$ |
|
|
NOTE 13. EQUITY
Warrants
Liability Warrants
In October 2021 the Company acquired
|
Number |
|
Weighted average exercise price |
|
Weighted average |
|
|||
Outstanding and exercisable as of January 1, 2023 |
|
|
$ |
|
|
|
|||
Granted |
|
— |
|
|
— |
|
|
— |
|
Exercised |
|
— |
|
|
— |
|
|
— |
|
Expired |
|
( |
) |
|
|
|
— |
|
|
Outstanding and exercisable as of June 30, 2023 |
|
— |
|
$ |
— |
|
|
— |
|
17
Share Based Compensation
Options
The Company recorded share-based compensation for stock options as follows:
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
Statement of operations location |
2023 |
|
2022 |
|
2023 |
|
2022 |
|
||||
|
(in thousands) |
|
||||||||||
Cost of goods sold |
$ |
|
$ |
( |
) |
$ |
|
$ |
|
|||
General and administrative |
|
( |
) |
|
|
|
|
|
|
|||
Sales and marketing |
|
|
|
|
|
|
|
|
||||
Total share-based compensation expense |
$ |
( |
) |
$ |
|
$ |
|
$ |
|
|||
The number and weighted-average exercise prices and remaining contractual life of options as of June 30, 2023 were as follows:
|
Number of options |
|
Weighted average exercise price |
|
Weighted average remaining contractual life (Yrs.) |
|
Aggregate intrinsic value |
|
||||
Outstanding, January 1, 2023 |
|
|
$ |
|
|
|
$ |
— |
|
|||
Granted |
|
— |
|
|
— |
|
|
|
|
|
||
Exercised |
|
— |
|
|
— |
|
|
|
|
|
||
Forfeited |
|
( |
) |
|
|
|
|
|
|
|||
Outstanding, June 30, 2023 |
|
|
$ |
|
|
|
$ |
— |
|
|||
Exercisable, June 30, 2023 |
|
|
$ |
|
|
|
$ |
— |
|
|||
As of June 30, 2023, there was approximately $
Restricted Stock Units
The following is a summary of RSU activity for the six months ended June 30, 2023
|
Number of |
|
Weighted average |
|
||
Unvested balance as of January 1, 2023 |
|
|
$ |
|
||
Granted |
|
— |
|
|
|
|
Vested |
|
— |
|
|
|
|
Forfeited |
|
( |
) |
|
|
|
Unvested balance as of June 30, 2023 |
|
|
$ |
|
||
The Company recorded share-based compensation for RSUs as follows:
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
Statement of operations location |
2023 |
|
2022 |
|
2023 |
|
2022 |
|
||||
|
(in thousands) |
|
||||||||||
Cost of goods sold |
$ |
|
$ |
|
$ |
|
$ |
|
||||
General and administrative |
|
|
|
|
|
|
|
|
||||
Sales and marketing |
|
|
|
|
|
|
|
|
||||
Total share-based compensation expense |
$ |
|
$ |
|
$ |
|
$ |
|
||||
As of June 30, 2023, there was approximately $
18
NOTE 14. EARNINGS PER SHARE
The following is a reconciliation for the calculation of basic and diluted earnings per share:
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
||||
Numerator |
(in thousands, except share and per share amounts) |
|
||||||||||
Continuing operations |
|
|
|
|
|
|
|
|
||||
Net loss from continuing operations |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
Less: Net loss attributable to non-controlling interest |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Net loss from continuing operations available to common shareholders of Trulieve Cannabis Corp. |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
Discontinued operations |
|
|
|
|
|
|
|
|
||||
Net loss from discontinued operations |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
Less: Net loss attributable to non-controlling interest |
|
( |
) |
|
|
|
( |
) |
|
|
||
Net loss from discontinued operations excluding non-controlling interest |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
Denominator |
|
|
|
|
|
|
|
|
||||
Weighted average number of common shares outstanding - Basic and diluted |
|
|
|
|
|
|
|
|
||||
Loss per Share - Continuing operations |
|
|
|
|
|
|
|
|
||||
Basic and diluted loss per share |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
Loss per Share - Discontinued operations |
|
|
|
|
|
|
|
|
||||
Basic and diluted loss per share |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
Shares which have been excluded from diluted per share amounts because their effect would have been anti-dilutive are as follows:
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
||||
Stock options |
|
|
|
|
|
|
|
|
||||
Restricted share units |
|
|
|
|
|
|
|
|
||||
Warrants |
|
|
|
|
|
|
|
|
||||
As of June 30, 2023, there are approximately
NOTE 15. INCOME TAXES
The following table summarizes the Company’s income tax expense and effective tax rate for the three and six months ended June 30, 2023 and 2022.
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
||||
|
(in thousands) |
|
||||||||||
(Loss) Income before provision for income taxes |
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
||
Provision for income taxes |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Effective tax rate |
|
( |
%) |
|
% |
|
( |
%) |
|
% |
||
The Company has computed its provision for income taxes based on the actual effective tax rate for the quarter as the Company believes this is the best estimate for the annual effective tax rate.
The Company is subject to income taxes in the United States and Canada. Significant judgment is required in evaluating the Company’s uncertain tax positions and determining the provision for income taxes. The Company’s gross unrecognized tax benefits were approximately $
19
NOTE 16. DISCONTINUED OPERATIONS
During the three months ended June 30, 2023, the Company determined to discontinue its operations in Massachusetts. In July 2022, the Company discontinued its Nevada operations. There are immaterial activities related to Nevada which are expected to continue until the associated lease liabilities are settled.
The assets and liabilities associated with discontinued operations consisted of the following as June 30, 2023 and December 31, 2022:
|
June 30, 2023 |
|
December 31, 2022 |
|
||
|
(in thousands) |
|
||||
Assets associated with discontinued operations |
|
|
|
|
||
Cash |
$ |
|
$ |
|
||
Accounts receivable, net |
|
|
|
|
||
Inventories, net |
|
|
|
|
||
Income tax receivable |
|
|
|
|
||
Prepaids expenses and other current assets |
|
|
|
|
||
Deferred tax asset |
|
|
|
|
||
Property and equipment, net |
|
|
|
|
||
Right of use assets - operating, net |
|
|
|
|
||
Right of use assets - finance, net |
|
|
|
|
||
Intangible assets, net |
|
|
|
|
||
Other assets |
|
|
|
|
||
Total assets associated with discontinued operations |
$ |
|
$ |
|
||
Liabilities associated with discontinued operations |
|
|
|
|
||
Accounts payable and accrued liabilities |
$ |
|
$ |
|
||
Deferred revenue |
|
|
|
|
||
Operating lease liabilities - current portion |
|
|
|
|
||
Finance lease liabilities - current portion |
|
|
|
|
||
Construction finance liability - current portion |
|
|
|
|
||
Operating lease liabilities |
|
|
|
|
||
Finance lease liabilities |
|
|
|
|
||
Construction finance liability |
|
|
|
|
||
Other long-term liabilities |
|
|
|
|
||
Total liabilities associated with discontinued operations |
$ |
|
$ |
|
||
20
The following table summarizes the Company's income (loss) from discontinued operations for the three and six months ended June 30, 2023 and 2022. The gain and loss resulting from the forgiveness of intercompany payables has been eliminated in consolidation.
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
||||
|
(in thousands) |
|
||||||||||
Revenues, net of discounts |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Cost of goods sold |
|
|
|
|
|
|
|
|
||||
Gross margin |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Expenses: |
|
|
|
|
|
|
|
|
||||
Operating expenses |
|
|
|
|
|
|
|
|
||||
Impairment and disposal of long-lived assets, net |
|
|
|
|
|
|
|
|
||||
Total Expenses |
|
|
|
|
|
|
|
|
||||
Income (loss) from operations |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Other (expense) income: |
|
|
|
|
|
|
|
|
||||
Interest expense |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Other income, net |
|
|
|
|
|
|
|
|
||||
Total other expense, net |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Loss before provision for income taxes |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Income tax (provision) benefit |
|
( |
) |
|
|
|
( |
) |
|
|
||
Net loss from discontinued operations, net of tax (provision) benefit |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
Less: Net loss attributable to non-controlling interest from discontinued operations |
|
( |
) |
|
|
|
( |
) |
|
|
||
Net loss from discontinued operations excluding non-controlling interest |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
The condensed consolidated statements of cash flows include continuing operations and discontinued operations. The following table summarizes the depreciation of long-lived assets, amortization of long-lived assets, and capital expenditures of discontinued operations for the three and six months ended June 30, 2023 and 2022.
|
Six Months Ended June 30, |
|
||||
|
2023 |
|
2022 |
|
||
|
|
|
|
|
||
Depreciation |
$ |
|
$ |
|
||
Amortization |
$ |
|
$ |
|
||
Purchases of property plant and equipment |
$ |
|
$ |
|
||
Loss on impairment of long-lived assets |
$ |
|
$ |
|
||
Other noncash investing and financing activities |
|
|
|
|
||
Noncash partial extinguishment of construction finance liability |
$ |
|
$ |
|
||
As a result of the Massachusetts exit, the Company performed a lease term reassessment for the Holyoke failed sale-leaseback financing arrangement due to lease renewals previously included in the lease term being excluded as of the Massachusetts exit. The Company concluded the failed sale-leaseback accounting conclusion is maintained. The Company recognized a gain on partial
21
extinguishment of $
The lease had a term of
Future minimum lease payments for the construction finance liability as of June 30, 2023, are as follows:
Year |
(in thousands) |
|
|
Six months ending December 31, 2023 |
$ |
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
2027 |
|
|
|
Thereafter |
|
|
|
Total future payments |
|
|
|
Less: Interest |
|
( |
) |
Total present value of minimum payments |
|
|
|
Construction finance liability - current portion |
|
( |
) |
Construction finance liability |
$ |
|
|
NOTE 17. Variable Interest Entities
The Company has entered into certain agreements with various entities related to the purchase and operation of cannabis dispensary, cultivation, and production licenses, in several states in which it determined to be variable interest entities. The Company's VIEs are not material to the consolidated financial position or operations as of June 30, 2023 and December 31, 2022 or for the three and six months ended June 30, 2023 and 2022.
The Company determined certain of these entities to be variable interest entities in which it is the primary beneficiary. The Company holds ownership interests in these entities ranging from
During the three months ended March 31, 2023, the Company paid $
During the three months ended June 30, 2023, the Company sold and divested of certain variable interest entities. The Company received cash proceeds of $
The Company no longer consolidates these VIEs since it is no longer considered the primary beneficiary.
22
The following table presents the summarized assets and liabilities of the Company’s VIEs in which the Company does not hold a majority interest as of June 30, 2023 and December 31, 2022. The assets and liabilities in the table below include third-party assets and liabilities of our VIEs only and exclude intercompany balances that eliminate in consolidation as included on our condensed consolidated balance sheets.
|
June 30, 2023 |
|
December 31, 2022 |
|
||
|
(in thousands) |
|
||||
Current assets: |
|
|
|
|
||
Cash |
$ |
|
$ |
|
||
Accounts receivable, net |
|
|
|
|
||
Inventories, net |
|
|
|
|
||
Prepaids and other current assets |
|
|
|
|
||
Total current assets |
|
|
|
|
||
Property and equipment, net |
|
|
|
|
||
Right of use asset - operating, net |
|
|
|
— |
|
|
Right of use asset - finance, net |
|
|
|
|
||
Intangible assets, net |
|
|
|
|
||
Other assets |
|
|
|
|
||
Total assets |
$ |
|
$ |
|
||
Current liabilities: |
|
|
|
|
||
Accounts payable and accrued liabilities |
$ |
|
$ |
|
||
Income tax payable |
|
|
|
|
||
Deferred revenue |
|
|
|
|
||
Finance lease liability - current portion |
|
|
|
|
||
Total current liabilities |
|
|
|
|
||
Notes payable |
|
|
|
|
||
Operating lease liability |
|
|
|
— |
|
|
Finance lease liability |
|
|
|
|
||
Deferred tax liabilities |
|
|
|
|
||
Other long-term liabilities |
|
|
|
|
||
Total liabilities |
$ |
|
$ |
|
||
NOTE 18. RELATED PARTIES
The Company leases a cultivation facility and corporate office facility from an entity that is directly or indirectly owned by Kim Rivers, the Company's Chief Executive Officer and Chair of the board of directors, George Hackney, a former member of the Company's board of directors, and Richard May, a member of the Company's board of directors.
As of June 30, 2023, and December 31, 2022, under ASC 842, the Company had the following related party operating leases on the condensed consolidated balance sheets:
|
As of June 30, 2023 |
|
As of December 31, 2022 |
|
||
|
(in thousands) |
|
||||
Right-of-use assets, net |
$ |
|
$ |
|
||
Lease liabilities: |
|
|
|
|
||
Lease liabilities - current portion |
$ |
|
$ |
|
||
Lease liabilities |
|
|
|
|
||
Total related parties lease liabilities |
$ |
|
$ |
|
||
Lease expense recognized on related party operating leases was less than $
23
NOTE 19. REVENUE DISAGGREGATION
Net revenues are comprised of the following for the three and six months ended June 30, 2023 and 2022:
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
||||
|
(in thousands) |
|
||||||||||
Retail |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Wholesale, licensing, and other |
|
|
|
|
|
|
|
|
||||
Revenue, net of discounts |
$ |
|
$ |
|
$ |
|
$ |
|
||||
NOTE 20. COMMITMENTS AND CONTINGENCIES
Operating Licenses
Although the possession, cultivation, and distribution of cannabis is permitted in the states in which the Company operates, cannabis is a Schedule-I controlled substance and its use remains a violation of federal law. Since federal law criminalizing the use of cannabis preempts state laws that legalize its use, strict enforcement of federal law regarding cannabis would likely result in the Company’s inability to proceed with our business plans. In addition, the Company’s assets, including real property, inventory, cash and cash equivalents, equipment, and other goods, could be subject to asset forfeiture because cannabis is still federally illegal.
Claims and Litigation
In the ordinary course of business, the Company may be a party to litigation, investigations, inquiries, employment-related matters, disputes and other potential claims. As of June 30, 2023, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s condensed consolidated statements of operations. The Company does not believe it is probable that the outcome of any existing litigation, investigations, disputes or other potential claims will materially affect the Company or these financial statements in excess of amounts accrued.
In connection with the acquisition of a cultivation operation from CP4 Group, LLC, in Phoenix, Arizona ("Watkins Cultivation Operation" or "Watkins"), in the prior period, the Company received a demand letter on October 12, 2022, related to the four potential earnouts. The earnouts were based on the completion of certain milestones related to construction and operations and contingent on the continued employment of key employee shareholders. The Company entered into a settlement agreement in April 2023 closing this matter.
Contingencies
The Company records contingent liabilities with respect to litigation on various claims in which it believes a loss is probable and can be estimated. As of June 30, 2023 and December 31, 2022, $
Regulatory Compliance
The Company’s compliance with state and other rules and regulations may be reviewed by state and federal agencies. If the Company fails to comply with these regulations, the Company could be subject to loss of licenses, substantial fines or penalties, and other sanctions.
24
NOTE 21. SUBSEQUENT EVENTS
In July 2023, the Company granted, under the Company’s 2021 Omnibus Incentive Plan,
25
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Trulieve Cannabis Corp., together with its subsidiaries ("Trulieve," "the Company," "we," or "our") should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the related notes included elsewhere within this Quarterly Report on Form 10-Q and the Audited Consolidated Financial Statements and the related Notes thereto and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "2022 Form 10-K"). There have been no material changes as of June 30, 2023 to the application of our critical accounting policies as described in Item 7 of the Form 10-K.
This discussion contains forward-looking statements and involves numerous risks and uncertainties, including but not limited to those described in the “Risk Factors” section of this Quarterly Report on Form 10-Q in “Part I, Item 1A. Risk Factors” in our 2022 Form 10-K and in “Part II, Item 1A – Risk Factors” in our Q1 2023 Form 10-Q (the “Q1 Form 10-Q”). Actual results may differ materially from those contained in any forward-looking statements. You should read “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” contained herein and in our 2022 Form 10-K and Q1 Form 10-Q. See “Special Note Regarding Forward-Looking Statements and Projections” in “Part II. Other Information” of this report. You should consider our forward-looking statements in light of the risks discussed in “Item 1A. Risk Factors” in “Part II. Other Information” of this report and our unaudited condensed consolidated financial statements, related notes and other financial information appearing elsewhere in this report, the Form 10-K and our other filings with the Securities and Exchange Commission (the “SEC”).
Overview
Trulieve Cannabis Corp. is a reporting issuer in the United States and Canada. The Company’s Subordinate Voting Shares (as hereinafter defined) are listed for trading on the Canadian Securities Exchange (“CSE”) under the symbol “TRUL” and are also traded in the United States on the OTCQX Best Market (“OTCQX”) under the symbol “TCNNF”.
Trulieve is a vertically integrated cannabis company and multi-state operator which currently operates in a number of states. Headquartered in Quincy, Florida, we are the market leader for quality medical cannabis products and services in Florida and we have market leading retail operations in Arizona, Pennsylvania, and West Virginia. By providing innovative, high-quality products across our brand portfolio, we aim to be the brand of choice for medical and adult-use customers in all of the markets that we serve. We operate in highly regulated markets that require expertise in cultivation, manufacturing, retail, and logistics. We have developed proficiencies in each of these functions and are committed to expanding access to high quality cannabis products and delivering exceptional customer experiences. Trulieve leverages its developed processes cultivate, process, and/or dispense a wide-range of permitted cannabis products across its operating markets with high standards for safety, effectiveness, quality, and customer care at the forefront.
As of June 30, 2023 we operated the following:
State |
Number of Dispensaries |
|
Number of Cultivation and Processing Facilities |
|
||
Florida |
|
125 |
|
|
6 |
|
Arizona |
|
21 |
|
|
4 |
|
Pennsylvania |
|
20 |
|
|
3 |
|
West Virginia |
|
10 |
|
|
1 |
|
Maryland |
|
3 |
|
|
1 |
|
Georgia |
|
3 |
|
|
1 |
|
Connecticut |
|
1 |
|
|
— |
|
Colorado |
|
— |
|
|
1 |
|
Total |
|
183 |
|
|
17 |
|
As of June 30, 2023, we employed over 5,900 people, and we are committed to providing patients and adult use consumers, which we refer to herein as “customers,” a consistent and welcoming retail experience across Trulieve branded stores and affiliated retail locations.
26
Our business and operations center around the Trulieve brand philosophy of “Customers First” which permeates our culture beginning with high-quality and efficient cultivation and manufacturing practices. We focus on the consumer experience at Trulieve branded and affiliated retail locations, our in-house call center and in our Florida market at customer residences through a robust home delivery program. Our investments in vertically integrated operations in several of our markets afford us ownership of the entire supply chain, which mitigates third-party risks and allows us to completely control product quality and brand experience. We believe that this is contributive to high customer retention and brand loyalty. We successfully operate our core business functions of cultivation, production, and distribution at scale, and are skilled at rapidly increasing capacity without interruption to existing operations.
In furtherance of our customer-first focus, we have developed a suite of Trulieve branded products, including flower, edibles, vaporizer cartridges, concentrates, topicals, capsules, tinctures, dissolvable powders, and nasal sprays. This wide variety of products gives customers the ability to select product(s) that consistently deliver the desired effect and in their preferred method of delivery.
Trulieve has identified five regional geographic hubs in the U.S. and has established cannabis operations in three of the five hubs: Southeast, Northeast, and Southwest. In each of our three regional hubs we have market leading positions in cornerstone states and additional operations and assets in other state markets. Our hubs are managed by national and regional management teams supported by our corporate headquarters in Florida.
Our Southeast hub operations are anchored by our cornerstone market of Florida. Trulieve cultivates and produces all of its products in-house and distributes those products to customers in Trulieve branded stores (dispensaries) throughout Florida, as well as via home delivery. In Georgia, Trulieve GA holds one of two Class 1 Production Licenses in the state and is permitted to cultivate cannabis for the manufacture and sale of low tetrahydrocannabinol, or THC oil. On April 28, 2023, the Company opened the first locations in Georgia, opening a store in Macon and Marietta and opened a third store in Newnan in June 2023.
Our Southwest hub operations are anchored by Arizona, where Trulieve holds a market-leading retail position with twenty one dispensaries, offering medical and adult use customers a wide range of branded and third-party products, including brand partner products, in addition to sales in the wholesale channel.
Our Northeast hub operations are anchored by our cornerstone market of Pennsylvania. We conduct cultivation, processing, and retail operations through direct and indirect subsidiaries with permits for retail operations and grower/processor operations in Pennsylvania.
During the three months ended June 30, 2023, the Company approved a plan to exit the Massachusetts market to redirect resources to more attractive and profitable markets. The exit of Massachusetts represented a strategic shift and the operations of Massachusetts are reported as discontinued operations as of June 30, 2023.
During the three months ended June 30, 2023, the Company divested three additional dispensaries in California.
Recent Developments
On June 19, 2023, Alex D'Amico resigned as the Company's Chief Financial Officer effective immediately. The resignation was not as a result of any disagreements regarding any matter relating to the Company’s operations, policies, or practices. During the interim period, the Company has appointed Ryan Blust, the Company’s Vice President, Finance, to serve as its Interim Chief Financial Officer. The Company appointed Tim Mullany as Chief Financial Officer, effective as of July 10, 2023; however, Mr. Mullany resigned as the Company’s Chief Financial Officer for personal reasons effective July 20, 2023 and the Company appointed Ryan Blust as its interim Chief Financial Officer effective July 21, 2023.
In connection with Mr. D’Amico’s resignation, the audit committee of the Company’s board of directors (the “Audit Committee”), with the assistance of independent outside legal counsel, investigated circumstances relating to irregularities with Mr. D’Amico’s expense reimbursement submissions and his use of a corporate credit card over the tenure of his employment at the Company. The Audit Committee and the Company determined that Mr. D’Amico engaged in conduct that was inconsistent with the Company’s policies and procedures by both submitting expense reimbursements for personal expenses as well as utilizing corporate credit cards for personal expenses. The investigation has concluded, and the Company estimates that the total amount in question is between $350,000 to $400,000. Mr. D’Amico has not reimbursed the Company for such expenses. The Audit Committee and the Company have concluded that the matters that were the subject of the investigation and the amounts involved did not have a material impact on the Company’s previously reported financial statements for any period. The Company is still evaluating its options, particularly with respect to the expenses submitted by Mr. D’Amico, which may include, without limitation, the Company seeking restitution from Mr. D’Amico of the amounts determined to have been improperly reimbursed and making corrective tax reports relating to any such amounts not recovered.
27
Critical Accounting Estimates and Judgments
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates in our condensed consolidated financial statements, include, but are not limited to, accounting for acquisitions and business combinations; initial valuation and subsequent impairment testing of goodwill, other intangible assets and long-lived assets; leases; fair value of financial instruments, income taxes; inventory; share-based payment arrangements, and commitment and contingencies. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis.
Financial Review
Results of Continuing Operations
This section of this Form 10-Q generally describes and compares our results of continuing operations for the three and six months ended June 30, 2023 and 2022, except as noted. Refer to Note 16. Discontinued Operations to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional financial information related to our discontinued operations.
Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022
|
Three Months Ended June 30, |
|
|
|
|||||||||||
|
2023 |
|
2022 |
|
|
|
|||||||||
|
(in thousands) |
|
|
|
|||||||||||
Statement of operations data: |
Amount |
|
Percentage of Revenues, Net |
|
Amount |
|
Percentage of Revenues, Net |
|
Amount Change |
|
|||||
Revenue, net |
$ |
281,795 |
|
|
100.0 |
% |
$ |
313,839 |
|
|
100.0 |
% |
$ |
(32,044 |
) |
Cost of goods sold |
|
140,188 |
|
|
49.7 |
% |
|
130,466 |
|
|
41.6 |
% |
|
9,722 |
|
Gross profit |
|
141,607 |
|
|
50.3 |
% |
|
183,373 |
|
|
58.4 |
% |
|
(41,766 |
) |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|||||
Sales and marketing |
|
61,075 |
|
|
21.7 |
% |
|
73,902 |
|
|
23.5 |
% |
|
(12,827 |
) |
General and administrative |
|
34,902 |
|
|
12.4 |
% |
|
33,575 |
|
|
10.7 |
% |
|
1,327 |
|
Depreciation and amortization |
|
26,052 |
|
|
9.2 |
% |
|
29,367 |
|
|
9.4 |
% |
|
(3,315 |
) |
Impairments and disposals of long-lived assets, net |
|
3,310 |
|
|
1.2 |
% |
|
5,055 |
|
|
1.6 |
% |
|
(1,745 |
) |
Impairment of goodwill |
|
307,590 |
|
|
109.2 |
% |
|
— |
|
|
0.0 |
% |
|
307,590 |
|
Total expenses |
|
432,929 |
|
|
153.6 |
% |
|
141,899 |
|
|
45.2 |
% |
|
291,030 |
|
(Loss) income from operations |
|
(291,322 |
) |
|
(103.4 |
%) |
|
41,474 |
|
|
13.2 |
% |
|
(332,796 |
) |
Other (expense) income: |
|
|
|
|
|
|
|
|
|
|
|||||
Interest expense |
|
(18,931 |
) |
|
(6.7 |
%) |
|
(18,144 |
) |
|
(5.8 |
%) |
|
(787 |
) |
Change in fair value of derivative liabilities - warrants |
|
— |
|
|
0.0 |
% |
|
1,442 |
|
|
0.5 |
% |
|
(1,442 |
) |
Other income, net |
|
1,976 |
|
|
0.7 |
% |
|
1,683 |
|
|
0.5 |
% |
|
293 |
|
Total other expense, net |
|
(16,955 |
) |
|
(6.0 |
%) |
|
(15,019 |
) |
|
(4.8 |
%) |
|
(1,936 |
) |
(Loss) income before provision for income taxes |
|
(308,277 |
) |
|
(109.4 |
%) |
|
26,455 |
|
|
8.4 |
% |
|
(334,732 |
) |
Provision for income taxes |
|
34,027 |
|
|
12.1 |
% |
|
45,242 |
|
|
14.4 |
% |
|
(11,215 |
) |
Net loss from continuing operations |
|
(342,304 |
) |
|
(121.5 |
%) |
|
(18,787 |
) |
|
(6.0 |
%) |
|
(323,517 |
) |
Net loss from discontinued operations, net of tax (provision) benefit of $(946) and $473, respectively |
|
(64,568 |
) |
|
(22.9 |
%) |
|
(5,234 |
) |
|
(1.7 |
%) |
|
(59,334 |
) |
Net loss |
|
(406,872 |
) |
|
(144.4 |
%) |
|
(24,021 |
) |
|
(7.7 |
%) |
|
(382,851 |
) |
Less: Net loss attributable to non-controlling interest from continuing operations |
|
(2,353 |
) |
|
(0.8 |
%) |
|
(1,530 |
) |
|
(0.5 |
%) |
|
(823 |
) |
Less: Net loss attributable to non-controlling interest from discontinued operations |
|
(670 |
) |
|
(0.2 |
%) |
|
— |
|
|
0.0 |
% |
|
(670 |
) |
Net loss attributable to common shareholders |
$ |
(403,849 |
) |
|
(143.3 |
%) |
$ |
(22,491 |
) |
|
(7.2 |
%) |
$ |
(381,358 |
) |
Revenue, Net
28
Revenue, net for the three months ended June 30, 2023 was $281.8 million, a decrease of $32.0 million or 10% from $313.8 million for the three months ended June 30, 2022. The decrease in revenue is due to a $25.7 million decrease in retail revenues and a $6.3 million decrease in wholesale revenues. The Company experienced increased competition and promotional activity in certain markets. The Company operated 183 dispensaries and 165 dispensaries as of June 30, 2023 and June 30, 2022, respectively.
Cost of Goods Sold
Cost of goods sold for the three months ended June 30, 2023 was $140.2 million, an increase of $9.7 million or 7% from $130.5 million for the three months ended June 30, 2022. Cost of goods as a percentage of revenue, net was 49.7% in the current quarter compared to 41.6% in the prior year period. The increase was primarily due to inventory reduction efforts to right-size inventory levels, increased depreciation related to capital expenditures to support business growth, new production facilities in existing markets where economies of scale are anticipated in the future, and expansion into new markets which are not fully vertical, resulting in the sale of third-party products, and therefore yield lower margin than our vertical markets. The Company also incurred additional costs related to excess capacity in certain temporarily idled facilities.
The Company has continued to see increased cost of goods sold in relation to our revenues due to our expansion and streamlining efforts which we expect to derive cost savings and long-term benefits in the future.
Gross Profit
Gross profit for the three months ended June 30, 2023 was $141.6 million, a decrease of $41.8 million or 23% from $183.4 million for the three months ended June 30, 2022. Gross profit as a percentage of revenue, net was 50.3% in the current quarter compared to 58.4% in the prior year period driven by increased promotional activity in certain retail markets, price compression in certain markets, a product mix shift to value brands, initiatives to reduce inventory levels and costs related to excess capacity in certain temporarily idled facilities.
Sales and Marketing Expense
Sales and marketing expense for the three months ended June 30, 2023 was $61.1 million, a decrease of $12.8 million or 17% from $73.9 million for the three months ended June 30, 2022. Sales and marketing expense as a percentage of revenues, net was 21.7% in the current quarter compared to 23.5% in the prior year period. The decrease in expense was largely attributable to lower headcount in the Company’s dispensaries as we refined staffing levels to more closely align with consumer traffic and consumption levels. The decrease in sales and marketing expenses was also due to the accrual of $5.2 million in the prior year related to the Watkins earnout.
General and Administrative Expense
General and administrative expense for the three months ended June 30, 2023 was $34.9 million, an increase of $1.3 million or 4% from $33.6 million for the three months ended June 30, 2022. The increase in general and administrative expense is primarily due to a $8.6 million of legislative campaign contributions to support the Florida adult-use ballot initiative, offset by lower stock-based compensation expense and transaction and integration costs as compared to the prior period.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended June 30, 2023 was $26.1 million, a decrease of $3.3 million or 11% from $29.4 million for the three months ended June 30, 2022. The decrease in depreciation and amortization expense was attributable to certain intangible assets becoming fully amortized in the prior year.
Impairments and Disposals of Long-lived Assets, Net
Impairment and disposal of long-lived assets, net for the three months ended June 30, 2023 was $3.3 million, a decrease of $1.7 million from $5.1 million for the three months ended June 30, 2022. The expense in the current quarter was primarily related to asset disposals in our California market and exiting the Watkins Cultivation Operation in the second quarter of 2023. The expense incurred in the prior year was primarily due to exited facilities and the repositioning of assets, primarily in our southeast hub.
29
Impairment of Goodwill
Impairment of goodwill for the three months ended June 30, 2023 was $307.6 million, an increase of $307.6 million from zero for the three months ended June 30, 2022 Based on the results of the Company's goodwill impairment procedures, the Company recorded a $307.6 million goodwill impairment for the single reporting unit during the three months ended June 30, 2023. The Company finds this is not a negative indicator of historic or current operating results and not a negative indicator of future performance as the Company has taken steps to shed underperforming assets while focusing on cash conservation which is reflective in the results of operations as of June 30, 2023. Additionally, the resulting non-cash charge has no impact on the Company’s compliance with debt covenants, its cash flows, or available liquidity.
Other Expense, Net
Other expense, net for the three months ended June 30, 2023 was $17.0 million, an increase of $1.9 million or 13% from $15.0 million for three months ended June 30, 2022. The increase is primarily the result of a change in the valuation of the warrants in the prior year which expired June 2022.
Provision for Income Taxes
The provision for income taxes for the three months ended June 30, 2023 was $34.0 million, a decrease of $11.2 million or 25% from $45.2 million for the three months ended June 30, 2022. For the three months ended June 30, 2023, the decrease in income tax expense is primarily due to the decrease in gross profit. Under IRC Section 280E, cannabis companies are only allowed to deduct expenses that are directly related to production of the products. The Company's quarterly tax provision is subject to change resulting from several factors, including regulations and administrative practices, principles, and interpretations related to tax.
Net Loss from Continuing Operations
Net loss from continuing operations for the three months ended June 30, 2023 was $342.3 million, an increase of $323.5 million from $18.8 million for the three months ended June 30, 2022. The increase was driven primarily by the goodwill impairment charge of $307.6 million, lower gross margin, and an increase of $8.6 million in legislative campaign contributions to support the Florida adult-use ballot initiative. These impacts were partially offset by lower operating expenses driven by the Company’s continued focus on cost savings initiatives, expenses of $5.2 million incurred in the prior year period related to the accrual of the Watkins earnout and a $11.2 million decrease in tax expense.
Net Loss from Discontinued Operations, Net of Tax Benefit
Net loss from discontinued operations, net of tax benefit for the three months ended June 30, 2023 was $64.6 million, an increase of $59.3 million from $5.2 million for the three months ended June 30, 2022. The increase in net loss is primarily attributable to losses from the exit of the Company’s operations in Massachusetts in the second quarter of 2023, including the disposal of long-lived assets of $31.6 million and a loss on divestment of a variable interest entity of $10.0 million. Discontinued operations also include the results of the Nevada operations that were discontinued in 2022.
30
Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022
|
Six Months Ended June 30, |
Six Months Ended June 30, |
|
||
|
2023 |
2022 |
|
||
|
(in thousands) |
|
|||
Statement of operations data: |
Amount |
Percentage of Revenues, Net |
Amount |
Percentage of Revenues, Net |
Amount Change |
Revenue, net |
$567,009 |
100.0% |
$624,400 |
100.0% |
$(57,391) |
Cost of goods sold |
275,240 |
48.5% |
261,172 |
41.8% |
14,068 |
Gross profit |
291,769 |
51.5% |
363,228 |
58.2% |
(71,459) |
Expenses: |
|
|
|
|
|
Sales and marketing |
121,808 |
21.5% |
145,352 |
23.3% |
(23,544) |
General and administrative |
74,212 |
13.1% |
66,989 |
10.7% |
7,223 |
Depreciation and amortization |
55,666 |
9.8% |
57,151 |
9.2% |
(1,485) |
Impairments and disposals of long-lived assets, net |
6,689 |
1.2% |
21,516 |
3.4% |
(14,827) |
Impairment of goodwill |
307,590 |
54.2% |
— |
0.0% |
307,590 |
Total expenses |
565,965 |
99.8% |
291,008 |
46.6% |
274,957 |
(Loss) income from operations |
(274,196) |
(48.4%) |
72,220 |
11.6% |
(346,416) |
Other (expense) income: |
|
|
|
|
|
Interest expense |
(40,091) |
(7.1%) |
(34,497) |
(5.5%) |
(5,594) |
Change in fair value of derivative liabilities - warrants |
252 |
0.0% |
2,262 |
0.4% |
(2,010) |
Other income, net |
6,893 |
1.2% |
2,568 |
0.4% |
4,325 |
Total other expense, net |
(32,946) |
(5.8%) |
(29,667) |
(4.8%) |
(3,279) |
(Loss) income before provision for income taxes |
(307,142) |
(54.2%) |
42,553 |
6.8% |
(349,695) |
Provision for income taxes |
69,484 |
12.3% |
88,384 |
14.2% |
(18,900) |
Net loss from continuing operations |
(376,626) |
(66.4%) |
(45,831) |
(7.3%) |
(330,795) |
Net loss from discontinued operations, net of tax (provision) benefit of $(439) and $1,299, respectively |
(95,877) |
(16.9%) |
(10,672) |
(1.7%) |
(85,205) |
Net loss |
(472,503) |
(83.3%) |
(56,503) |
(9.0%) |
(416,000) |
Less: Net loss attributable to non-controlling interest from continuing operations |
(3,337) |
(0.6%) |
(2,037) |
(0.3%) |
(1,300) |
Less: Net loss attributable to non-controlling interest from discontinued operations |
(1,193) |
(0.2%) |
— |
0.0% |
(1,193) |
Net loss attributable to common shareholders |
$(467,973) |
(82.5%) |
$(54,466) |
(8.7%) |
$(413,507) |
Revenue, Net
Revenue, net for the six months ended June 30, 2023 was $567.0 million, a decrease of $57.4 million or 9% from $624.4 million for the six months ended June 30, 2022. The decrease in revenue is due to a $40.9 million decrease in retail revenues and a $16.5 million decrease in wholesale revenues. The Company experienced increased competition and promotional activity in certain markets. The Company operated 183 dispensaries and 165 dispensaries as of June 30, 2023 and June 30, 2022, respectively.
Cost of Goods Sold
Cost of goods sold for the six months ended June 30, 2023 was $275.2 million, an increase of $14.1 million or 5% from $261.2 million for the six months ended June 30, 2022. Cost of goods as a percentage of revenues, net was 48.5% in the current year period compared to 41.8% in the prior year period. The increase was primarily due to inventory reduction efforts to right-size inventory levels, increased depreciation related to capital expenditures to support business growth, new production facilities in existing markets where economies of scale are anticipated in the future, and expansion into new markets which are not fully vertical, resulting in the sale of third-party products, and therefore yield lower margin than our vertical markets. The Company also incurred additional costs related to excess capacity in certain temporarily idled facilities.
31
Gross Profit
Gross profit for the six months ended June 30, 2023 was $291.8 million, a decrease of $71.5 million or 20% from $363.2 million for the six months ended June 30, 2022. Gross profit as a percentage of revenue, net was 51.5% in the current year period compared to 58.2% in the prior year period driven by increased promotional activity in certain retail markets, price compression in certain markets, a product mix shift to value brands, initiatives to reduce inventory levels and costs related to excess capacity in certain temporarily idled facilities.
Sales and Marketing Expense
Sales and marketing expense for the six months ended June 30, 2023 was 121.8 million, a decrease of 23.5 million or 16% from $145.4 million for the six months ended June 30, 2022. Sales and marketing expense as a percentage of revenues, net was 21.5% in the current year period compared to 23.3% in the prior year period. The decrease in expense was largely attributable to lower headcount in the Company’s dispensaries as we refined staffing levels to more closely align with consumer traffic and consumption levels. The decrease in sales and marketing expenses was also due to the accrual of $7.3 million in the prior year period related to the Watkins earnout.
General and Administrative Expense
General and administrative expense for the six months ended June 30, 2023 was $74.2 million, an increase of $7.2 million or 11% from $67.0 million for the six months ended June 30, 2022. The increase in general and administrative expense is primarily due to a $19.1 million of legislative campaign contributions to support the Florida adult-use ballot initiative during the current year period, partially offset by lower stock-based compensation expense and transaction and integration costs as compared to the prior period.
Depreciation and Amortization Expense
Depreciation and amortization expense for the six months ended June 30, 2023 was $55.7 million, a decrease of $1.5 million or 3% from $57.2 million for the six months ended June 30, 2022.
Impairments and Disposals of Long-lived Assets, Net
Impairment and disposal of long-lived assets, net for the six months ended June 30, 2023 was $6.7 million, a decrease of $14.8 million or 69% from $21.5 million for the six months ended June 30, 2022. The impairment expense incurred in the current year was primarily related to asset disposals in our California market while the prior year was due to exited facilities and the repositioning of assets, mainly in our southeast hub.
Impairment of Goodwill
Impairment of goodwill for the six months ended June 30, 2023 was $307.6 million, an increase of $307.6 million from zero for the six months ended June 30, 2022. Based on the results of the Company's goodwill impairment procedures, the Company recorded a $307.6 million goodwill impairment for the single reporting unit during the three months ended June 30, 2023. The Company finds this is not a negative indicator of historic or current operating results and not a negative indicator of future performance as the Company has taken steps to shed underperforming assets while focusing on cash conservation which is reflective in the results of operations as of June 30, 2023. Additionally, the resulting non-cash charge has no impact on the Company’s compliance with debt covenants, its cash flows, or available liquidity.
Other Expense, Net
Other expense, net for the six months ended June 30, 2023 was $32.9 million, an increase of $3.3 million or 11% from $29.7 million for six months ended June 30, 2022. The increase is primarily the result of additional interest expense related to new financings to support the long-term business growth, partially offset by gains related to non-operating assets, interest income on money market funds, and a change in the valuation of the interest rate swap.
32
Provision for Income Taxes
The provision for income taxes for the six months ended June 30, 2023 was $69.5 million, a decrease of $18.9 million or 21% from $88.4 million for the six months ended June 30, 2022. For the six months ended June 30, 2023, the decrease in income tax expense is primarily due to the decrease in gross profit. Under IRC Section 280E, cannabis companies are only allowed to deduct expenses that are directly related to production of the products. The Company's quarterly tax provision is subject to change resulting from several factors, including regulations and administrative practices, principles, and interpretations related to tax.
Net Loss from Continuing Operations
Net loss from continuing operations for the six months ended June 30, 2023 was $376.6 million, an increase of $330.8 million from $45.8 million for the six months ended June 30, 2022. The increase in net loss in the current year period was driven primarily by the goodwill impairment charge of $307.6 million, lower gross margin, and an increase of $19.1 million in legislative campaign contributions to support the Florida adult-use ballot initiative. These impacts were partially offset by lower operating expenses driven by the Company’s continued focus on cost savings initiatives, expenses of $7.3 million incurred in the prior year period related to the accrual of the Watkins earnout and a $18.9 million decrease in tax expense.
Net Loss from Discontinued Operations, Net of Tax Benefit
Net loss from discontinued operations, net of tax benefit for the six months ended June 30, 2023 was $95.9 million, an increase of $85.2 million from $10.7 million for the six months ended June 30, 2022. The increase in the current year is primarily attributable to losses from the exit of the Company’s operations in Massachusetts in the second quarter of 2023 including the disposal of long-lived assets of $59.3 million and a loss on divestment of a variable interest entity of $10.0 million. Discontinued operations also include the results of the Nevada operations that were discontinued in 2022.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have funded our operations and capital spending through cash flows from product sales, third-party debt, proceeds from the sale of our capital stock and loans from affiliates and entities controlled by our affiliates. We are generating cash from sales and are deploying our capital reserves to acquire and develop assets capable of producing additional revenues and earnings over both the immediate and near term to support our business growth and expansion. Our current principal sources of liquidity are our cash and cash equivalents provided by our operations and debt and equity offerings. Cash and cash equivalents consist primarily of cash on deposit with banks and money market funds.
Our primary uses of cash are for working capital requirements, capital expenditures, debt service payments, and income tax payments. Additionally, from time to time, we may use capital for other investing and financing activities. Working capital is used principally for our personnel as well as costs related to the growth, manufacture and production of our products. Our capital expenditures consist primarily of additional facilities and dispensaries, and improvements to existing facilities. Our debt service payments consist primarily of interest payments. Income tax payments are mainly represented by federal income tax payments due to IRC Section 280E.
Cash and cash equivalents were $152.4 million as of June 30, 2023. We believe our existing cash balances will be sufficient to meet our anticipated cash requirements from the date of this Quarterly Report on Form 10-Q through at least the next 12 months. Any additional future requirements will be funded through the following sources of capital:
33
Cash Flows
The condensed consolidated statements of cash flows include continuing operations and discontinued operations for the six months ended June 30, 2023 and 2022. The table below highlights our cash flows for the periods indicated.
|
Six Months Ended June 30, |
|
||||
|
2023 |
|
2022 |
|
||
|
(in thousands) |
|
||||
Net cash used in operating activities |
$ |
(23,062 |
) |
$ |
(10,284 |
) |
Net cash used in investing activities |
|
(25,318 |
) |
|
(136,392 |
) |
Net cash (used in) provided by financing activities |
|
(9,335 |
) |
|
94,438 |
|
Net decrease in cash and cash equivalents |
$ |
(57,715 |
) |
$ |
(52,238 |
) |
Cash Flow from Operating Activities
Net cash used in operating activities was $23.1 million for the six months ended June 30, 2023, an increase of $12.8 million as compared to $10.3 million net cash used operating activities during the six months ended June 30, 2022. This is primarily due to additional income tax payments which were deferred from the fourth quarter of 2022, due to Hurricane Ian, and paid in the first quarter of 2023. This was largely offset by the favorable impact of the Company’s inventory wind-down initiative. Inventory balances decreased in 2023 driven by targeted efforts to reduce specific product categories and lower third-party product offerings.
Cash Flow from Investing Activities
Net cash used in investing activities was $25.3 million for the six months ended June 30, 2023, a decrease of $111.1 million, compared to the $136.4 million net cash used in investing activities for the six months ended June 30, 2022.
The primary use of cash in both periods was the purchase of property and equipment, with the prior period having significantly more purchases of property and equipment due to the Company's build out of facilities and automation primarily at our Florida cultivation sites as well as Pennsylvania and West Virginia. Additionally, the prior period included the cash payment of $27.5 million related to the acquisition of the Watkins Cultivation Operation.
Cash Flow from Financing Activities
Net cash used in financing activities was $9.3 million for the six months ended June 30, 2023, a decrease of $103.8 million, compared to the $94.4 million net cash provided by financing activities for the six months ended June 30, 2022. The decrease was primarily due to proceeds from debt financing activities in the prior year that did not occur in the current period. The Company received proceeds of $76.4 million from private placement notes which closed in January 2022 and $19.2 million in proceeds from the exercise of warrants during the six months ended June 2022 prior to expiration.
Balance Sheet Exposure
As of June 30, 2023 and December 31, 2022, 100% of our condensed consolidated balance sheet is exposed to U.S. cannabis-related activities. We believe our operations are in material compliance with all applicable state and local laws, regulations, and licensing requirements in the states in which we operate. However, cannabis remains illegal under U.S. federal law. Substantially all our revenue is derived from U.S. cannabis operations. For information about risks related to U.S. cannabis operations, please refer to the “Risk Factors” section of this Quarterly Report on Form 10-Q, "Part I, Item 1A - Risk Factors" in our 2022 Form 10-K and Part II, Item 1A – Risk Factors in our Q1 Form 10-Q.
34
Contractual Obligations
As of June 30, 2023, we had the following contractual obligations to make future payments, representing contracts and other commitments that are known and committed:
|
<1 Year |
|
1 to 3 Years |
|
3 to 5 Years |
|
>5 Years |
|
Total |
|
|||||
|
(in thousands) |
|
|||||||||||||
Notes payable |
$ |
9,076 |
|
$ |
7,337 |
|
$ |
71,194 |
|
$ |
16,098 |
|
$ |
103,705 |
|
Private placement notes |
|
130,000 |
|
|
— |
|
|
425,000 |
|
|
— |
|
|
555,000 |
|
Operating lease liabilities |
|
21,532 |
|
|
43,876 |
|
|
41,767 |
|
|
90,639 |
|
|
197,814 |
|
Finance lease liabilities |
|
14,299 |
|
|
27,970 |
|
|
24,528 |
|
|
38,932 |
|
|
105,729 |
|
Construction finance liabilities |
|
22,184 |
|
|
46,286 |
|
|
48,966 |
|
|
308,341 |
|
|
425,777 |
|
Lease Settlements |
|
1,003 |
|
|
1,140 |
|
|
846 |
|
|
2,434 |
|
|
5,423 |
|
Total (1) |
$ |
198,094 |
|
$ |
126,609 |
|
$ |
612,301 |
|
$ |
456,444 |
|
$ |
1,393,448 |
|
For additional information on our commitments for financing arrangements, future lease payments, lease guarantees, and other obligations, see Note 9. Notes Payable, Note 10. Private Placement Notes, Note 11. Leases, Note 12. Construction Finance Liabilities, and Note 20. Commitments And Contingencies.
Off-Balance Sheet Arrangements
As of the date of this filing, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of, including, and without limitation, such considerations as liquidity and capital resources.
Management's Use of Non-GAAP Measures
Our management uses a financial measure that is not in accordance with generally accepted accounting principles in the U.S., or GAAP, in addition to financial measures in accordance with GAAP to evaluate our operating results. This non-GAAP financial measure should be considered supplemental to, and not a substitute for, our reported financial results prepared in accordance with GAAP. Adjusted EBITDA is a financial measure that is not defined under GAAP. Our management uses this non-GAAP financial measure and believes it enhances an investor’s understanding of our financial and operating performance from period to period because it excludes certain material non-cash items and certain other adjustments management believes are not reflective of our ongoing operations and performance. Adjusted EBITDA excludes from net income as reported interest, provision for income taxes, and depreciation and amortization to arrive at EBITDA. This is then adjusted for items that do not represent the operations of the core business such as integration and transition costs, acquisition and transaction costs, inventory step-up for fair value adjustments in purchase accounting, other non-recurring costs such as contributions to specific initiative campaigns (such as Smart and Safe Florida), expenses related to the COVID-19 pandemic, impairments and disposals of long-lived assets, the results of entities consolidated as variable interest entities ("VIEs") but not legally controlled and operated by the Company, discontinued operations, and other income and expense items. Integration and transition costs include those costs related to integration of acquired entities and to transition major systems or processes. Acquisition and transaction costs relate to specific transactions such as acquisitions whether contemplated or completed and regulatory filings and costs related to equity and debt issuances. Other non-recurring costs includes miscellaneous items which are not expected to reoccur frequently such as inventory adjustments related to specific issues and unusual litigation. Adjusted EBITDA for the three and six months ended June 30, 2022, has been adjusted to reflect this current definition and to conform with the current period presentation.
Trulieve reports Adjusted EBITDA to help investors assess the operating performance of the Company’s business. The financial measures noted above are metrics that have been adjusted from the GAAP net income measure in an effort to provide readers with a normalized metric in making comparisons more meaningful across the cannabis industry, as well as to remove non-recurring, irregular and one-time items that may otherwise distort the GAAP net income measure.
35
As noted above, our Adjusted EBITDA is not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to, measures prepared in accordance with GAAP. There are a number of limitations related to the use of Adjusted EBITDA rather than net income, which is the most directly comparable financial measure calculated and presented in accordance with GAAP. Because of these limitations, we consider, and you should consider, Adjusted EBITDA together with other operating and financial performance measures presented in accordance with GAAP. A reconciliation of Adjusted EBITDA from net income, the most directly comparable financial measure calculated in accordance with GAAP, has been included herein immediately following our discussion of “Adjusted EBITDA”.
Adjusted EBITDA
|
Three Months Ended |
|
Change Increase / (Decrease) |
Six Months Ended June 30, |
|
Change Increase / (Decrease) |
||||||||||||||
|
2023 |
|
2022 |
|
$ |
|
% |
2023 |
|
2022 |
|
$ |
|
% |
||||||
|
(in thousands) |
|
|
(in thousands) |
|
|
||||||||||||||
Adjusted EBITDA |
$ |
78,695 |
|
$ |
111,024 |
|
$ |
(32,329 |
) |
(29)% |
$ |
156,768 |
|
$ |
215,986 |
|
$ |
(59,218 |
) |
(27)% |
Adjusted EBITDA for the three months ended June 30, 2023 was $78.7 million, a decrease of $32.3 million or 29%, from $111.0 million for the three months ended June 30, 2022. Adjusted EBITDA for the six months ended June 30, 2023 was $156.8 million, a decrease of $59.2 million or 27%, from $216.0 million for the six months ended June 30, 2022. The following table presents a reconciliation of GAAP net income to non-GAAP Adjusted EBITDA, for each of the periods presented:
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
||||||||
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|
||||
|
(in thousands) |
|
||||||||||
Net loss attributable to common shareholders |
$ |
(403,849 |
) |
$ |
(22,491 |
) |
$ |
(467,973 |
) |
$ |
(54,466 |
) |
Add (deduct) impact of: |
|
|
|
|
|
|
|
|
||||
Interest expense |
|
18,931 |
|
|
18,144 |
|
|
40,091 |
|
|
34,497 |
|
Provision for income taxes |
|
34,027 |
|
|
45,242 |
|
|
69,484 |
|
|
88,384 |
|
Depreciation and amortization |
|
26,052 |
|
|
29,367 |
|
|
55,666 |
|
|
57,151 |
|
Depreciation included in cost of goods sold |
|
15,989 |
|
|
12,576 |
|
|
28,109 |
|
|
21,874 |
|
EBITDA |
|
(308,850 |
) |
|
82,838 |
|
|
(274,623 |
) |
|
147,440 |
|
Impairment of goodwill |
|
307,590 |
|
|
— |
|
|
307,590 |
|
|
— |
|
Impairment and disposal of long-lived assets, net |
|
3,310 |
|
|
5,055 |
|
|
6,689 |
|
|
21,516 |
|
Legislative campaign contributions |
|
8,550 |
|
|
— |
|
|
19,062 |
|
|
— |
|
Integration and transition costs |
|
5,698 |
|
|
5,129 |
|
|
7,635 |
|
|
10,397 |
|
Share-based compensation and related premiums |
|
475 |
|
|
5,703 |
|
|
2,876 |
|
|
10,267 |
|
Other income, net |
|
(1,976 |
) |
|
(1,683 |
) |
|
(6,893 |
) |
|
(2,568 |
) |
Change in fair value of derivative liabilities - warrants |
|
— |
|
|
(1,442 |
) |
|
(252 |
) |
|
(2,262 |
) |
Discontinued operations |
|
63,898 |
|
|
5,234 |
|
|
94,684 |
|
|
10,672 |
|
Acquisition and transaction costs |
|
— |
|
|
6,969 |
|
|
— |
|
|
10,266 |
|
Other non-recurring costs |
|
— |
|
|
3,499 |
|
|
— |
|
|
9,688 |
|
Inventory step up, fair value |
|
— |
|
|
648 |
|
|
— |
|
|
1,048 |
|
COVID related expenses |
|
— |
|
|
163 |
|
|
— |
|
|
588 |
|
Results of entities not legally controlled |
|
— |
|
|
(1,089 |
) |
|
— |
|
|
(1,066 |
) |
Total adjustments |
|
387,545 |
|
|
28,186 |
|
|
431,391 |
|
|
68,546 |
|
Adjusted EBITDA |
$ |
78,695 |
|
$ |
111,024 |
|
$ |
156,768 |
|
$ |
215,986 |
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to our market risk disclosures as set forth in Part II Item 7A of our 2022 Annual Report on Form 10-K for the year ended December 31, 2022.
36
Item 4. Controls and Procedures.
Material Weakness in Internal Control Over Financial Reporting
We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer, principal financial officer, and principal accounting officer, as appropriate to allow timely decisions regarding disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the risk related to controls and procedures.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Management of the Company, under the supervision and with the participation of our Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of June 30, 2023. Our Chief Executive Officer and Interim Chief Financial Officer have concluded that, due to the material weaknesses as described in the 2022 Annual Report on Form 10-K, which are currently in the process of being remediated, as of June 30, 2023, we did not maintain effective disclosure controls and procedures because of the material weaknesses in internal control as described in Item 9A. Controls and Procedures in the 2022 Annual Report on Form 10-K, filed with the SEC on March 8, 2023.
Notwithstanding the material weaknesses described in the 2022 Annual Report on Form 10-K, we have concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP.
We consolidated variable interest entities as of June 30, 2023 and December 31, 2022, because we determined we were the primary beneficiary. We have elected to exclude controls at our variable interest entities from the scope of our evaluation of internal control over financial reporting as of June 30, 2023 and December 31, 2022. The financial position of our variable interest entities represented an insignificant amount of our total assets, net revenues, and results of operations for the period ended June 30, 2023 and December 31, 2022, respectively.
Management’s Remediation Measures
We previously identified and disclosed material weaknesses in internal control as described in Item 9A. Controls and Procedures in the 2022 Annual Report on Form 10-K, filed with the SEC on March 8, 2023. The material weaknesses were due to a lack of sufficient controls around information technology, inventory valuation, and variable interest entities. Management is committed to maintaining a strong internal control environment. In response to the identified material weaknesses in the overall control environment, management, with the oversight of the Audit Committee of the Board of Directors, is taking a number of remediation actions including but not limited to the following:
Information technology:
The Company has designed and is in the process of designing and implementing improved or additional controls over access, change management, and IT operations to ensure that access rights are restricted to appropriate individuals, and that data integrity is maintained via effective change management controls over system updates and the transfer of data between systems. The Company additionally is evaluating and enhancing its policies for improved observation and enforcement of certain of its internal policies.
The Company continues to adjust its Enterprise Resource Planning (“ERP”) Systems to work towards improvement and automation of ITGC’s as well as other business process application controls.
The Company is enhancing procedures to validate the information produced by the entity and end user computing to compensate while the ITGC controls are being improved.
Inventory Valuation:
The Company continues to enhance its ERP Systems and has a project plan in place to work towards increasing the level of automation in inventory tracking and analysis and reducing manual processes.
37
The Company has hired additional qualified personnel to provide additional oversight around the inventory valuation process.
The Company is in the process of implementing more robust management review controls to provide more focus on detailed analyses and enhanced monitoring of our inventory valuation policies and process. The Company continues to review and enhance procedures related to internal controls.
Variable Interest Entities:
The Company has enhanced its procedures around the identification and evaluation, and where applicable, remeasurement, of our variable interest entities and potential variable interest entities.
We have reviewed business processes surrounding non-routine transactions and other complex financial reporting areas to identify enhanced procedures related to internal controls.
Beginning in fiscal year 2022, the Company consolidated the identified variable interest entity that was previously not consolidated. The consolidated financial statements for prior periods were not and will not be modified in future Annual Reports as such errors are immaterial to those periods.
Current status:
While progress has been made to enhance our internal control over financial reporting, we are still in the process of building and enhancing internal processes, procedures, and controls, as well as evaluating and enhancing our related policies. Additional time is required to complete the remediation of the material weaknesses and the assessment to ensure the sustainability of these remediation actions. We believe the above actions as well as those being implemented currently, when complete, will be effective in the remediation of the material weaknesses described above.
Changes in Internal Controls Over Financial Reporting
Other than the remediation measures discussed above, there have been no changes in internal controls over financial reporting during the six months ended June 30, 2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Management believes these actions will help remediate internal control deficiencies related to the Company’s financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act).
PART II - OTHER INFORMATION
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may”, “will”, “would”, “could”, “should”, “believes”, “estimates”, “projects”, “potential”, “expects”, “plans”, “intends”, “anticipates”, “targeted”, “continues”, “forecasts”, “designed”, “goal”, or the negative of those words or other similar or comparable words. Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical facts may be deemed to be forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, results of operations and future growth prospects. The forward-looking statements contained herein are based on certain key expectations and assumptions, including, but not limited to, with respect to expectations and assumptions concerning receipt and/or maintenance of required licenses and third party consents and the success of our operations, are based on estimates prepared by us using data from publicly available governmental sources, as well as from market research and industry analysis, and on assumptions based on data and knowledge of this industry that we believe to be reasonable. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and discussed elsewhere in this Quarterly Report on Form 10-Q in “Part I, Item 1A – Risk Factors” in our 2022 Annual Report and in Part II, “Item 1A—Risk Factors” in the Company’s First Quarter 10-Q. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Quarterly Report on Form 10-Q. These factors and risks include, among other things, the following:
Risks Related to Our Business and Industry
38
39
Risks Related to Owning Subordinate Voting Shares
Item 1. Legal Proceedings.
There are no actual or to our knowledge contemplated legal proceedings material to us or to which any of our or any of our subsidiaries’ property is the subject matter.
There have been no material penalties or sanctions imposed against the Company by a court or regulatory authority, and the Company has not entered into any material settlement agreements before any court relating to provincial or territorial securities legislation or with any securities regulatory authority, in the three years prior to the date of this filing.
Item 1A. Risk Factors.
Investing in our Subordinate Voting Shares involves a high degree of risk. Our 2022 Form 10-K filed with the SEC on March 8, 2023 and our Q1 Form 10-Q filed with the SEC on May 10, 2023 include detailed discussions of our risk factors under the heading “Part I, Item 1A—Risk Factors" and "Part II, Item 1A—Risk Factors," respectively. You should consider carefully the risk factors discussed in our 2022 Form 10-K or Q1 Form 10-Q and all other information contained in or incorporated by reference in this Quarterly Report on Form 10-Q before making an investment decision. If any of the risks discussed in the 2022 Form 10-K or Q1 Form 10-Q actually occur, they may materially harm our business, financial condition, operating results, cash flows or growth prospects. As a result, the market price of our Subordinate Voting Shares could decline, and you could lose all or part of your investment. Additional risks and uncertainties that are not yet identified or that we think are immaterial may also materially harm our business, financial condition, operating results, cash flows or growth prospects and could result in a complete loss of your investment. Other than the following, there have been no material changes from such risk factors during the period ended June 30, 2023.
The risk of negative effects related to known or potential material weakness in our internal control over financial reporting.
We have identified material weaknesses in our internal control over financial reporting, and our management has concluded that our disclosure controls and procedures are not effective. While we are working to remediate any material weaknesses or significant deficiencies in our internal controls over financial reporting, we cannot assure that additional material weaknesses or significant deficiencies will not occur in the future. For example, the Company identified information leading it to review its internal controls over the observation and enforcement of certain of our internal policies.
Ineffective internal control over financial reporting could result in errors or misstatements in our financial statements, reduce investor confidence, and adversely impact our stock price. As discussed in Part II, Item 9A “Controls and Procedures” in the 2022 Annual Report on Form 10-K, in connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2022, we identified material weaknesses related to information technology general controls, valuation of inventory, and the identification and evaluation of variable interest entities.
We are in the process of remediating the material weaknesses, as such remediation measures are described in Part II, Item 9A “Controls and Procedures” of our 2022 Annual Report on Form 10-K and as discussed in Part I, Item 4 of each of the First Quarter 2023 Quarterly Report on Form 10-Q and this Quarterly Report on Form 10-Q. While progress has been made to enhance our internal control over financial reporting, we are still in the process of building and enhancing our processes, procedures, and controls, as well as evaluating and enhancing our internal policies. Additional time is required to complete the remediation of the material weaknesses
40
and to ensure the sustainability of these remediation actions. We believe the above actions as well as those being implemented currently, when complete, will be effective in the remediation of the material weaknesses described above. There can be no assurance that the additional processes, procedures, and controls that we have implemented while we work to remediate the material weaknesses or that other material weaknesses will not arise in the future. If the additional processes, procedures, and controls that we have implemented while we work to remediate the material weaknesses are not sufficient, or if we identify additional control deficiencies that individually or together constitute significant deficiencies or material weaknesses, our ability to accurately record, process, and report financial information and consequently, our ability to prepare financial statements within required time periods, could be adversely affected. Failure to properly remediate the material weaknesses or the discovery of additional control deficiencies could result in violations of applicable securities laws, CSE listing requirements, subject us to litigation and investigations, negatively affect investor confidence in our financial statements, and adversely impact our stock price and ability to access capital markets.
We maintain cash deposits in excess of federally insured limits. Adverse developments affecting financial institutions, including bank failures, could adversely affect our liquidity and financial performance.
We maintain domestic cash deposits in Federal Deposit Insurance Corporation (“FDIC”) insured banks that exceed the FDIC insurance limits. Bank failures, events involving limited liquidity, defaults, non-performance, or other adverse developments that affect financial institutions, or concerns or rumors about such events, may lead to liquidity constraints. There can be no assurance that our deposits in excess of the FDIC or other comparable insurance limits will be backstopped by the United States government, or that any bank or financial institution with which we do business will be able to obtain needed liquidity from other banks, government institutions, or by acquisition in the event of a failure or liquidity crisis.
For example, on March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, which appointed the FDIC as receiver. Similarly, on March 12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. Although we do not have any accounts at or business relationships with these banks, we may be negatively impacted by other disruptions to the United States banking system caused by these or similar developments. The failure of a bank, or other adverse conditions in the financial or credit markets impacting financial institutions at which we maintain balances, could adversely impact our liquidity and financial performance.
In addition, as further described in our Annual Report on Form 10-K for the year ended December 31, 2022, most banks and other financial institutions have not been willing to provide banking services to cannabis-related businesses. As such, the Company may have increased difficulty accessing the services of banks amid the adverse developments affecting the financial services industry, which may make it difficult to operate its business. In such an event, the Company’s operations and financial condition could be adversely impacted.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Not applicable.
41
Item 6. Exhibits.
Exhibit Number |
|
Description |
|
|
|
10.1‡ |
|
|
10.2*‡ |
|
|
10.3*‡ |
|
Executive Employment Agreement, dated September 29, 2021, by and between Trulieve Cannabis Corp. and |
10.4*‡ |
|
Form of Restricted Stock Unit Award Agreement for Directors (Immediate or Deferred Settlement) |
10.5*‡ |
|
Form of Restricted Stock Unit Award Agreement for Executive Officers |
10.6*‡ |
|
|
10.7*‡ |
|
Form of Nonqualified Stock Option Agreement for Executive Officers |
31.1 * |
|
|
31.2 * |
|
|
32.1 * |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
|
Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
‡ Management contract or compensatory plan or arrangement.
∔ Certain identified information has been excluded from the exhibit pursuant to Item 601(a)(6) and/or Item 601(b)(10)(iv) of Regulation S-K.
42
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
TRULIEVE CANNABIS CORP. |
|
|
|
|
|
Date: August 9, 2023 |
|
By: |
/s/ Kim Rivers |
|
|
|
Kim Rivers |
|
|
|
Chief Executive Officer |
|
|
|
(Principal Executive Officer) |
|
|
|
|
Date: August 9, 2023 |
|
By: |
/s/ Ryan Blust |
|
|
|
Ryan Blust |
|
|
|
Interim Chief Financial Officer |
|
|
|
(Principal Financial Officer) |
|
|
|
|
Date: August 9, 2023 |
|
By: |
/s/ Joy Malivuk |
|
|
|
Joy Malivuk Chief Accounting Officer |
|
|
|
(Principal Accounting Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
43