i
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
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: 000-56248
TRULIEVE CANNABIS CORP.
(Exact Name of Registrant as Specified in its Charter)
British Columbia
84-2231905
(State or other jurisdiction of
incorporation or organization)
(I.R.S. EmployerIdentification No.)
6749 Ben Bostic Road
Quincy, FL
32351
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (850) 480-7955
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
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. Yes ☒ No ☐
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). Yes ☒ No ☐
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.
Large accelerated filer
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 May 3, 2023, the registrant had 159,761,126 Subordinate Voting Shares and 26,226,386 Multiple Voting Shares (on an as converted basis) outstanding.
Table of Contents
Page
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
1
Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three Months Ended March 31, 2023 and 2022
2
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2023 and 2022
3
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022
4
Notes to Condensed Consolidated Financial Statements
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
25
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
37
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Item 5.
Other Information
Item 6.
Exhibits
38
Signatures
39
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. 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.
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PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets (Unaudited)
(in thousands, except per share data)
March 31, 2023
December 31, 2022
ASSETS
(Audited)
Current Assets:
Cash and cash equivalents
$
188,128
212,266
Restricted cash
7,154
6,607
Accounts receivable, net
8,037
9,443
Inventories, net
297,556
297,815
Prepaid expenses and other current assets
70,724
63,627
Notes receivable - current portion
740
728
Assets associated with discontinued operations
1,850
2,466
Total current assets
574,189
592,952
Property and equipment, net
782,368
796,947
Right of use assets - operating, net
101,848
101,379
Right of use assets - finance, net
70,658
76,231
Intangible assets, net
967,398
1,012,646
Goodwill
791,495
Notes receivable, net
11,922
11,992
Other assets
15,829
14,716
Long-term assets associated with discontinued operations
690
TOTAL ASSETS
3,316,397
3,399,048
LIABILITIES
Current Liabilities:
Accounts payable and accrued liabilities
92,503
83,146
Income tax payable
35,650
49,024
Deferred revenue
5,115
9,568
Notes payable - current portion, net
9,813
12,453
Operating lease liabilities - current portion
10,365
10,448
Finance lease liabilities - current portion
8,041
8,727
Construction finance liabilities - current portion
1,256
1,189
Contingencies
25,491
34,666
Liabilities associated with discontinued operations
35
482
Total current liabilities
188,269
209,703
Long-term liabilities:
Notes payable, net
93,521
94,247
Private placement notes, net
543,037
541,664
Warrant liabilities
—
252
Operating lease liabilities
103,066
102,388
Finance lease liabilities
71,982
75,838
Construction finance liabilities
182,406
182,361
Deferred tax liabilities
216,241
224,137
Other long-term liabilities
37,241
26,183
Long-term liabilities associated with discontinued operations
14,567
14,571
TOTAL LIABILITIES
1,450,330
1,471,344
Commitments and contingencies (see Note 20)
SHAREHOLDERS' EQUITY
Common stock, no par value; unlimited shares authorized. 185,987,512 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively.
Additional paid-in-capital
2,049,047
2,045,003
Accumulated deficit
(177,967
)
(113,843
Non-controlling interest
(5,013
(3,456
TOTAL SHAREHOLDERS' EQUITY
1,866,067
1,927,704
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income (Unaudited)
Three Months Ended
March 31, 2022
Revenue, net of discounts
289,089
317,747
Cost of goods sold
139,151
137,291
Gross profit
149,938
180,456
Expenses:
Sales and marketing
62,312
72,838
General and administrative
39,383
33,547
Depreciation and amortization
30,371
28,436
Impairments and disposals of long-lived assets, net
31,015
16,461
Total expenses
163,081
151,282
(Loss) income from operations
(13,143
29,174
Other (expense) income:
Interest expense
(22,748
(17,877
Change in fair value of derivative liabilities - warrants
820
Other income, net
4,918
885
Total other expense
(17,578
(16,172
(Loss) income before provision for income taxes
(30,721
13,002
Provision for income taxes
34,958
43,125
Net loss from continuing operations and comprehensive loss
(65,679
(30,123
Net (income) loss from discontinued operations, net of tax benefit of $8 and $809, respectively
(48
2,359
Net loss
(65,631
(32,482
Less: Net loss and comprehensive loss attributable to non-controlling interest from continuing operations
(1,507
(507
Net loss and comprehensive loss attributable to common shareholders
(64,124
(31,975
Net loss per share - Continuing operations:
Basic and diluted
(0.34
(0.16
Net income (loss) per share - Discontinued operations:
0.00
(0.01
Weighted average number of common shares used in computing net (loss) income per share:
Basic
188,899,309
187,054,916
Diluted
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
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)
51,916,999
128,587,173
180,504,172
2,008,100
137,721
1,552
2,147,373
Share-based compensation
4,564
Exercise of stock options
45,775
108
Shares issued for cash - warrant exercise
1,648
22
Shares issued under share compensation plans
16,257
Tax withholding related to net share settlements of equity awards
(10,005
(230
Conversion of Multiple Voting to Subordinate Voting Shares
(2,699,100
2,699,100
Shares issued for PurePenn, Pioneer, and Solevo earnouts
3,626,295
Distribution
(50
Divestment of variable interest entity
(111
Net loss and comprehensive loss
Balance, March 31, 2022
49,217,899
134,966,243
184,184,142
2,012,564
105,746
884
2,119,194
Accumulated Deficit
Balance, January 1, 2023 (audited)
26,226,386
159,761,126
185,987,512
2,401
Value of shares earned for purchase of variable interest entity
1,643
Net income and comprehensive income
Balance, March 31, 2023
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Three Months EndedMarch 31, 2023
Three Months EndedMarch 31, 2022
Cash flow from operating activities
Adjustments to reconcile net loss and comprehensive loss to net cash provided by operating activities:
29,305
Depreciation included in cost of goods sold
13,551
10,692
Non-cash interest expense
1,494
1,232
Non-cash interest income
(122
(163
Impairment and disposal of long-lived assets, net
Amortization of operating lease right of use assets
2,634
2,892
Accretion of construction finance liabilities
389
293
(252
(820
Non-cash change in contingencies
(3,725
(1,248
Allowance for credit losses
(159
42
Deferred income tax expense
(7,896
Changes in operating assets and liabilities:
Inventories
260
(21,957
Accounts receivable
1,565
(3,970
(1,776
(8,094
1,888
(16,216
9,177
22,093
(13,383
42,210
Other current liabilities
(5,448
2,057
(2,523
(2,106
(4,452
(654
11,032
1,016
Net cash provided by operating activities
410
45,147
Cash flow from investing activities
Purchases of property and equipment
(13,731
(48,118
Purchases of property and equipment related to construction finance liabilities
(7,334
Capitalized interest
(582
(1,487
Acquisitions, net of cash acquired
(27,500
Purchases of internal use software
(2,046
(2,214
Cash paid for license
(3,500
Proceeds from sale of property and equipment
287
Proceeds from sale of variable interest entity
1,604
Proceeds from sale of held for sale assets
580
203
Proceeds received from notes receivable
180
1,018
Net cash used in investing activities
(18,812
(83,828
Cash flow from financing activities
Proceeds from private placement notes, net of discounts
76,420
Proceeds from equity exercises
130
Payments on notes payable
(3,442
(2,285
Payments on finance lease obligations
(2,040
(1,421
Payments on construction finance liabilities
(278
(297
Payments for debt issuance costs
(19
Payments for taxes related to net share settlement of equity awards
Distributions
Net cash (used in) provided by financing activities
(5,810
72,248
Net (decrease) increase in cash and cash equivalents
(24,212
33,567
Cash, cash equivalents, and restricted cash, beginning of period
218,873
233,098
Cash and cash equivalents of discontinued operations, beginning of period
621
561
Less: cash and cash equivalents of discontinued operations, end of period
(823
Cash, cash equivalents, and restricted cash, end of period
195,282
266,403
Condensed Consolidated Statements of Cash Flows (Unaudited) (Continued)
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest
9,618
6,949
Income taxes, net of refunds
46,775
46
Other noncash investing and financing activities
ASC 842 lease additions - operating and finance leases
4,544
10,852
Purchases of property and equipment in accounts payable and accrued liabilities
2,197
10,985
*The condensed consolidated statements of cash flows include continuing operations and discontinued operations for the three months ended March 31, 2023 and 2022.
Beginning of period:
(1)
230,085
(2)
3,013
Cash, cash equivalents and restricted cash
End of period:
(3)
(1) Excludes $0.6 million attributable to discontinued operations.
(2) Excludes $0.5 million attributable to discontinued operations.
(3) Excludes $0.8 million attributable to discontinued operations.
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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 March 31, 2023, and the results of its operations and cash flows for the periods ended March 31, 2023 and 2022. The results of the Company's operations for the three months ended March 31, 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
In July 2022, the Company discontinued its Nevada operations. This action represents a strategic shift in the business and therefore, the related assets and liabilities associated with the Nevada operations are classified as discontinued operations on the condensed consolidated balance sheets and the results of the Nevada operations have been presented as discontinued operations within the condensed consolidated statements of operations and comprehensive (loss) income 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.
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.
The fair values of financial instruments by class are as follows as of March 31, 2023 and December 31, 2022:
Level 1
Level 2
Level 3
Financial Assets:
Money market funds (1)
145,986
340
Financial Liabilities:
Interest rate swap (2)
3,396
2,536
Warrant liabilities (3)
There have been no transfers between hierarchy levels during the periods ending March 31, 2023 or December 31, 2022.
The Company's non-recurring impairment tests, including those performed as of March 31, 2023, utilize significant level 3 unobservable inputs, including projections of future revenue and operating income.
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 $4.7 million in revenue, net of discounts in the condensed consolidated statements of operations and comprehensive (loss) income. As of March 31, 2023 and December 31, 2022, the loyalty liability totaled $4.7 million and $8.9 million, respectively, and is included in deferred revenue on the condensed consolidated balance sheets. Included within deferred revenue as of March 31, 2023 and December 31, 2022 are customer credit balances of $0.4 million and $0.6 million, respectively.
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 combination of the market, income, and cost approach for its impairment testing, resulting in an impairment of $30.3 million, consisting of property and equipment and intangible assets, recorded within impairment and disposal of long-lived assets, net in the condensed consolidated statements of operations and comprehensive (loss) income.
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. During the three months ending March 31, 2023, the Company continued to experience a sustained 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, including:
7
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.
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, or the income approach, and the market approach. 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 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.
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.
NOTE 3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of March 31, 2023 and December 31, 2022:
Trade receivables
11,791
12,864
Less: allowance for credit losses
(3,754
(3,421
NOTE 4. NOTES RECEIVABLE
Notes receivable consisted of the following as of March 31, 2023 and December 31, 2022:
March 31,2023
December 31,2022
Stated Interest Rate
Maturity Date
Promissory note acquired in October 2021 (1)
8,025
8,205
7.50
%
11/9/2025
Promissory note dated November 15, 2021 (2)
4,714
4,602
9.75
11/14/2024
Notes receivable
12,739
12,807
Less: discount on notes receivable
(77
(87
Total notes receivable, net of discount
12,662
12,720
Less: current portion of notes receivable
(740
(728
8
During the three months ended March 31, 2023 and 2022, the Company recorded interest income of $0.3 million and $0.4 million in other income in the condensed consolidated statements of operations and comprehensive (loss) income, respectively.
Stated maturities of the notes receivable are as follows as of March 31, 2023:
Year
Expected principal payments
Nine months ending December 31, 2023
548
2024
5,498
2025
6,693
2026
2027
Thereafter
NOTE 5. INVENTORIES
Inventories are comprised of the following items as of March 31, 2023 and December 31, 2022:
Raw material
Cannabis plants
22,457
22,243
Packaging and supplies
53,516
52,046
Total raw material
75,973
74,289
Work in process
165,868
174,533
Finished goods-unmedicated
6,445
7,563
Finished goods-medicated
49,270
41,430
Total inventories
NOTE 6. PROPERTY AND EQUIPMENT
As of March 31, 2023 and December 31, 2022, property and equipment consisted of the following:
Land
38,575
38,485
Buildings and improvements
570,193
556,932
Furniture and equipment
288,546
277,164
Vehicles
838
839
898,152
873,420
Less: accumulated depreciation
(154,762
(134,587
Total property and equipment
743,390
738,833
Construction in progress
38,978
58,114
Total property and equipment, net
9
During the three months ended March 31, 2023 and 2022, the Company capitalized interest of $0.6 million and $1.5 million, respectively.
During the three months ended March 31, 2023 and 2022, the Company incurred depreciation expense of $20.5 million and $15.5 million, respectively.
During the three months ended March 31, 2023, the Company recorded an impairment on property and equipment related to the Massachusetts market of $3.0 million, which is recorded to impairment and disposal of long-lived assets, net within the condensed consolidated statements of operations and comprehensive (loss) income.
During the three months ended March 31, 2022, the Company recorded an impairment of $0.3 million, which is mainly the result of repositioning of assets, which is recorded to impairment and disposal of long-lived assets, net within the condensed consolidated statements of operations and comprehensive (loss) income.
During the three months ended March 31, 2023, the Company recorded a nominal loss on disposal of property and equipment, which is recorded to impairment and disposal of long-lived assets, net within the condensed consolidated statements of operations and comprehensive (loss) income. During the three months ended March 31, 2022, the Company recorded a loss of $3.0 million, primarily related to assets located in our Southeast region, which is recorded to impairment and disposal of long-lived assets, net within the condensed consolidated statements of operations and comprehensive (loss) income.
During the three months ended March 31, 2023 and 2022, the Company recorded a gain on sale of property and equipment, net of $0.3 million and zero, respectively, which is recorded to impairment and disposal of long-lived assets, net within the condensed consolidated statements of operations and comprehensive (loss) income.
NOTE 7. INTANGIBLE ASSETS
The Company's definite-lived intangible assets consisted of the following as of March 31, 2023 and December 31, 2022:
Gross Carrying Amount
Accumulated Amortization
Net Book Value
Licenses
1,044,660
106,772
937,888
1,076,173
93,567
982,606
Trademarks
27,430
13,826
13,604
12,530
14,900
Internal use software
18,573
3,986
14,587
16,586
3,086
13,500
Tradenames
4,862
3,777
1,085
3,506
1,356
Customer relationships
3,536
3,302
234
3,252
284
1,099,061
131,663
1,128,587
115,941
Amortization expense for the three months ended March 31, 2023 and 2022 was $20.5 million and $21.1 million, respectively.
10
During the three months ended March 31, 2023, the Company impaired intangible assets, primarily consisting of licenses, resulting in a loss on impairment of intangible assets of $27.3 million, which is recorded to impairment and disposal of long-lived assets, net within the condensed consolidated statements of operations and comprehensive (loss) income.
The following table outlines the estimated future amortization expense related to intangible assets as of March 31, 2023:
EstimatedAmortization
Nine Months Ending December 31, 2023
60,465
79,003
76,000
73,603
71,102
607,225
As of March 31, 2023, the weighted average amortization period remaining for intangible assets was 13.2 years.
NOTE 8. HELD FOR SALE
As of March 31, 2023, the Company had $18.1 million in assets held for sale and $1.4 million in liabilities held for sale, which are recorded in prepaids and other current assets and accounts payable and accrued liabilities, respectively, on the condensed consolidated balance sheets, and primarily consist of property and equipment and a lease liability, respectively. As of December 31, 2022, the Company had $14.5 million in assets held for sale which primarily consisted of property and equipment.
Held for sale assets as of December 31, 2022
14,521
Assets moved to held for sale
5,402
Non-cash settlement
(350
Impairments (1)
(440
Assets sold (2)
(1,000
Held for sale assets as of March 31, 2023
18,133
Held for sale liabilities as of December 31, 2022
Liabilities moved to held for sale
(1,428
Held for sale liabilities as of March 31, 2023
11
NOTE 9. NOTES PAYABLE
As of March 31, 2023 and December 31, 2022, notes payable consisted of the following:
Effective Interest Rate
Net Book Value of Collateral
Promissory notes dated December 21, 2022 (1)
71,217
71,500
7.53%
(4)
7.86%
1/1/2028
156,270
Promissory note dated December 22, 2022 (2)
18,791
18,900
7.30%
7.38%
12/22/2032
9,557
Promissory notes dated October 1, 2021 (3)
5,959
6,095
8.14%
8.29%
10/1/2027
10,567
Promissory note dated December 22, 2022
5,500
10.00%
12/22/2023
(5)
Promissory notes acquired in October 2021
2,484
5,338
(6)
Promissory note of consolidated variable-interest entity dated February 1, 2022
1,139
1,200
8.00%
12/31/2025
Total notes payable
105,090
108,533
Less: debt discount
(1,756
(1,833
Less: current portion of notes payable
(9,813
(12,453
Notes payable (7)
12
During the three months ended March 31, 2023 and 2022, the Company incurred interest expense of $2.1 million and $0.1 million, respectively, which is included within interest expense in the condensed consolidated statements of operations and comprehensive (loss) income. This includes accretion expense of $0.1 million for the three months ended March 31, 2023. Accretion expense for the three months ended March 31, 2022 was nominal.
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 March 31, 2023, stated maturities of notes payable are as follows:
Nine months ended December 31, 2023
9,080
3,232
3,982
3,044
69,352
16,400
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 5-year senior secured promissory notes with a face value of $70.0 million and $60.0 million, respectively. The purchasers of the June Notes received warrants to purchase 1,470,000 Subordinate Voting Shares at a price of $13.47 ("June Warrants") and the purchasers of the November Notes received warrants to purchase 1,560,000 Subordinate Voting Shares at a price of $980 per Unit, with each unit consisting of one Note issued in Denominations of $1,000 and 26 warrants ("November Warrants"), which can be exercised for approximately three years after closing (collectively the "Public Warrants"). The remaining outstanding Public Warrants expired in June 2022.
The fair value of the June Notes at inception was determined to be $63.9 million using an effective interest rate of 13.32%, which the Company estimates would have been the coupon rate required to issue the notes had the financing not included the June Warrants. The fair value of the November Notes at inception was determined to be $54.5 million using an effective interest rate of 13.43%, which the Company estimates would have been the coupon rate required to issue the notes had the financing not included the November Warrants.
2026 Notes
On October 6, 2021, the Company closed its private placement of 8% Senior Secured Notes (the "2026 Notes - Tranche One") for aggregate gross proceeds of $350.0 million and net proceeds of $342.6 million. The Company used a portion of the net proceeds to repay certain outstanding acquired indebtedness and used the remaining net proceeds for capital expenditures and other general corporate purposes. On January 28, 2022, the Company closed on a second tranche private placement of 8% Senior Secured Notes (the "2026 Notes - Tranche Two") for aggregate gross proceeds of $76.9 million and net proceeds of $75.6 million. The Company used the net proceeds for capital expenditures and other general corporate purposes. The notes may be redeemed in whole or in part, at the Company's option, at any time, on or after October 6, 2023, at the applicable redemption price. These notes are collectively referred to as the "2026 Notes".
13
As of March 31, 2023 and December 31, 2022, private placement notes payable consisted of the following:
2026 Notes - Tranche One
350,000
8.52%
10/6/2026
2026 Notes - Tranche Two
75,000
8.43%
June Notes
70,000
9.75%
13.32%
6/11/2024
November Notes
60,000
13.43%
Total private placement notes
555,000
Less: Unamortized debt discount and issuance costs
(11,963
(13,336
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 months ended March 31, 2023 and 2022, the Company incurred interest expense of $12.9 million and $12.3 million, respectively, which is included within interest expense in the condensed consolidated statements of operations and comprehensive (loss) income related to the private placement notes. This includes accretion expense on the private placement notes of $1.4 million and $1.2 million, respectively, for the three months ended March 31, 2023 and 2022.
Stated maturities of the principal portion of private placement notes outstanding as of March 31, 2023, are as follows:
130,000
425,000
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 five to ten years. Most leases include options to renew for varying terms at the Company’s sole discretion. Other leased assets include passenger vehicles, trucks, and equipment. Lease terms for these assets generally range from three to five years. Lease right-of-use assets and liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date.
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 zero and $10.5 million for three months ended March 31, 2023 and 2022, respectively, the latter is the result of repositioning away from margin dilutive assets, which is recorded to impairment and disposal of long-lived assets, net within the condensed consolidated statements of operations and comprehensive (loss) income.
14
The following table provides the components of lease cost recognized within the condensed consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2023 and 2022:
Three Months EndedMarch 31,
Statement of operations and comprehensive (loss) income location
2023
2022
Operating lease cost
Cost of goods sold, sales and marketing, general and administrative
4,913
5,602
Finance lease cost:
Amortization of lease assets
2,955
2,515
Interest on lease liabilities
1,741
1,579
Finance lease cost
4,696
4,094
Variable lease cost
2,300
1,928
Short term lease expense
99
Total lease cost
12,112
11,723
During the three months ended March 31, 2023 and 2022, the Company earned $0.4 million and $0.1 million of sublease income, respectively, which is recorded in other income, net within the condensed consolidated statements of operations and comprehensive (loss) income.
Other information related to operating and finance leases is as follows:
Three Months Ended March 31,
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
5,052
5,027
Operating cash flows from finance leases
1,782
Financing cash flows from finance leases
2,040
1,421
ASC 842 lease additions and modifications:
Operating leases
9,294
Finance leases
(58
6,301
Weighted average discount rate:
9.43
9.28
8.86
8.65
Weighted average remaining lease term (in years):
8.3
8.0
7.8
15
Future minimum lease payments under the Company's non-cancellable leases as of March 31, 2023 are as follows:
Operating Leases
Finance Leases
15,294
11,004
20,364
14,640
20,245
14,434
19,649
13,572
19,205
12,710
72,218
46,921
Total undiscounted lease liabilities
166,975
113,281
Less: Interest
(53,544
(33,258
Total present value of minimum lease payments
113,431
80,023
Lease liabilities- current portion
(10,365
(8,041
Lease liabilities
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 months ended March 31, 2023 and 2022, the Company recorded interest expense of $5.5 million and $5.3 million, respectively, related to construction finance liabilities, which is included in interest expense within the condensed consolidated statements of operations and comprehensive (loss) income.
Holyoke
In July 2019, the Company sold property it had recently acquired in Massachusetts for $3.5 million, which was the cost to the Company. In connection with the sale of this location, the Company agreed to lease the location back for cultivation. The transaction was determined to be a failed sale-leaseback financing arrangement. As of March 31, 2023, and December 31, 2022, the total construction finance liability associated with this transaction is $45.4 million and $45.2 million, respectively.
Ben Bostic
In October 2019, the Company sold property in Florida in exchange for cash of $17.0 million. Concurrent with the closing of the purchase, the buyer entered into a lease agreement with the Company, for continued operation as a licensed medical cannabis cultivation facility. Control was never transferred to the buyer-lessor because the transaction was determined to be a finance lease and did not meet the requirements of a sale. The transaction was treated as a failed sale-leaseback financing arrangement. As of March 31, 2023, and December 31, 2022, the total construction finance liability associated with this transaction is $17.7 million and $17.7 million, respectively.
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 15 years, with two five-year options to renew. As of March 31, 2023, and December 31, 2022, the total construction finance liability associated with this transaction is $42.0 million and $41.8 million, respectively.
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 20 years, with two five-year options to renew. During the three months ended March 31, 2022, the Company idled the facility while determining the future plans for the operations. In the second quarter of fiscal 2022, the Company committed to a plan to cease using this facility and as a result recorded a loss on disposal of the related property and equipment of $42.4 million. As of March 31, 2023, and December 31, 2022, the total construction finance liability associated with this transaction is $59.2 million and $59.2 million, respectively.
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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 ten years with two options to extend the term, the first providing a ten-year renewal option and the second providing a five-year renewal option. The landlord has agreed to provide a tenant improvement allowance of $12.9 million as an additional component of base rent. As of March 31, 2023, and December 31, 2022, $12.3 million and $12.3 million of the tenant improvement allowance has been provided, respectively. As of March 31, 2023, and December 31, 2022, the total construction finance liability associated with this transaction is $19.4 million and $19.7 million, respectively.
Future minimum lease payments for the construction finance liabilities as of March 31, 2023, are as follows:
16,441
22,498
23,140
23,801
24,480
409,063
Total future payments
519,423
(335,761
Total present value of minimum payments
183,662
(1,256
NOTE 13. EQUITY
Warrants
Liability Warrants
In October 2021 the Company acquired 1,679 warrants in connection with the acquisition of Harvest Health and Recreation, Inc. ("Harvest Liability Warrants"). Each acquired warrant is exercisable into one Multiple Voting Share. Changes in fair value are recognized as a component of other (expense) income within the condensed consolidated statements of operations and comprehensive (loss) income as change in fair value of derivative liabilities - warrants.
Numberofwarrants
Weighted average exercise price($CAD)
Weighted averageremaining contractuallife (Yrs)
Outstanding and exercisable as of January 1, 2023
1,679
1,125
0.31
Granted
Exercised
Outstanding and exercisable as of March 31, 2023
0.06
The fair value of the Harvest Liability Warrants is determined using the Black-Scholes options pricing model. The following table summarizes the significant assumptions used in determining the fair value of the warrant liability:
Stock price ($C)
$7.48
$10.26
Exchange rate
0.739
0.738
Remaining life
Annualized volatility
26.84%
104.07%
Discount rate
4.74%
4.42%
Exercise price ($C)
$11.25
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Equity Warrants
In connection with the Harvest Health and Recreation, Inc. acquisition in October 2021, the Company acquired certain equity classified warrants ("equity warrants"). The warrants range in exercise price from $23.76 to $145.24 and expire at various dates from June 2022 through December 2025. The warrants are exercisable into one Subordinate Voting Share. As of March 31, 2023 and December 31, 2022, there were 9,496 acquired equity warrants outstanding, respectively. Each acquired equity warrant is exercisable into one Subordinate Voting Share.
As of March 31, 2023 and December 31, 2022 there were zero Public Warrants outstanding. See Note 10. Private Placement Notes for further details on warrants issued in connection with private placement debt in 2019.
Share Based Compensation
Options
The Company did not issue any options during the three months ended March 31, 2023. In determining the amount of share-based compensation related to options issued during the three months ended March 31, 2022, the Company used the Black-Scholes pricing model to establish the fair value of the options granted with the following assumptions:
Three Months Ended March 31, 2022
Fair value at grant date
$8.39-$11.01
Stock price at grant date
$21.48-$25.41
Exercise price at grant date
Expected life in years
3.50 - 4.46
Expected volatility
51.81% - 52.87%
Expected annual rate of dividends
0%
Risk free annual interest rate
1.20% - 1.79%
The Company recorded share-based compensation for stock options as follows:
126
744
20
290
Total share-based compensation expense
780
2,157
The number and weighted-average exercise prices and remaining contractual life of options as of March 31, 2023 and 2022, were as follows:
Number of options
Weighted average exercise price
Weighted average remaining contractual life (Yrs.)
Aggregate intrinsic value
Outstanding, January 1, 2023
3,177,815
25.96
5.41
Forfeited
(50,581
27.28
Outstanding, March 31, 2023
3,127,234
25.94
5.10
Exercisable, March 31, 2023
2,374,971
26.21
4.01
18
Outstanding, January 1, 2022
2,973,895
27.61
6.26
864,051
21.56
(88,278
11.32
(121,127
55.93
Outstanding, March 31, 2022
3,628,541
25.62
6.23
Exercisable, March 31, 2022
1,569,874
18.21
3.70
2.84
As of March 31, 2023, there was approximately $3.3 million of unrecognized compensation cost related to unvested stock option arrangements which is expected to be recognized over a weighted average service period of 0.70 years.
Restricted Stock Units
The following is a summary of RSU activity for the three months ended March 31, 2023 and 2022, respectively:
Number of restricted stock units
Weighted average grant price
Unvested balance as of January 1, 2023
720,707
22.36
Vested
(28,402
23.20
Unvested balance as of March 31, 2023
692,305
22.21
Unvested balance as of January 1, 2022
332,428
26.86
821,800
21.51
(24,444
21.48
(51,460
26.00
Unvested balance as of March 31, 2022
1,078,324
22.94
The Company recorded share-based compensation for RSUs as follows:
220
201
1,319
1,894
82
312
1,621
2,407
As of March 31, 2023, there was approximately $7.2 million of total unrecognized compensation cost related to unvested restricted stock units, which is expected to be recognized over a weighted-average service period of 0.74 years.
19
NOTE 14. EARNINGS PER SHARE
The following is a reconciliation for the calculation of basic and diluted earnings per share:
Numerator
(in thousands, except share and per share amounts)
Net loss from continuing operations
Less: Net loss and comprehensive loss attributable to non-controlling interest
Net loss from continuing operations available to common shareholders of Trulieve Cannabis Corp.
(64,172
(29,616
Net income (loss) from discontinued operations
48
(2,359
Net loss and comprehensive loss attributable to common shareholders of Trulieve Cannabis Corp.
Denominator
Weighted average number of common shares outstanding
Dilutive effect of securities
Diluted weighted average number of common shares outstanding
Loss per Share - Continuing operations
Basic and diluted loss per share
Income (loss) per Share - Discontinued operations
Shares which have been excluded from diluted per share amounts because their effect would have been anti-dilutive are as follows:
March 31,
Stock options
Restricted share units
177,391
3,636,029
As of March 31, 2023, there are approximately 186.0 million issued and outstanding shares which excludes approximately 2.9 million fully vested RSUs which are not contractually issuable until 2024.
NOTE 15. INCOME TAXES
The following table summarizes the Company’s income tax expense and effective tax rate for the three months ended March 31, 2023 and 2022.
(Loss) Income before provision for income taxes
Effective tax rate
-114
332
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 $48.8 million and $41.8 million as of March 31, 2023 and December 31, 2022, respectively, which is recorded in deferred tax liabilities and other long-term liabilities in the condensed consolidated balance sheets. The increase of $7.0 million in uncertain tax positions is due to a tax position taken relating to our inventory costs for tax purposes in our Florida dispensaries.
NOTE 16. DISCONTINUED OPERATIONS
In July 2022, the Company approved the exit of the Nevada operations. This represents a strategic shift in the Company's operations and therefore is classified as discontinued operations as of March 31, 2023. Immaterial wind-down activities are expected to continue in the near term.
The assets and liabilities associated with discontinued operations consisted of the following as March 31, 2023 and December 31, 2022:
Income tax receivable
1,716
1,708
Cash
Prepaids and other current assets
134
137
Total assets associated with discontinued operations
2,540
3,156
14,569
14,560
493
Total liabilities associated with discontinued operations
14,602
15,053
The following table summarizes the Company's income (loss) from discontinued operations for the three months ended March 31, 2023 and 2022. The gain and loss resulting from the forgiveness of intercompany payables has been eliminated in consolidation.
Revenues, net of discounts
601
2,907
Gross margin
(2,306
Operating (income) expenses
892
Total Expenses
Income (loss) from operations
(3,198
Other income:
21
30
Total other income
Income (loss) before provision for income taxes
40
(3,168
Income tax benefit
809
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 months ended March 31, 2022. There was nominal activity for three months ended March 31, 2023.
Depreciation
Amortization
860
Purchases of property plant and equipment
226
NOTE 17. Variable Interest Entities
The Company has entered into operating 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 holds ownership interests in these entities ranging from none to 95% either directly or through a proxy as of March 31, 2023. The Company's VIEs are not material to the consolidated financial position or operations as of March 31, 2023 and December 31, 2022 or for the three months ended March 31, 2023 and 2022.
The Company determined certain of these entities to be variable interest entities in which it is the primary beneficiary. The Company consolidates these entities due to the other holder’s equity investment being insufficient to finance its activities without additional subordinated financial support and the Company meeting the power and economics criteria. In particular, the Company controls the management decisions and activities most significant to certain VIEs, has provided a significant portion of the subordinated financial support provided to date, and holds membership interests exposing the Company to the risk of reward and/or loss. The Company allocates income and cash flows of the VIEs based on the outstanding ownership percentage in accordance with the underlying operating agreements, as amended. The Company has consolidated all identified variable interest entities for which the Company is the primary beneficiary in the accompanying condensed consolidated financial statements.
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 March 31, 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.
Current assets:
4,916
3,974
507
597
7,330
6,922
2,349
314
15,102
11,807
10,386
9,916
Right of use asset - operating, net
1,702
1,760
Right of use asset - finance, net
2,333
2,371
15,830
16,123
79
Total assets
45,432
42,056
Current liabilities:
4,190
2,992
2,363
2,216
29
Operating lease liability - current portion
109
105
Finance lease liability - current portion
129
6,825
5,448
Notes payable
Operating lease liability
1,676
1,705
Finance lease liability
2,191
2,226
3,993
4,228
526
625
Total liabilities
16,350
15,432
During the three months ended March 31, 2023, the Company paid $0.4 million in cash and $1.7 million in subordinate voting shares, earned but not yet issued, based on the completion of certain milestones required as part of the acquisition of one of the Company's consolidated variable interest entities. The Company previously paid $0.8 million in cash for certain milestones. As of March 31, 2023, the Company has $2.9 million in prepaid acquisition costs included in prepaids and other current assets in the condensed consolidated balance sheets. The agreement contains additional future milestones expected to be met in the near-term for additional cash and shares to be issued in accordance with the terms of the purchase agreement.
In the first quarter of 2022, the Company divested of its minority ownership interest in one of its VIEs and received cash of $1.6 million and recorded an insignificant loss on the divestment which is recorded in impairment and disposal of long-lived, net in the condensed consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2022. The Company no longer consolidates the VIE since it is no longer considered the primary beneficiary.
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 March 31, 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 March 31, 2023
As of December 31, 2022
Right-of-use assets, net
783
Lease liabilities:
Lease liabilities - current portion
117
113
710
751
Total related parties lease liabilities
827
864
Lease expense recognized on related party operating leases was less than $0.1 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively.
NOTE 19. REVENUE DISAGGREGATION
Net revenues are comprised of the following for the three months ended March 31, 2023 and 2022:
Retail
275,650
290,614
Wholesale, licensing, and other
13,439
27,133
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
From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. Except as disclosed below, as of March 31, 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 and comprehensive (loss) income. There are also no proceedings in which any of the Company’s directors, officers, or affiliates is an adverse party or has a material interest adverse to the Company’s interest.
In connection with the acquisition of Watkins in the prior period, the Company received a demand letter on October 12, 2022, related to the four potential earnouts. The earnouts are based on the completion of certain milestones related to construction and operations
23
and contingent on the continued employment of key employee shareholders. The Company entered into a settlement agreement in May 2023 closing this matter.
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 March 31, 2023 and December 31, 2022, $24.2 million and $31.7 million was included in contingent liabilities on the condensed consolidated balance sheets related to pending litigation, respectively. During the three months ended March 31, 2023 the Company settled various claims resulting in a decrease to the accrual. As of March 31, 2023 and December 31, 2022, $1.3 million and $3.0 million, respectively, was included in contingent liabilities on the condensed consolidated balance sheets for estimates related to various sales tax matters.
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
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 "Form 10-K"). There have been no material changes as of March 31, 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 and in “Part I, Item 1A. Risk Factors” in our 2022 Form 10-K. 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. 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 eleven 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.
All of the states in which we operate have developed programs to permit the use of cannabis products for medicinal purposes to treat specific conditions and diseases, which we refer to as medical cannabis. Recreational marijuana, or adult-use cannabis, is legal marijuana sold in licensed dispensaries to adults ages 21 and older. Thus far, of the states in which we operate, Arizona, California, Colorado, Connecticut, Maryland, and Massachusetts have enacted laws permitting the commercialization of adult-use cannabis products. Trulieve operates its business through its directly and indirectly owned subsidiaries that hold licenses and have entered managed service agreements in the states in which they operate.
As of March 31, 2023 we operated the following:
State
Number of Dispensaries
Number of Cultivation and Processing Facilities
Florida
125
Arizona
Pennsylvania
West Virginia
Maryland
Massachusetts
California
Connecticut
Colorado
Georgia
184
As of March 31, 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.
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.
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.
Southeast Hub
Our Southeast hub operations are anchored by our cornerstone market of Florida. Trulieve was the first licensed operator in the medical market in Florida with initial sales in 2016. Publicly available reports filed with the Florida Office of Medical Marijuana Use show Trulieve has the most dispensing locations and the greatest dispensing volume across product categories out of all licensed medical marijuana businesses in the state as of March 31, 2023. 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 accordance with Florida law, Trulieve grows all of its cannabis in secure enclosed indoor facilities and greenhouse structures. 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. These products are delivered to customers statewide in Trulieve-branded retail stores and by 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. The Class 1 Production License allows for production facilities and five retail location with the potential to increase the retail locations as the registered patient count increases. Our cultivation and processing facility is active, producing cannabis oil via hydrocarbon extraction. Dispensaries have been constructed and are ready to serve the patients of Georgia. On April 28, 2023, the Company opened the first locations in Georgia, opening a store in Macon and Marietta.
Northeast Hub
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. These subsidiaries operate cultivation and processing facilities in Carmichael, McKeesport, and Reading, Pennsylvania to support our affiliated network of retail dispensaries and wholesale distribution network across the state.
We operate three medical dispensaries and conduct wholesale sales supported by cultivation and processing in Hancock, Maryland.
We operate three retail dispensaries in Massachusetts, serving medical patients and adult use customers in Northampton and adult use customers in Framingham and Worcester. Our retail operations are supported by cultivation and manufacturing operations in Holyoke. We commenced wholesale sales in September 2021. Trulieve was the first to offer sales of clones supporting home grow for residents in the Massachusetts market in August 2021.
We operate a medical cannabis dispensary located in Bristol, Connecticut. In February 2023 we obtained a hybrid license and began adult-use cannabis sales in the state.
We operate ten medical dispensaries in West Virginia, supported by cultivation and processing operations in Huntington, West Virginia.
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Southwest Hub
Our Southwest hub operations are anchored by our cornerstone market of Arizona. In Arizona, Trulieve holds a market-leading retail position with twenty 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. We also serve medical and adult use customers in California. Trulieve conducts wholesale operations in Colorado, serving the medical and adult use markets.
Critical Accounting Estimates and Judgements
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.
Drivers of Results of Continuing Operations
Revenue, Net
We derive our revenue from cannabis products which we manufacture, sell, and distribute to our customers by home delivery and in our dispensaries.
Gross Profit
Gross profit includes revenue less the costs directly attributable to product sales and includes amounts paid to produce finished goods, such as flower, and concentrates, as well as packaging and other supplies, fees for services and processing, allocated overhead which includes allocations of rent, administrative salaries, utilities, and related costs. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in margins over comparative periods as the regulatory environment changes.
Sales and Marketing
Sales and marketing expenses primarily relate to personnel and other costs related to dispensaries. Other expenses consist of marketing expenses related to marketing programs for our products. As we continue to expand and open additional dispensaries, we expect our sales and marketing expenses to continue to increase over the long-term.
General and Administrative
General and administrative expenses represent costs incurred at our corporate offices, primarily related to personnel costs, including salaries, incentive compensation, benefits, and other professional service costs, including legal and accounting. We expect to continue to invest considerably in this area to support our expansion plans and to support the increasing complexity of the cannabis business.
Depreciation and Amortization
Depreciation expense is calculated on a straight-line basis using the estimated useful life of each asset. Estimated useful life is determined by asset class and is reviewed on an annual basis and revised if necessary. Amortization expense is amortized using the straight-line method over the estimated useful life of the intangible assets. Useful lives for intangible assets are determined by type of asset with the initial determination of useful life determined during the valuation of the business combination. On an annual basis, the useful lives of each intangible class of assets are evaluated for appropriateness and adjusted if appropriate.
Other Income (Expense), Net
Other income (expense), net consist primarily of interest expense, interest income, and the impact of the revaluation of the liability classified warrants and our interest rate swap.
Provision for Income Taxes
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Provision for income taxes is calculated using the asset and liability method. Deferred income tax assets and liabilities are determined based on enacted tax rates and laws for the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
As we operate in the cannabis industry, we are subject to the limits of IRC Section 280E under which we are only allowed to deduct expenses directly related to cost of goods sold.
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 months ended March 31, 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 March 31, 2023 Compared to Three Months Ended March 31, 2022
Statement of operations data:
Amount
Percentage of Revenues, Net
Amount Change
100.0
(28,658
48.1
43.2
1,860
51.9
56.8
(30,518
21.6
22.9
(10,526
13.6
10.6
5,836
10.5
8.9
1,935
10.7
5.2
14,554
56.4
47.6
11,799
(4.5
%)
9.2
(42,317
(7.9
(5.6
(4,871
0.1
0.3
(568
1.7
4,033
(6.1
(5.1
(1,406
(10.6
4.1
(43,723
12.1
(8,167
(22.7
(9.5
(35,556
(0.0
0.7
(2,407
(10.2
(33,149
(0.5
(0.2
(22.2
(10.1
(32,149
Revenue, net for the three months ended March 31, 2023 was $289.1 million, a decrease of $28.7 million or 9% from $317.7 million for the three months ended March 31, 2022. The decrease in revenue is due to a $15.0 million decrease in retail revenues and a $13.7 million decrease in wholesale revenues. The Company experienced increased competition and promotional activity in
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certain markets, including Florida, Pennsylvania and Massachusetts. The Company operated 184 dispensaries and 165 dispensaries as of March 31, 2023 and March 31, 2022, respectively, opening three new dispensaries during the first quarter of 2023.
Cost of Goods Sold
Cost of goods sold for the three months ended March 31, 2023 was $139.2 million, an increase of $1.9 million or 1% from $137.3 million for the three months ended March 31, 2022. Cost of goods as a percentage of revenues, net was 48.1% in the current quarter compared to 43.2% in the prior year period. The increase was primarily due to 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.
Gross profit for the three months ended March 31, 2023 was $149.9 million, a decrease of $30.5 million or 17% from $180.5 million for the three months ended March 31, 2022. Gross profit as a percentage of revenue, net was 51.9% in the current quarter compared to 56.8% in the prior year period driven by increased promotional activity in certain retail markets, a product mix shift to value brands and initiatives to reduce inventory levels.
Sales and Marketing Expense
Sales and marketing expense for the three months ended March 31, 2023 was $62.3 million, a decrease of $10.5 million or 14% from $72.8 million for the three months ended March 31, 2022. Sales and marketing expense as a percentage of revenues, net was 21.6% in the current quarter compared to 22.9% 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. Another factor in the decrease in sales and marketing expenses is $2.1 million related to the accrual of earn-outs related to the Watkins acquisition for the three months ended March 31, 2022.
General and Administrative Expense
General and administrative expense for the three months ended March 31, 2023 was $39.4 million, an increase of $5.8 million or 17% from $33.5 million for the three months ended March 31, 2022. The increase in general and administrative expense is primarily due to a $10.5 million contribution to the Smart and Safe Florida campaign during the first quarter of 2023, 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 three months ended March 31, 2023 was $30.4 million, an increase of $1.9 million or 7% from $28.4 million for the three months ended March 31, 2022. The overall increase in depreciation and amortization expense was due to acquired facilities and investment in infrastructure for additional dispensaries and cultivation facilities.
Impairments and Disposals of Long-lived Assets, Net
Impairment and disposal of long-lived assets, net for the three months ended March 31, 2023 was $31.0 million, an increase of $14.6 million or 88% from $16.5 million for the three months ended March 31, 2022. During the three months ended March 31, 2023, the Company recorded an impairment of $30.3 million in the Massachusetts market, which primarily consisted of intangible assets. The impairment expense incurred in the prior year was primarily due to exited facilities and the repositioning of assets, primarily in our southeast hub.
Other Expense, Net
Other expense, net for the three months ended March 31, 2023 was $17.6 million, an increase of $1.4 million or 9% from $16.2 million for three months ended March 31, 2022. The increase is primarily the result of a $4.9 million increase in interest expense related to additional finance leases and private placement notes to support the long-term business growth, partially offset by gains related to non-operating assets and interest income on money market funds.
The provision for income taxes for the three months ended March 31, 2023 was $35.0 million, a decrease of $8.2 million or 19% from $43.1 million for the three months ended March 31, 2022. For the three months ended March 31, 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 and Comprehensive Loss
Net loss from continuing operations and comprehensive loss for the three months ended March 31, 2023 was $65.7 million, an increase of $35.6 million or 118% from $30.1 million for the three months ended March 31, 2022. The increase was driven primarily by lower gross margin and impairment expense, partially offset by lower sales and marketing and decreased tax expense.
Net Income (Loss) from Discontinued Operations, Net of Tax Benefit
Net income from discontinued operations, net of tax benefit for the three months ended March 31, 2023 increased $2.4 million or 102% from a net loss of $2.4 million for the three months ended March 31, 2022. Net losses relate to the Company’s operations in Nevada 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, income tax payments, and acquisitions. 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 $188.1 million as of March 31, 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:
Cash Flows
The condensed consolidated statements of cash flows include continuing operations and discontinued operations for the three months ended March 31, 2023 and 2022. The table below highlights our cash flows for the periods indicated.
Cash Flow from Operating Activities
Net cash provided by operating activities was $0.4 million for the three months ended March 31, 2023, a decrease of $44.7 million as compared to $45.1 million net cash provided by operating activities during the three months ended March 31, 2022. This is primarily due to income tax payments of $46.3 million that were deferred from the fourth quarter of 2022 due to Hurricane Ian and paid in the first quarter of 2023. Cash flows from operating activities were also impacted by lower results in the three months ended March 31, 2023, offset by favorable changes in working capital (excluding tax payments).
Cash Flow from Investing Activities
Net cash used in investing activities was $18.8 million for the three months ended March 31, 2023, a decrease of $65.0 million, compared to the $83.8 million net cash used in investing activities for the three months ended March 31, 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. 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 $5.8 million for the three months ended March 31, 2023, a decrease of $78.1 million, compared to the $72.2 million net cash provided by financing activities for the three months ended March 31, 2022. The decrease was primarily due to proceeds of $76.4 million from private placement notes which closed in the first quarter of 2022.
Balance Sheet Exposure
As of March 31, 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 and "Part I, Item 1A - Risk Factors" in our 2022 Form 10-K.
Contractual Obligations
As of March 31, 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
9,737
7,307
71,797
16,249
Private placement notes
22,263
44,315
42,800
92,125
201,503
14,704
28,851
25,871
43,855
22,029
45,962
48,623
402,809
Lease Settlements
1,646
1,284
847
6,317
Total(1)
70,379
257,719
614,938
557,578
1,500,614
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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 months ended March 31, 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.
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
Change Increase / (Decrease)
78,152
105,439
(27,287
(26)%
Adjusted EBITDA for the three months ended March 31, 2023 was $78.2 million, a decrease of $27.3 million or 26%, from $105.4 million for the three months ended March 31, 2022. The following table presents a reconciliation of GAAP net income to non-GAAP Adjusted EBITDA, for each of the periods presented:
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Add (deduct) impact of:
22,748
17,877
10,683
EBITDA
37,504
68,146
Legislative campaign contributions
10,512
Integration and transition costs
1,938
5,274
Share-based compensation and related premiums
(4,918
(885
Discontinued operations
Acquisition and transaction costs
3,297
Other non-recurring costs
6,189
Inventory step up, fair value
400
COVID related expenses
431
Results of entities not legally controlled
Total adjustments
40,648
37,293
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 Annual Report on Form 10-K for the year ended December 31, 2022.
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 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 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 March 31, 2023. Our Chief Executive Officer and Chief Financial Officer have concluded that, due to the material weaknesses identified in the prior period which are currently in the process of being remediated, as of March 31, 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 March 31, 2023 and December 31, 2022, because we determined we were the primary beneficiary. We have elected to exclude our variable interest entities from the scope of our evaluation of internal control over financial reporting as of March 31, 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 March 31, 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, the Company is taking a number of remediation actions and are continuing our actions. Remediation efforts include but are not limited to the following:
Information technology:
The Company has designed and is 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 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 adjust its ERP Systems to work towards increasing the level of automation in inventory tracking and analysis and reducing manual processes.
The Company has hired additional qualified personnel to provide additional oversight around the inventory valuation process.
Adding additional and more robust management review controls to provide more focus on detailed analyses and enhanced monitoring of our inventory valuation policies and process.
Variable Interest Entities:
The Company is enhancing procedures around the identification and evaluation, and where applicable, remeasurement, of our variable interest entities and potential variable interest entities.
Reviewing business processes surrounding non-routine transactions and other complex financial reporting areas to identify and implement 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.
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. 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 three months ended March 31, 2023, that has materially affected, or is reasonably likely to materially affect, the
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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 and in “Part I, Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. 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
Risks Related to Owning Subordinate Voting Shares
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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 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 Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on March 8, 2023 includes a detailed discussion of our risk factors under the heading “Part I, Item 1A—Risk Factors.” You should consider carefully the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 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 Annual Report on Form 10-K for the year ended December 31, 2022 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 March 31, 2023.
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.
Item 5. Other Information.
In connection with the regularly scheduled review of executive compensation effective as of January 1, 2023, an annual salary increase in the amount of 5.0% was approved for each Alex D’Amico and Eric Powers. In addition, effective as of January 1, 2023, the restructuring of the incentive compensation structure was approved for Kim Rivers and Alex D’Amico.
This disclosure is provided in this Part II, Item 5 in lieu of disclosure under Item 5.02(e) of Form 8-K.
Item 6. Exhibits.
Exhibit
Number
Description
10.1 ‡,*
Executive Employment Agreement, dated January 3, 2023, by and between Trulieve Cannabis Corp. and Joy Malivuk
10.2 ∔,*
First Amendment to Loan Agreement, dated as of May 9, 2023 and effective as of December 21, 2022
10.3 *
Second Amendment to Loan Agreement, dated as of May 9, 2023
31.1 *
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 *
Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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.
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.
Date: May 10, 2023
By:
/s/ Kim Rivers
Kim Rivers
Chief Executive Officer
(Principal Executive Officer)
/s/ Alex D’Amico
Alex D’Amico
Chief Financial Officer
(Principal Financial Officer)
/s/ Joy Malivuk
Joy Malivuk
Chief Accounting Officer
(Principal Accounting Officer)