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, 2022
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 5, 2022, the registrant had 135,001,544 Subordinate Voting Shares and 49,217,899 Multiple Voting Shares (on an as converted basis) outstanding.
Trulieve Cannabis Corp.
Table of Contents
Page
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
1
Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income for the three months ended March 31, 2022 and 2021
2
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2022 and 2021
3
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021
4
Notes to Condensed Consolidated Financial Statements
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
44
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
Legal Proceedings
47
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
48
Signatures
49
i
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, 2021. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this Quarterly Report on Form 10-Q.
ii
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
(in thousands)
March 31, 2022
December 31, 2021
(unaudited)
(audited)
ASSETS
Current assets:
Cash and cash equivalents
$
267,226
230,646
Restricted cash
—
3,013
Accounts receivable, net
12,782
8,854
Inventories, net
236,427
212,188
Notes receivable - current portion
634
1,530
Prepaid expenses and other current assets
76,182
68,189
Total current assets
593,251
524,420
Property and equipment, net
805,999
779,916
Right of use assets - operating, net
121,972
125,973
Right of use assets - finance, net
70,225
66,764
Intangible assets, net
1,098,278
1,117,982
Goodwill
789,900
765,358
Notes receivable, net
12,188
12,147
Other assets
34,041
18,312
TOTAL ASSETS
3,525,854
3,410,872
LIABILITIES
Current liabilities:
Accounts payable and accrued liabilities
109,810
94,073
Income tax payable
77,687
27,610
Deferred revenue
6,514
7,168
Notes payable - current portion, net
9,481
10,052
Private placement notes - current portion
1,874
Operating lease liabilities - current portion
10,553
9,840
Finance lease liabilities - current portion
6,905
6,185
Construction finance liabilities - current portion
1,154
991
Contingencies
13,826
13,017
Total current liabilities
237,804
168,936
Long-term liabilities:
Notes payable
3,476
6,456
Private placement notes, net
537,703
462,929
Warrant liabilities
2,075
2,895
Operating lease liabilities
128,575
122,130
Finance lease liabilities
69,167
65,244
Construction finance liabilities
175,032
175,198
Deferred tax liabilities
243,395
251,311
Other long-term liabilities
9,433
8,400
TOTAL LIABILITIES
1,406,660
1,263,499
Commitments and contingencies (see Note 21)
SHAREHOLDERS' EQUITY
Common stock, no par value; unlimited shares authorized. 184,184,142 issued and outstanding as of March 31, 2022 and 180,504,172 issued and outstanding as of December 31, 2021.
Additional paid-in-capital
2,012,564
2,008,100
Accumulated earnings
105,746
137,721
Non-controlling interest
884
1,552
TOTAL SHAREHOLDERS' EQUITY
2,119,194
2,147,373
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
(in thousands, except per share data)
Three Months Ended
March 31, 2021
Revenues, net of discounts
318,348
193,823
Cost of goods sold
140,198
58,559
Gross profit
178,150
135,264
Expenses:
Sales and marketing
72,862
44,558
General and administrative
33,546
12,709
Depreciation and amortization
29,305
5,434
Impairment and disposal of long-lived assets
13,780
Total expenses
149,493
62,701
Income from operations
28,657
72,563
Other income (expense):
Interest expense, net
(17,877
)
(7,899
Change in fair value of derivative liabilities - warrants
820
Loss on divestment and sale of non-operating assets
(2,681
Other income (expense), net
915
(37
Total other expense
(18,823
(7,936
Income before provision for income taxes
9,834
64,627
Provision for income taxes
42,316
34,549
Net (loss) income and comprehensive (loss) income
(32,482
30,078
Less: Net loss and comprehensive loss attributed to non-controlling interest
(507
Net (loss) income and comprehensive (loss) income attributed to common shareholders
(31,975
Net (loss) income per share:
Basic
(0.17
0.25
Diluted
0.24
Weighted average number of common shares used in computing net (loss) income per common share:
187,054,916
119,892,507
127,589,096
Condensed Consolidated Statements of Changes in Shareholders’ Equity
Super Voting Shares
Multiple Voting Shares
Subordinate Voting Shares
Total Common Shares
Additional Paid-in-Capital
Accumulated Earnings
Non-Controlling Interest
Total
Balance, January 1, 2021 (audited)
58,182,500
1,439,037
59,952,461
119,573,998
328,214
119,689
447,903
Share-based compensation
741
Shares issued for cash - warrant exercise
469,133
6,861
Conversion of warrants to Subordinate Voting Shares
133,408
Conversion of Multiple Voting to Subordinate Voting Shares
(117,668
117,668
Conversion of Super Voting to Subordinate Voting Shares
(3,021,100
3,021,100
Conversion of Super Voting to Multiple Voting Shares
(55,161,400
55,161,400
Net income and comprehensive income
Balance, March 31, 2021 (unaudited)
56,482,769
63,693,770
120,176,539
335,816
149,767
485,583
Balance, January 1, 2022 (audited)
51,916,999
128,587,173
180,504,172
4,564
Exercise of Stock Options
45,775
108
1,648
22
Shares issued under share compensation plans
16,257
Tax withholding related to net share settlements of equity awards
(10,005
(230
(2,699,100
2,699,100
Shares issued for PurePenn, Pioneer, and Solevo earnout
3,626,295
Distribution
(50
Divestment of variable interest entity
(111
Net (loss) income and comprehensive loss
Balance, March 31, 2022 (unaudited)
49,217,899
134,966,243
184,184,142
Condensed Consolidated Statements of Cash Flows
Three Months EndedMarch 31, 2022
Three Months EndedMarch 31, 2021
Cash flow from operating activities
Adjustments to reconcile net (loss) income and comprehensive (loss) income to net cash provided by operating activities:
Depreciation included in cost of goods sold
10,692
3,667
Non-cash interest expense
1,232
(41
Non-cash interest income
(163
Loss on impairment and disposal of long-lived assets
Loss on settlement of held for sale assets, net
1,862
Loss on lease terminations
819
Amortization of operating lease right of use assets
2,892
1,573
Accretion of construction finance liabilities
293
711
(820
Change in legal contingencies
(1,248
Allowance for credit losses
42
Deferred income tax expense
(1,487
Changes in operating assets and liabilities:
Inventories
(21,957
(5,598
Accounts receivable
(3,970
(2,309
(8,094
(1,673
(16,216
(7,298
22,093
595
42,210
36,540
(2,106
(943
(654
(399
Other current liabilities
2,057
1,016
Net cash provided by operating activities
45,147
59,591
Cash flow from investing activities
Purchases of property and equipment
(48,118
(48,387
Purchases of property and equipment related to construction finance liabilities
(7,334
(3,687
Capitalized interest
(365
Acquisitions, net of cash acquired
(27,500
91
Purchases of internal use software
(2,214
(1,014
Proceeds from sale of variable interest entity
1,604
Proceeds from sale of held for sale assets
203
Proceeds received from notes receivable
1,018
Net cash used in investing activities
(83,828
(53,362
Cash flow from financing activities
Proceeds from private placement notes, net of discounts
76,420
Proceeds from construction finance liabilities
3,687
Proceeds from warrant exercises
Proceeds from stock option exercises
Payments on notes payable
(2,285
Payments on finance lease obligations
(1,421
(1,028
Payments on construction finance liabilities
(297
Payments for debt issuance costs
(19
Payments on notes payable - related party
(12
Payments for taxes related to net share settlement of equity awards
Distributions
Net cash provided by financing activities
72,248
9,508
Net increase in cash and cash equivalents
33,567
15,737
Cash, cash equivalents, and restricted cash, beginning of period
233,659
146,713
Cash, cash equivalents, and restricted cash, end of period
162,450
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest
6,949
540
Income taxes
46
Other noncash investing and financing activities
ASC 842 lease additions - operating and finance leases
10,852
10,697
Purchases of property and equipment financed with accounts payable
10,985
13,155
NOTE 1. NATURE OF BUSINESS
Trulieve Cannabis Corp. together with its subsidiaries (“Trulieve” or the “Company”) was incorporated in British Columbia, Canada. Trulieve is a vertically integrated cannabis company which, as of March 31, 2022, held licenses to operate in Florida, California, Connecticut, Pennsylvania, Massachusetts, West Virginia, Arizona, Colorado, Maryland, and Nevada, to cultivate, produce, and sell medicinal-use cannabis products, and with respect to Arizona, California, Colorado, Nevada, and Massachusetts, adult-use cannabis products, and have received notice of intent to award a license in Georgia.
In addition to the States listed above, the Company also conducts activities in other markets. In these markets, the Company has either applied for licenses, plans on applying for licenses, or partners with other entities, but does not currently directly own any cultivation, production or retail licenses.
In July 2018, Trulieve, Inc. entered into a non-binding letter agreement (“Letter Agreement”) with Schyan Exploration Inc. (“Schyan”) whereby Trulieve, Inc. and Schyan have agreed to merge their respective businesses resulting in a reverse takeover of Schyan by Trulieve, Inc. and change the business of Schyan from a mining issuer to a marijuana issuer (the “Transaction”). The Transaction was completed in August 2018 and Schyan changed its name to Trulieve Cannabis Corp.
The Company’s principal address is located in Quincy, Florida. The Company’s registered office is located in British Columbia. Our operations are substantially located in Florida and to a lesser extent Arizona and Pennsylvania.
The Company is listed on the Canadian Securities Exchange (the “CSE”) and began trading on September 25, 2018, under the ticker symbol “TRUL” and trades on the OTCQX market under the symbol “TCNNF”.
NOTE 2. BASIS OF PRESENTATION
Principles of consolidation
The accompanying condensed consolidated financial statements include the financial position and operations of Trulieve Cannabis Corp. and its subsidiaries. The condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and include the assets, liabilities, revenue and expenses of all wholly-owned subsidiaries and variable interest entities for which we have determined that we are the primary beneficiary. Outside shareholders' interests in subsidiaries are shown on the condensed consolidated financial statements as non-controlling interests. Material intercompany balances and transactions are eliminated in consolidation. In our opinion, the condensed consolidated financial statements include all adjustments of a normal recurring nature necessary to present fairly our financial position as of March 31, 2022, and the results of our operations and cash flows for the three months ended March 31, 2022 and March 31, 2021. The results of our operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full 2022 fiscal year.
A variable interest entity (“VIE”) is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support, is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights, or do not substantively participate in the gains and losses of the entity. Upon inception of a contractual agreement, the Company performs an assessment to determine whether the arrangement contains a variable interest in a legal entity and whether that legal entity is a VIE. The primary beneficiary has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE entity that could potentially be significant to the VIE. Where the Company concludes it is the primary beneficiary of a VIE, the Company consolidates the accounts of that VIE. When the Company is not the primary beneficiary, the VIE is accounted for using the equity method and is included in equity method investments on the consolidated balance sheets.
The Company regularly reviews and reconsiders previous conclusions regarding whether it is the primary beneficiary of a VIE in accordance with FASB ASC 810. The Company also reviews and reconsiders previous conclusions regarding whether the Company holds a variable interest in a potential VIE, the status of an entity as a VIE, and whether the Company is required to consolidate such a VIE in the consolidated financial statements when a change occurs.
The financial data presented herein should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2021, as reported in the 2021 Annual Report on Form 10-K.
Basis of Measurement
These condensed consolidated financial statements have been prepared on the going concern basis, under the historical cost convention, except for certain financial instruments that are measured at fair value as described herein.
Functional Currency
The functional currency of the Company and its subsidiaries, as determined by management, is the United States (“U.S.”) dollar. These condensed consolidated financial statements are presented in U.S. dollars.
Reclassifications
Certain reclassifications have been made to the condensed consolidated financial statements of prior periods and the accompanying notes to conform to the current period presentation.
NOTE 3. 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 Company’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the Securities and Exchange Commission ("SEC") on March 30, 2022 (the "2021 Form 10-K"). There have been no material changes to the Company’s significant accounting policies.
Critical accounting estimates and judgments
The preparation of the condensed consolidated financial statements 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.
Restricted Cash
Restricted cash balances are those which meet the definition of cash and cash equivalents but are not available for use by the Company. As of December 31, 2021, restricted cash was $3.0 million, which represented cash consideration set aside in relation to amounts held for a pending legal dispute. The restriction on this cash was released in January 2022 as the litigation was settled in December 2021. There was no restricted cash as of March 31, 2022.
6
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consists of:
Trade accounts payable
18,958
14,330
Accrued payroll
27,245
24,728
Accrued property and equipment
6,507
Accrued property and equipment - related party
11,353
Accrued inventory
11,039
8,373
Accrued insurance
3,449
6,620
Accrued interest
17,673
6,787
Accrued utilities
317
990
Sales tax payable
5,508
5,352
Other payables and accrued liabilities
14,636
9,033
Total accounts payable and accrued liabilities
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consists of:
Prepaid insurance
6,073
10,175
Prepaid expenses
10,677
10,325
Prepaid payroll
12,809
Tenant improvement receivables
9,539
16,853
Held for sale assets, net
9,460
8,719
Deposits
11,185
16,969
Current portion of acquisition earnouts
9,999
Other current assets
6,440
5,148
Total prepaids and other current assets
Deferred Revenue
The Company has a loyalty rewards program that allows customers to earn reward credits to be used on future purchases. Loyalty reward credits issued as part of a sales transaction results in revenue being deferred until the loyalty reward is redeemed by the customer. The loyalty rewards are shown as reductions to ‘revenues, net of discounts’ line on the accompanying condensed consolidated statements of operations and comprehensive (loss) income and included as deferred revenue on the condensed consolidated balance sheets.
A portion of the revenue generated in a sale must be allocated to the loyalty points earned. The amount allocated to the points earned is deferred until the loyalty points are redeemed or expire. As of March 31, 2022 and December 31, 2021, the loyalty liability totaled $6.2 million and $6.7 million, respectively, that is included in deferred revenue on the condensed consolidated balance sheets.
Advertising Costs
Advertising costs are expensed as incurred and are included in sales and marketing expenses in the accompanying condensed consolidated statements of operations and comprehensive (loss) income and totaled $2.7 million and $1.1 million for the three months ended March 31, 2022 and 2021, respectively.
7
Held for sale
We classify long-lived assets or disposal groups and related liabilities as held-for-sale when management having the appropriate authority, generally our Board of Directors or certain of our Executive Officers, commits to a plan of sale, the disposal group is ready for immediate sale, an active program to locate a buyer has been initiated and the sale is probable and expected to be completed within one year. Once classified as held-for-sale, disposal groups are valued at the lower of their carrying amount or fair value less estimated selling costs. Depreciation on these properties is discontinued at the time they are classified as held for sale, but operating revenues, operating expenses and interest expense continue to be recognized until the date of sale.
As of March 31, 2022, the Company had $9.5 million in net assets held for sale which is recorded in prepaids and other current assets in the condensed consolidated balance sheets. The net assets held for sale as of March 31, 2022 primarily consists of leases and related liabilities. As of December 31, 2021, the Company had $8.7 million in net assets held for sale which is recorded in prepaid expenses and other current assets in the consolidated balance sheets. The net assets held for sale primarily consist of property and equipment, leases and related liabilities, and a note payable. During the three months ended March 31, 2022 the Company settled net assets of $0.7 million, sold land held for sale for $0.2 million in proceeds, and recorded a loss on sale of $2.6 million of which is recorded in loss on divestment and sale of non-operating assets in the condensed consolidated statement of operations and comprehensive (loss) income.
Recently Issued Accounting Pronouncements
Recent accounting pronouncements, other than those below, issued by the FASB, the AICPA and the SEC did not or are not believed by management to have a material effect on the Company’s present or future financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 was effective for the Company beginning January 1, 2021. The Company adopted ASU 2016-13 on January 1, 2021, and the adoption did not have a material impact on the Company’s consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”), which requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Revenue from Contracts with Customers (“Topic 606”) rather than adjust them to fair value at the acquisition date. We elected to early adopt this accounting standard in the fourth quarter of 2021, with retrospective application to business combinations that occurred in fiscal year 2021. Results of operations for quarterly periods prior to September 30, 2021 remain unchanged as a result of the adoption of ASU No. 2021-08. The acquisitions of Harvest Health and Recreation Inc. and Purplemed Healing Center were accounted for in accordance with ASU 2021-08, as will all future acquisitions. Refer to Note 4. Acquisitions for further information. The adoption of this standard did not have a material impact on our consolidated financial statements.
NOTE 4. ACQUISITIONS
(a) CP4 Group, LLC
On February 14, 2022, the Company acquired a cultivation operation from CP4 Group, LLC, in Phoenix, Arizona ("Watkins"). Total consideration was $27.5 million paid in cash. An additional $22.5 million was paid into escrow for four potential earnouts. The earnouts are based on the completion of certain milestones and contingent on the continued employment of the key employee shareholders ("Key Employees") of Watkins. As the earnouts are contingent on the continued employment of the Key Employees, the $22.5 million is compensation for post-combination services. The Company will accrue the compensation cost for each earnout as it becomes probable and estimable and over the most probable period of continued employment required for the specific earnouts. The Company reviewed the potential earnouts concluding three are probable and estimable as of March 31, 2022, recording an accrual of $2.1 million in contingencies and other long-term liabilities on the condensed consolidated balance sheets which was expensed during the three months ended March 31, 2022, in general and administrative expenses in the condensed consolidated statements of operations and comprehensive (loss) income. No liability was recorded for the fourth earnout as it was concluded to be reasonably possible but not probable as of March 31, 2022. The earnouts will be evaluated on a quarterly basis. The Company incurred $0.2 million of transaction costs related to the acquisition of Watkins. These costs were expensed as incurred and included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive (loss) income for the quarter ended March 31, 2022.
8
The Company analyzed the acquisition under ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, determining Watkins met the definition of a business as Watkins is an existing cultivation facility with inputs, processes, and outputs in place that constitute a business under Topic 805. As a result, the acquisition of Watkins has been accounted for as a business combination. Goodwill represents the premium the Company paid over the fair value of the net tangible assets acquired. The primary reason for the acquisition was to expand the Company's cultivation capacity in Arizona. The goodwill of $24.5 million arising from the acquisition primarily consist of the economies of scale expected from a vertical cannabis market in Arizona.
The following table summarizes the allocation of consideration exchanged for the estimated fair value of tangible assets acquired and liabilities assumed:
Consideration
Cash
27,500
Fair value of consideration exchanged
Recognized amounts of identifiable assets acquired and liabilities assumed:
2,266
Property and equipment
692
Right of use asset - operating
4,737
24,542
Operating lease liability
(4,737
Total net assets acquired
(b) Purplemed Healing Center
On December 28, 2021, the Company acquired 100% of certain assets of Purplemed Healing Center ("Purplemed") including the Medical Marijuana Dispensary License issued by the Arizona Department of Health Services ("ADHS") and the Marijuana Establishment License issued by the ADHS which collectively serve as the Purplemed license providing the ability to operate a marijuana retail sales dispensary as well as the assumption of the associated lease. The Company also acquired the right to operate an additional offsite cultivation business under the Arizona Adult Use Marijuana Act, and the option to purchase full ownership and management of Greenmed, Inc., the Greenmed license, and the Greenmed dispensary. As part of the transaction, the Company assumed the Purplemed loyalty program.
The Company analyzed the acquisition under ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, determining Purplemed did not meet the definition of a business as Purplemed did not have inputs, processes, and outputs in place that constituted a business under Topic 805. As a result, the acquisition of Purplemed has been accounted for as an asset acquisition, whereby all of the assets acquired and liabilities assumed are assigned a carrying amount based on relative fair values. The total consideration was $15.0 million consisting of cash. The acquisition provided for indemnity for pre-closing liabilities. Accordingly, the Company recognized an indemnification asset of $0.5 million offset by associated liabilities based on the information that was available at the date of the acquisition, which is included in the net assets acquired.
9
The net assets were acquired for an aggregate purchase price of $15.0 million.
Consideration:
15,000
Transaction costs
12
15,012
531
271
Intangible asset
15,076
(531
(109
(226
The acquired intangible asset includes a dispensary license which is treated as a definite-lived intangible asset amortized over a 15-year useful life.
(c) Harvest Health & Recreation Inc.
On October 1, 2021, (the “Closing Date”), the Company acquired 100% of the common shares of Harvest Health & Recreation, Inc. (“Harvest”) and its portion of variable interest entities in exchange for Subordinate Voting Shares of the Company (the “Transaction”).
Harvest is one of the largest multi-state vertically integrated operators in the cannabis industry in the United States operating from “seed to sale". Harvest operates facilities or provides services to cannabis dispensaries in Arizona, California, Colorado, Florida, Maryland, Nevada, and Pennsylvania, with two provisional licenses in Massachusetts. In addition, Harvest owns CO2 extraction, distillation, purification, and manufacturing technology used to produce a line of cannabis topicals, vapes, and gems featuring cannabinoids and a hemp-derived product line sold in Colorado.
Total consideration was $1.4 billion consisting of Trulieve Subordinate Voting Shares (“Trulieve Shares”) with a fair value of $1.37 billion, stock options, equity classified warrants, restricted stock units and other outstanding equity instruments with a fair value of $18.4 million, and warrant liabilities convertible into equity with a fair value of $3.1 million at the time of the Transaction. The Company incurred $13.0 million in transaction costs related to the acquisition of Harvest as of December 31, 2021. No additional transaction costs have been incurred.
The acquisition was accounted for as a business combination in accordance with the Accounting Standards Codification (ASC) 805, Business Combinations. Goodwill represents the premium the Company paid over the fair value of the net tangible and intangible assets acquired. The primary reason for the acquisition was to expand the Company’s retail and cultivation footprint and gain access to new markets. The goodwill of $662.1 million arising from the acquisition primarily consisted of the synergies and economies of scale expected from combining the operations of Trulieve and Harvest including growing the Company's customer base, acquiring assembled workforces, and expanding its presence in new and existing markets. These benefits were not recognized separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets. Goodwill is subject to the limits of IRC Section 280E under which the Company is only allowed to deduct expenses directly related to the cost of goods sold, therefore goodwill is not deductible.
10
The following table summarizes the allocation of consideration exchanged for the estimated fair value of tangible and identifiable intangible assets acquired and liabilities assumed:
Trulieve Subordinated Voting Shares
1,369,024
Fair value of other equity instruments
18,394
Fair value of warrants classified as liabilities
3,103
1,390,521
85,318
3,072
3,645
92,537
100,129
Notes receivable
9,805
191,801
Right of use assets - operating
73,476
Intangible assets:
Dispensary license
946,000
Trademarks
27,430
Customer relationships
3,500
5,289
(58,887
(24,863
(4,523
(76,558
(26,599
(285,238
(79,683
(1,085
(253,986
730,580
(2,139
662,080
The acquired intangible assets include dispensary licenses which are treated as definite-lived intangible assets amortized over a 15-year useful life, tradenames amortized over a one to five year useful life, and customer relationships amortized over a one year period.
On acquisition date there was consideration in the form of 1,266,641 stock options (as converted) that had been issued before the acquisition date to employees and non-employees of Harvest. The pre-combination fair value of these awards is $6.2 million. There was consideration in the form of 1,011,095 warrants (1,009,416 equity classified SVS warrants and 1,679 liability classified MVS warrants, as converted) that had been issued before the acquisition date to employees and non-employees of Harvest. The pre-combination fair value of these awards is $7.7 million with $4.6 million representing the equity classified warrants and $3.1 million representing the liability classified warrants. There was consideration in the form of restricted stock units that had been issued before the acquisition date to non-employees of Harvest which vested for services performed pre-combination representing 18,297 SVS. The pre-combination fair value of these awards is $0.5 million. There was additional consideration in the form of other outstanding equity instruments issued before the acquisition date to non-employees which had a pre-combination fair value of $7.1 million.
As part of the acquisition, Harvest entered into a sale agreement to sell their Florida cannabis license for $55.0 million where Trulieve was legally prohibited from holding this license and the sale occurred simultaneously with the Transaction. Therefore, a $55.0 million
11
receivable for the sale proceeds was deemed acquired and recorded. The funds were received subsequent to the closing of the transaction on October 1, 2021.
The Company has not yet finalized their accounting for non-controlling interests on the acquired entities but has recorded preliminary entries in this area. Any subsequent adjustments would be expected to impact non-controlling interest and goodwill. This accounting will be finalized during the measurement period.
Supplemental pro forma information (unaudited)
The unaudited pro forma information for the periods set forth below gives effect to the acquisition of Harvest Health & Recreation Inc. and Keystone Shops, as if the acquisitions had occurred on January 1, 2021. This pro forma information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the transactions been consummated as of that time nor does it purport to be indicative of future financial operating results.
Unaudited pro forma net income reflects the adjustment of sales between the companies, and adjustments for alignment of significant differences in accounting principles and elections.
(d) Keystone Shops
On July 8, 2021, the Company acquired 100% of the membership interests of Anna Holdings, LLC, the sole member of Chamounix Ventures, LLC which holds a permit to operate dispensaries under Keystone Shops (“Keystone Shops”) with locations in Philadelphia, Devon and King of Prussia, Pennsylvania. Total consideration was $55.6 million consisting of $20.3 million in cash, inclusive of net working capital adjustments, and 1,009,336 in Trulieve Subordinate Voting Shares ("Trulieve Shares") with a fair value of $35.4 million. The agreement provides for an additional $5.0 million in consideration which is contingent on the enactment, adoption or approval of laws allowing for adult-use cannabis in Pennsylvania. No liability was recorded for this contingent consideration, as it was not estimated to be probable at the time of acquisition nor as of March 31, 2022. The acquisition was accounted for as a business combination in accordance with the Accounting Standards Codification (ASC) 805, Business Combinations. Goodwill arose because the consideration paid for the business acquisition reflected the benefit of expected revenue growth and future market development.
20,251
Shares issued upon acquisition
35,385
55,636
500
1,766
240
1,144
Right of use asset - finance
1,340
Intangible assets
27,000
Tradename
100
Favorable leasehold interests, net
86
39,703
40
(878
(2,892
(1,340
(2,179
Deferred tax liability
(8,994
The acquired intangible assets include a dispensary license which is treated as a definite-lived intangible asset amortized over a 15-year useful life, as well as tradename and net favorable leasehold interests which were fully amortized in the period of acquisition due to useful life and materiality considerations.
(e) Nature’s Remedy of Massachusetts, Inc.
On June 30, 2021, the Company completed an asset purchase agreement whereby Trulieve acquired a licensed, but not yet operating, adult-use dispensary location from Nature’s Remedy of Massachusetts, Inc. (“Nature’s Remedy”). The Company analyzed the acquisition under ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, determining Nature’s Remedy did not meet the definition of a business as Nature’s Remedy did not have inputs, processes, and outputs in place that constituted a business under Topic 805. As a result, the acquisition of Nature’s Remedy has been accounted for as an asset acquisition, whereby all of the assets acquired and liabilities assumed are assigned a carrying amount based on relative fair values. Total consideration was $16.2 million consisting of $7.0 million in cash and 237,881 in Trulieve Shares, with a fair value of $9.1 million, and less than $0.1 million in transaction costs.
13
7,000
9,139
23
16,162
1,006
799
15,274
(335
Finance lease liability
(594
The acquired intangible asset is represented by the adult-use license and is treated as a definite-lived intangible asset amortized over a 15-year useful life.
(f) Patient Centric of Martha's Vineyard
On July 2, 2021, the Company acquired certain assets of Patient Centric of Martha’s Vineyard (“PCMV”) including the rights to a Provisional Marijuana Retailers License from the Massachusetts Cannabis Control Commission, the right to exercise an option held by PCMV to lease real property in Framingham, Massachusetts for use as a marijuana retailer, and necessary municipal entitlements to operate as a marijuana retailer at the property. Total consideration was 258,383 in Trulieve Shares, of which 10,879 are subject to a holdback for six months as security for any indemnity claims by the Company under the asset purchase agreement. The fair value of the equity exchanged was $10.0 million. The Company analyzed the acquisition under ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, determining PCMV did not meet the definition of a business as PCMV did not have inputs, processes, and outputs in place that constituted a business under Topic 805. As a result, the acquisition of PCMV has been accounted for as an asset acquisition, whereby all of the assets acquired and liabilities assumed are assigned a carrying amount based on relative fair values.
10,012
18
10,030
1,756
10,594
(2,320
(g) Solevo Wellness West Virginia, LLC
On June 8, 2021, the Company acquired 100% of the membership interests of Solevo Wellness West Virginia, LLC (“Solevo WV”) which holds three West Virginia dispensary licenses. The Company analyzed the acquisition under ASU 2017-01, Business
14
Combinations (Topic 805): Clarifying the Definition of a Business, determining Solevo WV did not meet the definition of a business as substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset. Therefore, the transaction has been accounted for as an asset acquisition. Total consideration was $0.8 million consisting of $0.2 million in cash, 11,658 in Trulieve Shares with a fair value of $0.4 million, $0.1 million in debt forgiveness and less than $0.1 million in transaction costs. The consideration of $0.8 million was allocated to acquired assets of $0.8 million, which are treated as definite-lived intangible assets amortized over a 15-year useful life.
(h) Mountaineer Holding, LLC
On May 6, 2021, the Company acquired 100% of the membership interests of Mountaineer Holding LLC (“Mountaineer”) which holds a cultivation permit and two dispensary permits in West Virginia. The Company analyzed the acquisition under ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, determining Mountaineer did not meet the definition of a business as substantially all of the fair value of the gross assets acquired are concentrated in a single identifiable asset. Therefore, the transaction has been accounted for as an asset acquisition. Total consideration was $5.5 million, consisting of $3.0 million in cash and 60,342 in Trulieve Shares with a fair value of $2.5 million. The consideration of $5.5 million has been allocated to the $5.5 million of acquired assets which are treated as definite-lived intangible assets and amortized over a 15-year useful life.
NOTE 5. ACCOUNTS RECEIVABLE
As of March 31, 2022 and December 31, 2021, Accounts receivable, net consisted of the following:
Trade receivables
13,633
9,363
Less: allowance for credit losses
(851
(509
NOTE 6. NOTES RECEIVABLE
As of March 31, 2022 and December 31, 2021, Notes receivable, net consisted of the following:
March 31,2022
December 31,2021
Promissory note acquired from Harvest maturing in November 2025. Secured by certain assets.
8,659
8,827
Convertible note receivable dated November 2021 maturing in November 2024.
4,276
4,124
Promissory notes acquired from Harvest maturing in February 2022. Secured by certain assets.
850
12,935
13,801
Less: discount on notes receivable
(113
(124
Total notes receivable, net of discounts
12,822
13,677
Less: current portion of notes receivable
(634
(1,530
15
In October 2021, the Company acquired a note receivable with the Harvest acquisition. The note receivable is originally dated November 2020 maturing in November 2025. The note had an original principal balance of $12.0 million and accrues interest at a rate of 7.5% per annum with monthly interest and principal payments of $0.1 million.
In October 2021, the Company acquired notes receivable with the Harvest acquisition. The notes receivable are originally dated February 2021 maturing in February 2022. The notes had an original principal balance of $0.9 million and accrue interest at a rate of 10% per annum with interest only payments due monthly. These notes were repaid in full in February 2022.
As part of the acquisition of Harvest, we acquired $9.8 million in notes receivable on October 1, 2021. There were no notes receivable outstanding prior to October 1, 2021.
See Note 4. Acquisitions for further details of the Harvest acquisition.
In November 2021, the Company entered into a convertible note receivable agreement for a principal amount of $4.1 million that matures in November 2024. The note accrues interest monthly at 9.75%, and accrued interest is added to the principal balance at each quarter end. The note is convertible to equity of the holder at our option at any time prior to maturity. Further, the note was issued at a discount of 3% or $0.1 million, which is accreted to the note receivable balance over the term of the note.
During the three months ended March 31, 2022, the Company recorded interest income of $0.4 million in other income (expense), net on the condensed consolidated statements of operations and comprehensive (loss) income. The Company had no accrued interest receivable as of March 31, 2022, and $0.1 million as of December 31, 2021, included in prepaid expenses and other current assets on the condensed consolidated balance sheets.
Stated maturities of notes receivable are as follows as of March 31, 2022:
Expected principal payments
Remaining 2022
454
2023
728
2024
5,060
2025
6,693
2026
Thereafter
16
NOTE 7. INVENTORY
As of March 31, 2022 and December 31, 2021, Inventories, net consisted of the following:
Raw material
Cannabis plants
34,271
31,279
Packaging and supplies
41,453
40,326
Total raw material
75,724
71,605
Work in process
99,671
94,249
Finished goods-unmedicated
9,213
4,824
Finished goods-medicated
51,819
41,510
Total inventories
NOTE 8. PROPERTY & EQUIPMENT
As of March 31, 2022 and December 31, 2021, Property and equipment, net consisted of the following:
Land
30,884
32,904
Buildings and improvements
601,195
435,185
Construction in progress
86,431
234,198
Furniture and equipment
163,518
140,281
Vehicles
985
959
883,013
843,527
Less: accumulated depreciation
(77,014
(63,611
Total property and equipment, net
Capitalized interest for the three months ended March 31, 2022 and March 31, 2021 totaled $1.5 million and $0.4 million, respectively. Depreciation expense for the three months ended March 31, 2022 and March 31, 2021 totaled $15.5 million and $5.6 million, respectively.
During the three months ended March 31, 2022, the Company recorded a loss on the disposal of property and equipment of $3.0 million and an impairment of $0.3 million which is the result of repositioning of assets in the southeast. This loss was recorded in impairment and disposal of long-lived assets in the condensed consolidated statements of operations and comprehensive (loss) income. There was no loss on disposal of property and equipment during the three months ended March 31, 2021.
17
NOTE 9. INTANGIBLE ASSETS & GOODWILL
As of March 31, 2022 and December 31, 2021, Intangible assets, net consisted of the following:
Gross Carrying Amount
Accumulated Amortization
Net Book Value
Licenses
1,106,658
42,819
1,063,839
5,617
21,813
Internal use software
9,588
1,496
8,092
Tradenames
4,862
2,512
2,350
4,536
2,352
2,184
1,153,074
54,796
-
25,352
1,081,306
2,809
24,621
7,374
1,119
6,255
2,168
2,694
1,430
3,106
1,150,860
32,878
Amortization expense for the three months ended March 31, 2022 and 2021 was $21.9 million and $2.0 million, respectively.
The following table outlines the estimated future annual amortization expense related to intangible assets as of March 31, 2022:
Estimatedamortization
64,964
82,161
80,419
78,392
76,894
715,448
The changes in the carrying amount of Goodwill arose from the following:
Three Months Ending March 31, 2022
As of December 31, 2021
Acquisition of Watkins
As of March 31, 2022
NOTE 10. NOTES PAYABLE
As of March 31, 2022 and December 31, 2021, Notes payable consisted of the following:
Promissory notes dated October 1, 2021, maturing in October 2022. Monthly interest payments due of 4.75%. Secured by mortgaged property with a $6 million book value.
6,156
Promissory note acquired in Harvest acquisition dated February 2020, maturing in February 2023. Monthly interest payments due at 5.5%.
2,670
4,699
Promissory note dated July 2018, maturing in July 2023. Monthly interest payments due of 4% per annum. Secured by certain assets.
1,103
1,113
Promissory note of consolidated variable-interest entity dated February 2022, maturing February 2029. Monthly interest payments due of 8%.
930
Promissory note dated October 2019, maturing in October 2024. Monthly interest payments due of 5.5%. Principal balance due at maturity.
800
829
Promissory note acquired in Harvest acquisition dated August 2018, maturing in August 2024. Monthly interest payments due of 2%. Secured by certain assets.
928
1,022
Promissory note acquired in Harvest acquisition dated January 2020, maturing in May 2023. Quarterly interest payments due of 2%.
325
425
Promissory note acquired in Harvest acquisition dated April 2021, maturing in April 2026. Principal due at maturity. Secured by equipment.
56
60
Promissory note acquired in Harvest acquisition dated January 2020, maturing in January 2023. Monthly interest payments due of 2%.
45
65
Promissory notes of consolidated variable-interest entities acquired in Harvest Acquisition. Maturing December 2022 and 2029, interest ranging from 5.25% to 8.25%. Secured by real-estate. In the first quarter of 2022 these notes were fully paid.
2,231
Total notes payable
13,013
16,600
Less: Debt discount
(56
(92
Less: Current portion of notes payable
(9,481
(10,052
19
As of March 31, 2022, stated maturities of notes payable are as follows:
6,697
4,711
657
NOTE 11. PRIVATE PLACEMENT NOTES
2024 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. Both notes accrue interest at an annual rate of 9.75%, payable semi-annually, in equal installments, in arrears on June 18 and December 18 of each year. The purchasers of the June Notes received warrants to purchase 1,470,000 Subordinate Voting Shares and the purchasers of the November Notes received warrants to purchase 1,560,000 Subordinate Voting Shares, which can be exercised for three years after closing.
During the three months ended March 31, 2022 and 2021, accretion expense for the June Notes was $0.4 million and $0.4 million, respectively. During the three months ended March 31, 2022 and 2021, accretion expense for the November Notes was $0.4 million and $0.3 million, respectively.
2026 Notes
On January 28, 2022, the Company closed on a second tranche private placement of 8% Senior Secured Notes (the "2026 Notes") for aggregate gross proceeds of $75.6 million. The 2026 Notes bear interest at a rate of 8% per annum, payable semi-annually in equal installments until the maturity date, unless earlier redeemed or repurchased. The 2026 Notes will mature on October 6, 2026, and 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. The Company intends to use the net proceeds for capital expenditures and other general corporate purposes. During the three months ended March 31, 2022, accretion expense for the January 2026 Notes was less than $0.1 million.
On October 6, 2021, the Company closed its private placement of 8% Senior Secured Notes (the "2026 Notes") for aggregate gross proceeds of $350.0 million and net proceeds of $342.6 million. The 2026 Notes were issued at 100% face value, bear an interest rate of 8% per annum payable semi-annually in equal installments until the maturity date, unless earlier redeemed or repurchased. The 2026 Notes mature on October 6, 2026, and may be redeemed in whole or in part, at the Company's option, at any time, on or after October 6, 2023, at the application redemption price set forth in the Indenture. The Company used a portion of the net proceeds to redeem certain outstanding indebtedness of Harvest and intends to use the remaining net proceeds for capital expenditures and other general corporate purposes. During the three months ended March 31, 2022 the Company incurred $0.3 million in accretion expense.
Accretion expense on the private placement notes is included in general and administrative expenses in the condensed consolidated statements of operations and comprehensive (loss) income.
20
Scheduled maturities of the principal portion of private placement notes, net outstanding as of March 31, 2022, are as follows:
130,000
425,000
Total private placement notes
556,874
Less: Unamortized debt discount & issuance costs
(17,297
Less: current portion
(1,874
NOTE 12. LEASES
The Company leases real estate used for dispensaries, production plants, 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.
During the three months ending March 31, 2022, the Company recorded a loss on disposal of Operating right of use assets of $10.5 million which is the result of repositioning of assets in the southeast. This loss was recorded in impairment and disposal of long-lived assets in the condensed consolidated statements of operations and comprehensive (loss) income.
21
The following table provides the components of lease cost recognized in the condensed consolidated statements of operations and comprehensive (loss) income for the three months ended March 31, 2022 and 2021:
For the Three Months Ended March 31,
Statement of operations and comprehensive (loss) income location
2022
2021
Operating lease cost
Cost of goods sold, sales and marketing, general and administrative
6,093
Finance lease cost:
Amortization of lease assets
2,515
1,570
Interest on lease liabilities
Interest expense
1,579
779
Finance lease cost
4,094
2,349
Variable lease cost
1,934
395
Short term lease expense
99
Total lease cost
12,220
4,317
Short term lease expense for the three months ended March 31, 2022 and 2021, was nominal. During the three months ended March 31, 2022 and 2021, we earned a nominal amount of sublease income which is recorded in other income on the 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
5,387
1,424
Operating cash flows from finance leases
802
Financing cash flows from finance leases
1,421
1,028
Lease assets obtained in exchange for new lease liabilities:
Operating leases
9,566
5,613
Finance leases
6,301
5,084
Weighted average discount rate:
9.58
%
9.69
8.65
8.68
Weighted average remaining lease term (in years):
9.93
10.09
8.11
8.16
Future minimum lease payments under our non-cancellable leases as of March 31, 2022 is as follows:
Remainder of 2022
17,371
9,852
22,465
15,930
22,145
12,160
21,792
11,747
21,259
11,325
118,546
47,049
Total undiscounted lease liabilities
223,578
108,063
(84,450
(31,991
Total present value of minimum lease payments
139,128
76,072
Lease liabilities- current portion
(10,553
(6,905
Lease liabilities
NOTE 13. CONSTRUCTION FINANCE LIABILITIES
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. This transaction was determined to be a finance lease, and therefore did not meet the definition of a sale because control was never transferred to the buyer-lessor. The transaction was treated as a failed sale-leaseback financing arrangement.
Included in the agreement, the Company completed the tenant improvements related to the property, for which the landlord has provided a tenant improvement allowance (“TI Allowance”) for $40.0 million. As of December 31, 2021, the entire TI Allowance had been provided. The initial term of the agreement is ten years, with two five-year options to renew. The initial payments are equal to 11% of the sum of the purchase price for the property and will increase when a draw is made on the TI Allowance. In addition, a 3% increase in payments will be applied annually after the first year. As of March 31, 2022, and December 31, 2021, the total finance liability associated with this transaction is $44.8 million and $44.6 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.
The initial term of the agreement is ten years, with two five-year options to renew. The initial annualized payments are equal to 11% of the purchase price for the property. A 3% increase in payments will be applied annually after the first year. As of March 31, 2022, and December 31, 2021, the total finance liability associated with this transaction is $17.5 million and $17.4 million, respectively.
McKeesport
In October 2019, prior to acquisition by the Company, PurePenn, sold their cannabis cultivation facility in Pennsylvania for $5.0 million. Simultaneously with the closing of the sale, PurePenn agreed to lease the cultivation facility back. The transaction was treated as a failed sale-leaseback financing arrangement.
The initial term of the lease is 15 years, with two five-year options to renew. The landlord has agreed to provide a TI Allowance of $21.0 million as an additional component of base rent. Payments are made based on one twelfth (1/12) of the TI allowance dispersed with 12.75% due for the first $5.0 million, 13.25% for $5.0 million to $15.0 million and 13.50% for $15.0 to $21.0 million. In 2021, the Company entered into an amendment with the landlord to increase the tenant improvement allowance by an additional $15.5 million for a total of $36.5 million at a rate of 10.75% on the additional allowance in excess of $21.0 million. As of March 31, 2022, and December 31, 2021, $29.5 million and $29.5 million of the TI allowance has been provided, respectively.
Alachua
In October 2021, in connection with the acquisition of Harvest, the Company acquired a transaction in which Harvest sold a licensed cultivation and processing facility and simultaneously with the closing of the sale, agreed to lease the facility back. The transaction was treated as a failed sale-leaseback financing arrangement.
The initial term of the lease is 20 years, with two five-year options to renew. The landlord has agreed to provide a TI Allowance of $17.9 million as an additional component of base rent. As of March 31, 2022, and December 31, 2021, $17.9 million and $15.3 million of the TI allowance has been provided, respectively.
In the first quarter of 2022, the Company temporarily idled this facility. The Company is evaluating the future use of this facility and remains in compliance with the associated lease obligation.
Hancock
The initial term of the lease is 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 TI Allowance of $12.9 million as an additional component of base rent. As of March 31, 2022, and December 31, 2021, $10.5 million and $5.7 million of the TI allowance has been provided, respectively.
Under the failed-sale-leaseback accounting model, the Company is deemed to own this real estate and will reflect the properties on our condensed consolidated balance sheet and depreciate over the assets' remaining useful life.
24
Future minimum lease payments for the construction finance liabilities as of March 31, 2022, are as follows:
17,068
23,406
23,737
24,176
24,595
427,860
Total future payments
540,842
Less: Interest
(364,656
Total present value of minimum payments
176,186
(1,154
NOTE 14. SHARE CAPITAL
The authorized share capital of the Company is comprised of the following:
(i) Unlimited number of Subordinate Voting Shares
Holders of the Subordinate Voting Shares are entitled to notice of and to attend any meeting of the shareholders of the Company, except a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote. At each such meeting holders of Subordinate Voting Shares shall be entitled to one vote in respect of each Subordinate Voting Share held. Holders of Subordinate Voting Shares are entitled to receive as and when declared by the directors, dividends in cash or property of the Company. No dividend will be declared or paid on the Subordinate Voting Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Multiple Voting Shares and Super Voting Shares.
(ii) Unlimited number of Multiple Voting Shares
Holders of Multiple Voting shares are entitled to notice of and to attend any meetings of the shareholders of the Company, except a meeting of which only holders of another particular class or series of shares of the Company have the right to vote. At each such meeting, holders of Multiple Voting Shares are entitled to one vote in respect of each Subordinate Voting Share into which such Multiple Voting Share could ultimately then be converted (initially, 100 votes per Multiple Voting Share). The initial “Conversation Ratio” for Multiple Voting Shares is 100 Subordinate Voting shares for each Multiple Voting Share, subject to adjustment in certain event. Holders of Multiple Voting Shares have the right to receive dividends, out of any cash or other assets legally available therefor, pari passu (on an as converted basis, assuming conversion of all Multiple Voting Shares into Subordinate Voting Shares at the Conversion Ratio) as to dividends and any declaration or payment of any dividend on the Subordinate Voting Shares.
No dividend may be declared or paid on the Multiple Voting Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Subordinate Voting Shares and Super Voting Shares.
(iii) Unlimited number of Super Voting Shares
Holders of Super Voting Shares are entitled to notice of and to attend at any meeting of the shareholders of the Company, except a meeting of which only holders of another particular class or series of shares of the Company shall have the right to vote. At each such meeting, holders of Super Voting Shares are be entitled to two votes in respect of each Subordinate Voting Share into which such Super Voting Share could ultimately then be converted (initially, 200 votes per Super Voting Share). Holders of Super Voting Shares have the right to receive dividends, out of any cash or other assets legally available therefore, pari passu (on an as converted to Subordinated Voting Share basis) as to dividends and any declaration or payment of any dividend on the Subordinate Voting Shares. No dividend is
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to be declared or paid on the Super Voting Shares unless the Company simultaneously declares or pays, as applicable, equivalent dividends (on an as-converted to Subordinate Voting Share basis) on the Subordinate Voting Shares and Multiple Voting Shares. The initial “Conversion Ratio” for the Super Voting Shares is one Multiple Voting Share for each Super Voting Share, subject to adjustment in certain events.
Warrants
Liability warrants
NumberofWarrants
Weighted average exercise price($CAD)
Weighted averageremaining contractuallife (Yrs)
Outstanding and exercisable as of December 31, 2020
Granted
1,679
1,125
1.31
Exercised
Outstanding and exercisable as of December 31, 2021
Outstanding and exercisable as of March 31, 2022
In October 2021 we acquired 1,679 warrants in connection with the acquisition of Harvest ("Harvest liability warrants"). See Note 4. Acquisitions for further details. Each acquired warrant is exercisable into one Multiple Voting Share. Changes in fair value are recognized as a component of other income (expense), net in the condensed consolidated statements of operations and comprehensive (loss) income as change in fair value of derivative liabilities - warrants.
Equity warrants
In connection with the Harvest acquisition in October 2021, we acquired certain equity classified warrants ("Acquired equity warrants"). The acquired equity warrants range in exercise price from $23.76 to $145.24 and expire at various dates from June 2022 through December 2025, and are exercisable into one Subordinate Voting Share. As of March 31, 2022 and December 31, 2021, there were 1,009,416 equity warrants outstanding. Each acquired equity warrant is exercisable into one Subordinate Voting Share.
As of March 31, 2022, and 2021, there were 2,458,719 and 2,520,567 Public Warrants outstanding. As of December 31, 2021, there were 2,460,367 Public Warrants outstanding. See Note 11. Private Placement Notes for further details on warrants issued in connection with private placement debt in 2019.
NOTE 15. SHARE-BASED COMPENSATION
Equity Incentive Plans
The Company’s 2021 Omnibus Incentive Plan (the “2021 Plan”) was adopted in June 2021 at the 2021 annual meeting of shareholders. The 2021 Plan reserves 4,000,000 Subordinate Voting Shares for issuance thereunder and replaced the Schyan Exploration Inc. Stock Option Plan (the “Prior Plan”). Awards previously granted under the Prior Plan, including equity awards granted in the first quarter of 2021 for performance in 2020, remain subject to the terms of the Prior Plan. No further grants of awards shall be made under the Prior Plan. The Prior Plan is administered by the Board of Directors of the Company and the 2021 Plan is administered by the Compensation Committee. The 2021 Plan provides for the grant of Incentive Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Share Units, and Other Awards.
Options
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On January 4, 2022 and February 24, 2022, under the 2021 Plan, the Board awarded options to purchase shares to board members, directors, officers, and key employees of the Company. The options granted vest immediately for board members and all other options granted vest over a two-to three-year period.
On October 26, 2021, under the 2021 Plan, the Board awarded options to purchase shares to officers and other select employees of the Company. The options generally vest over a two-to three-year period.
On October 1, 2021, the Company acquired Harvest which included consideration in the form of 1,266,641 stock options (as converted) that had been issued before the acquisition date to employees and non-employees of Harvest. The post-combination options vest over a one-to three-year period.
On September 29, 2021, under the 2021 Plan, the Board awarded options to purchase shares to officers and other select employees of the Company. The September 29, 2021, options vest over a three-year period.
On January 4, 2021, under the Prior Plan, the Board awarded options to purchase shares to directors, officers, and key employees of the Company. The January 4, 2021, options generally vest over a two-to three-year period.
In determining the amount of share-based compensation related to options issued during the periods ending March 31, 2022 and 2021, the Company used the Black-Scholes pricing model to establish the fair value of the options granted with the following assumptions:
For the Three Months Ended March 31, 2022
For the Three Months Ended March 31, 2021
Fair value at grant date
$8.39-11.01
$11.20
Stock price at grant date
$21.48-$25.41
$33.42
Exercise price at grant date
Expected life in years
3.50 - 4.46
3.00
Expected volatility
51.81% - 52.87%
49.88%
Expected annual rate of dividends
0%
Risk free annual interest rate
1.20% - 1.79%
0.11%
The expected volatility was estimated by using the historical volatility of the Company. In cases where there is insufficient trading history, the expected volatility is estimated using the historical volatility of other companies that the Company considers comparable that have trading and volatility history prior to the Company becoming public. The expected life in years represents the period of time that options granted are expected to be outstanding and is computed using the simplified method. The risk-free rate was based on the United States bond yield rate at the time of grant of the award. Expected annual rate of dividends is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
For the three months ended March 31, 2022, and 2021, the Company recorded share-based compensation for all stock options in the amount of $2.2 million and $0.7 million, respectively. This is recognized as $0.1 million and $0.1 million, cost of goods sold, $1.7 million and $0.5 million general and administrative, and $0.3 million and $0.1 million, sales and marketing in the condensed consolidated statements of operations and comprehensive (loss) income.
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The following is a summary of stock option activity:
Number of options
Weighted average exercise price
Weighted average remaining contractual life (yrs)
Aggregate intrinsic value
Outstanding, January 1, 2022
2,973,895
27.61
6.26
864,051
21.56
(88,278
11.32
Forfeited
(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
Outstanding at January 1, 2021
1,129,779
11.72
4.01
19.90
326,867
33.42
Outstanding, March 31, 2021
1,456,646
16.59
4.05
28.91
Exercisable, March 31, 2021
554,459
11.70
3.84
33.80
As of March 31, 2022, there was approximately $12.7 million of unrecognized compensation cost related to nonvested stock option arrangements which is expected to be recognized over a weighted average period of 0.91 years.
Restricted Stock Units
Restricted stock units ("RSUs") represent a right to receive a single Subordinate Voting Share that is both non-transferable and forfeitable unless and until certain conditions are satisfied. RSUs vest ratably over a two to three year period subject to continued employment through each anniversary. The fair value of RSUs is determined on the grant date and is amortized over the vesting period on a straight-line basis.
On January 4, February 24, and March 31, 2022, the Board awarded RSUs to board members, directors, officers, and key employees of the Company. The RSUs vest immediately for board members and all other RSUs granted vest over a two-year period.
On September 15, 2021, the Board awarded RSUs to two officers of the Company as replacement awards for cancelled warrants, which vest immediately. The previously held 3,572,514 warrants were cancelled on September 15, 2021 with the new RSUs granted on September 15, 2021 as a replacement of the previously held warrants. The two officers were awarded a total premium of $3.1 million, allocated between the two officers, to incentivize the cancellation and replacement, which was recorded to general and administrative expenses in the consolidated statements of operations and comprehensive (loss) income.
On September 29, 2021, under the 2021 Plan, the Board awarded RSUs to officers and other select employees of the Company, which vest over a two-to three-year period.
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The following is a summary of RSU activity:
Number of restricted stock units
Weighted average grant price
Unvested balance as of January 1, 2022
332,428
26.86
821,800
21.51
Vested
(24,444
21.48
(51,460
26.00
Unvested balance as of March 31, 2022
1,078,324
22.94
During the three months ended March 31, 2022, the Company recorded share-based compensation in the amount of $2.4 million related to RSUs. This is recognized as $0.2 million cost of goods sold, $1.9 million general and administrative and $0.3 million sales and marketing in the statements of operations and comprehensive (loss) income.
As of March 31, 2022, there was approximately $21.5 million of total unrecognized compensation cost related to unvested restricted stock units which is expected to be recognized over a weighted-average service period of 1.11 years.
During the year ended December 31, 2018, the Company issued 8,784,872 warrants to certain employees and directors of the Company for past services provided. The warrants had no vesting conditions and are exercisable at any time for three years after the issuance, subject to certain lock-up provisions: (i) the warrants may not be exercised for 18 months following the Issue Date; (ii) 50% of the warrants may be exercised between months 19-24 following the Issue Date; and (iii) the remaining 50% of the warrants may be exercised at any time thereafter until expiration. The warrants are exchangeable into Subordinate Voting Shares.
The following table summarizes the activity related to warrants issued and outstanding to certain employees and directors of the Company for the three month period ending March 31, 2021. There were no outstanding warrants as of December 31, 2021 and no changes to outstanding warrants occurred during the three months ended March 31, 2022.
Number of warrants
Weighted average exercise price ($CAD)
Outstanding, December 31, 2020
6,061,561
6.00
0.72
(133,408
(16,592
5,911,561
0.48
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NOTE 16. EARNINGS PER SHARE
The following is a reconciliation for the calculation of basic and diluted earnings per share for the three months ended March 31, 2022 and 2021:
Net (loss) income
Weighted average number of common shares outstanding
Dilutive effect of warrants and options outstanding
7,696,589
Diluted weighted average number of common shares outstanding
Basic (loss) earnings per share
Diluted (loss) earnings per share
For the three months ended March 31, 2022, the Company excluded 3,628,541 options, 1,078,324 RSUs, and 3,636,029 warrants, from the dilutive calculation as the Company is in a net loss position. For the three months ended March 31, 2021, the Company excluded 926,242 options from the dilutive calculation as they would have been anti-dilutive. For the three months ended March 31, 2021, the Company excluded 619,237 warrants as they would have been anti-dilutive. As of March 31, 2022, there are approximately 184 million issued and outstanding shares which excludes approximately 2.9 million of fully vested RSUs which are not contractually issuable until 2024.
NOTE 17. INCOME TAXES
The following table summarizes the Company’s income tax expense and effective tax rate for the three months ended March 31, 2022 and 2021.
For the Three MonthsEnded March 31,
Effective tax rate
430
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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 estimated 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 was approximately $44.9 million as of March 31, 2022 and December 31, 2021, respectively, which is recorded in deferred tax liabilities in the condensed consolidated balance sheets.
NOTE 18. Variable Interest Entities
The Company through its acquisition of Harvest and through the acquired Harvest subsidiaries has entered into operating agreements with various entities related to the purchase and operation of cannabis dispensary, cultivation, and production licenses, in several states.
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The Company determined these entities to be variable interest entities ("VIEs") due to the financial relationship and as the Company is the primary beneficiary as of March 31, 2022, and December 31, 2021. The Company holds varying ownership interests in these entities and in certain cases may not directly hold ownership in the entities, but holds a significant interest through an agent. The Company's VIEs are not material to the consolidated financial position or operations as of March 31, 2022, or for the three month period ended March 31, 2022, or as of December 31, 2021. The Company did not have any VIEs prior to the acquisition of Harvest in October 2021.
We have determined these entities to be variable interest entities and that we are the primary beneficiary. We consolidate 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 consolidated financial statements.
The following table presents the summarized assets and liabilities of the Company’s VIEs in which we do not hold a majority interest as of March 31, 2022, and December 31, 2021. 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 in our condensed consolidated balance sheets.
2,146
1,241
1,035
905
2,008
2,451
93
313
5,282
4,910
4,489
8,335
17,240
17,735
57
544
Total assets
27,068
31,524
579
828
Notes payable - current portion
1,170
474
522
1,053
2,520
1,061
4,479
Total liabilities
6,486
8,060
During the three months ended March 31, 2022, the Company divested of it's minority ownership interest in one of it's VIEs and received cash of $1.6 million and recorded an insignificant loss on the divestment which is recorded in loss on divestment and sale of non-operating assets in the condensed consolidated statement of operations and comprehensive (loss) income. As of March 31, 2022, this VIE is no longer consolidated in the Company's condensed consolidated financial statements.
NOTE 19. RELATED PARTIES
The Company had raised funds by issuing notes to various related parties including directors, officers, and shareholders. The related party notes were paid off in full in November 2021. The balance of related party notes was zero as of December 31, 2021, and March 31, 2022, respectively. The Company incurred interest expense for the three months ended March 31, 2021, on the related party notes of $0.4 million.
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J.T. Burnette, the spouse of Kim Rivers, the Chief Executive Officer and Chair of the board of directors of the Company, was a minority owner of a company (the “Supplier”) that provides construction and related services to the Company. As of January 1, 2022, the Supplier is no longer a related party of the Company. The Supplier is responsible for the construction of the Company’s cultivation and processing facilities, and provides labor, materials and equipment on a cost-plus basis. For the year ended December 31, 2021, related party property and equipment purchases totaled $148.4 million. As of December 31, 2021, $11.4 million of related party property and equipment purchases was included in accounts payable in the condensed consolidated balance sheets. The use of the Supplier was reviewed and approved by the independent members of the Company’s board of directors, and all invoices of the Supplier are reviewed by the office of the Company’s Chief Legal Officer.
The Company leases a cultivation facility and corporate office facility from an entity that is directly or indirectly owned by Kim Rivers, our Chief Executive Officer and Chair of the board of directors, George Hackney, a former member of our board of directors, and Richard May, a member of our board of directors. The Company also leases various properties from companies that are managed by Benjamin Atkins, a former director and shareholder of the Company, and the Supplier. As of January 1, 2022, Benjamin Atkins is no longer a related party of the Company due to the time that has passed since Mr. Atkins held a director position.
As of March 31, 2022, and December 31, 2021, under ASC 842, the Company had the following related party leases in the condensed consolidated balance sheets:
Operating
Finance
Right-of-use assets, net
899
2,082
2,009
Lease liabilities:
Lease liabilities - current portion
103
418
215
837
2,127
Total related parties lease liabilities
940
2,280
2,342
Expenses recognized for related party leases was $0.1 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively.
NOTE 20. REVENUE DISAGGREGATION
Net revenues are comprised of the following for the period ending March 31, 2022 and 2021:
Retail
290,614
181,264
Wholesale, licensing and other
27,734
12,559
NOTE 21. COMMITMENTS AND CONTINGENCIES
Operating Licenses
Although the possession, cultivation and distribution of cannabis for medical use is permitted in Arizona, California, Colorado, Connecticut, Florida, Maryland, Massachusetts, Nevada, Pennsylvania and West Virginia, cannabis is a Schedule-I controlled substance and its use and possession 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, cash and cash equivalents, equipment and other goods, could be subject to asset forfeiture because cannabis is still federally illegal.
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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. As of March 31, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated statements of operations and comprehensive 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.
The Company records contingent liabilities with respect to litigation on various claims in which we believe a loss may be probable and the loss in estimable. As of March 31, 2022, and December 31, 2021, $11.0 million and $8.8 million was included in contingent liabilities in the condensed consolidated balance sheets related to pending litigation. As of March 31, 2022 and December 31, 2021, $1.6 million and $2.3 million was included in contingent liabilities in the condensed consolidated balance sheets for estimates related to various sales tax matters. As of March 31, 2022, the Company recorded $2.1 million in liabilities related to potential earn-outs on the Watkins acquisition, that were determined to probable and estimable as of March 31, 2022, with $1.2 million included in contingent liabilities and $0.9 million included in other long term liabilities in the condensed consolidated balance sheets, respectively.
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.
NOTE 22. FINANCIAL INSTRUMENTS
The Company’s financial instruments that are measured at fair value on a recurring basis consist of money market funds and a warrant liability. Our financial instruments where carrying value approximates the fair value include cash, accounts payable and accrued liabilities, notes payable, notes payable related party, operating lease liabilities, finance lease liabilities, other long-term liabilities and construction finance liabilities. Excluding the money market funds and warrant liability classified at fair value, the carrying values of these financial instruments approximate their fair values as of March 31, 2022, and December 31, 2021, due to their short-term nature or because the effective interest rate applied to the balance approximates the market rate.
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. There have been no transfers between hierarchy levels during the three months ended March 31, 2022, and the year ended December 31, 2021.
The following tables present information about the Company’s financial instruments and their classifications as of March 31, 2022, and December 31, 2021, and indicate the fair value hierarchy of the valuation inputs utilized to determine such fair value.
Fair Value Measurements as of March 31, 2022, using:
Level 1
Level 2
Level 3
Financial Assets:
Money market funds (1)
94,784
Financial Liabilities:
Warrant liabilities (2)
(1) Money market funds are included within cash and cash equivalents in the Company’s condensed consolidated balance sheets. As a short-term, highly liquid investments readily convertible to known amounts of cash, the Company’s money market funds have carrying values that is fair value.
(2) Warrant liabilities represent liability classified warrants acquired from Harvest in October 2021 ("Harvest liability warrants") and included as part of the consideration transferred. See Note 4. Acquisitions. The fair value of the Harvest acquired warrants is determined
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using the Black-Scholes options pricing model. March 31, 2022 inputs: Share Price: C$26.30; Exercise Price: C$11.25; Remaining term: 1.06 years; Annualized Volatility: 51.81%; Dividend yield: 0%; Discount Rate: 1.63%; C$ Exchange Rate: 0.8003.
Fair Value Measurements as of December 31, 2021, using:
94,161
(2) Warrant liabilities represent liability classified warrants acquired from Harvest in October 2021 ("Harvest liability warrants") and included as part of the consideration transferred. See Note 4. Acquisitions. The fair value of the Harvest acquired warrants is determined using the Black-Scholes options pricing model. December 31, 2021, inputs: Share Price: C$32.91; Exercise Price: C$11.25; Remaining term: 1.31 years; Annualized Volatility: 49.57%; Dividend yield: 0%; Discount Rate: 0.56%; C$ Exchange Rate: 0.788.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read together with our consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and accompanying notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2021 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 2021 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 2021 Form 10-K.
Overview
We are a vertically integrated cannabis company and multi-state operator which currently holds licenses to operate in ten states and has received notice of intent to award a license in an eleventh state. 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 and Pennsylvania. 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 adopted legislation 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, only Arizona, California, Colorado, Connecticut, Massachusetts and Nevada have adopted legislation permitting commercialization of adult-use cannabis products. As previously disclosed, on October 1, 2021, we completed our previously announced acquisition of Harvest Health & Recreation Inc. (“Harvest”) and, as a result of the acquisition, our operations have expanded significantly effective as of such date. As of May 2, 2022, we operated 165 dispensaries, with 115 dispensaries in Florida, 19 affiliated dispensaries in Pennsylvania, 17 dispensaries in Arizona, five dispensaries in California, three dispensaries in Maryland, three dispensaries in Massachusetts, two dispensaries in West Virginia and one dispensary in Connecticut, and we operated cultivation and processing facilities in Arizona, Colorado, Florida, Maryland, Massachusetts, Nevada, Pennsylvania, and West Virginia.
As of March 31, 2022, we employed over 9,000 people, and we are committed to providing patients and adult consumers, which we refer to herein as “customers,” a consistent and welcoming retail experience across Trulieve branded stores and affiliated retail locations. As of March 31, 2022, the majority of our revenue was generated from the sale of medical cannabis products in the State of Florida and to a lesser extent Arizona and the Commonwealth of Pennsylvania. To date, neither the sale of adult-use cannabis products, nor our operations in California, Connecticut, Colorado, Maryland, Massachusetts, Nevada, or West Virginia, have been material to our business.
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, focus on the consumer experience at Trulieve branded and affiliated retail locations, at our in-house call center and where available 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 contributes 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 any 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 December 31, 2021. 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.
As of March 31, 2022, Trulieve operated cultivation and processing facilities across thirteen sites and 113 retail dispensaries throughout the state. 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 the product that consistently delivers the desired effect and in their preferred method of delivery.
In Georgia, Trulieve received a Notice of Intent to award a Class 1 Production License from the Georgia Access to Medical Cannabis Commission in July 2021. The Notice of Intent to award is a notice of the Georgia Access to Medical Cannabis Commission’s expected contract award to Trulieve GA pending resolution of a protest process. If the contract is awarded, Trulieve GA will hold one of two Class 1 Production Licenses in the state and will be permitted to cultivate cannabis for the manufacture of low tetrahydrocannabinol, or THC oil.
Northeast Hub
Our northeast hub operations are anchored by our cornerstone market of Pennsylvania.
We conduct cultivation, processing, and retail operations through its direct and indirect subsidiaries with permits for retail operations and grower/processor operations in Pennsylvania. These subsidiaries operate cultivation and processing facilities in McKeesport, Reading, and Carmichael, Pennsylvania to support our affiliated network of retail dispensaries and wholesale distribution network across the state.
We operate three medical dispensaries in Maryland and conduct wholesale sales supported by cultivation and processing in Hancock, Maryland. As of May 2, 2022, we operate three retail dispensaries in Massachusetts, serving medical and adult use customers in Northampton and adult use customers in Worcester and Framingham as of May 2, 2022. 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. Under Connecticut’s adult-use cannabis legislation, which was enacted July 1, 2021, Trulieve can seek regulatory approval to expand sales at this dispensary to include adult use sales.
We operate two medical dispensaries in Morgantown, and Weston, West Virginia, supported by cultivation and processing operations in Huntington, West Virginia. As of May 2, 2022, Trulieve has been awarded and has acquired permits to operate up to a total of ten dispensaries in West Virginia.
Southwest Hub
Our southwest hub operations are anchored by our cornerstone market of Arizona. In Arizona, Trulieve holds a market-leading position, offering medical and adult use customers a wide range of branded and third-party products, including brand partner products. We also serve medical and adult use customers in California. Trulieve conducts wholesale operations in Nevada and Colorado, serving the medical and adult use markets in each state.
Recent Developments
On January 28, 2022, the Company closed on a second tranche private placement of 8% Senior Secured Notes (the "2026 Notes") for aggregate gross proceeds of $75.6 million. The 2026 Notes bear interest at a rate of 8% per annum, payable semi-annually in equal installments until the maturity date, unless earlier redeemed or repurchased. The 2026 Notes mature on October 6, 2026, and 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 set forth in the agreement.
On February 14, 2022, the Company completed an acquisition whereby Trulieve acquired a cultivation operation from CP4 Group, LLC, in Phoenix, Arizona ("Watkins"). Total consideration was $27.5 million consisting of cash.
Components of Results of Operations
Revenue
We derive our revenue from cannabis products which we manufacture, sell, and distribute to our customers by home delivery and in our dispensaries, as well as sales of cannabis products to wholesale customers in select markets.
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Gross Profit
Gross profit includes 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 consist primarily of personnel costs related to the dispensaries as well as 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.
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. Furthermore, we expect to continue to incur acquisition, transaction, and integration costs related to our expansion plans, and we anticipate a significant increase in compensation expenses related to recruiting and hiring talent, accounting, and legal and professional fees associated with becoming compliant with the Sarbanes-Oxley Act and other public company corporate expenses.
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 recognized 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 derived 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, loss on sale of non-operational assets, and the revaluation of derivative liabilities.
Provision for Income Taxes
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 the cost of producing the products or cost of production.
Results of Operations
March 31,
Change
64%
Revenue for the three months ended March 31, 2022 was $318.3 million, an increase of $124.5 million, from $193.8 million for the three months ended March 31, 2021. The increase in revenue is the result of an increase in organic growth in retail sales due to an
37
increase in products available for purchase and overall patient count, increased retail locations, as well as expansion of the wholesale business. During the period the Company made acquisitions such as Harvest and Keystone Shops, expanded business into new states such as Massachusetts and West Virginia, and opened additional dispensaries in existing markets such as Florida, all of which contributed to the increase in revenue.
Cost of Goods Sold
139%
% of total revenues
Cost of goods sold for the three months ended March 31, 2022, was $140.2 million, an increase of $81.6 million, from $58.6 million for the three months ended March 31, 2021. Cost of goods sold increased due to expansion of the business and increased revenue. Cost of goods sold as a percentage of revenue increased from 30% for the three months ended March 31, 2021, to 44% for the three months ended March 31, 2022 due to increased depreciation related to capital expenditures to support business growth, 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.
32%
70
Gross profit for the three months ended March 31, 2022, was $178.2 million, up $42.9 million or 32% from $135.3 million for the three months ended March 31, 2021. Gross profit as a percentage of revenue decreased from 70% for the three months ended March 31, 2021, to 56%, for the three months ended March 31, 2022. The decrease is due to increased wholesale business which is generally lower margin than retail sales, increased depreciation related to capital expenditures to support business growth, 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.
Sales and Marketing Expenses
Sales and marketing expenses
Sales and marketing expense increased by 64% from $44.6 million for the three months ended March 31, 2021 to $72.9 million for the three months ended March 31, 2022. The increase in sales and marketing expense is the result of a higher headcount for the year, as we continue to add additional dispensaries in efforts to maintain and further drive higher growth in sales and market share as well as expanding into new markets. This increased headcount resulted in higher personnel costs, which is the primary driver for the increase year over year.
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General and Administrative Expenses
General and administrative expenses
164%
General and administrative expense for the three months ended March 31, 2022, increased by 164% to $33.5 million from $12.7 million for the three months ended March 31, 2021. The increase in general and administrative expense is the result of entering new markets, ramping our infrastructure to support growth initiatives, continued acquisitions resulting in additional transaction and integration costs and increased go-forward compliance costs. General and administrative expenses included acquisition and transaction costs of $3.3 million for the three months ended March 31, 2022.
Depreciation and Amortization Expenses
Depreciation and amortization expenses
439%
Depreciation and amortization expense for the three months ended March 31, 2022, was $29.3 million, up $23.9 million from $5.4 million for the three months ended March 31, 2021. The overall increase in depreciation and amortization expenses was due to investment in infrastructure that resulted in a higher number of capitalized assets from the additional dispensaries and cultivation facilities. Furthermore, amortization expense increased due to acquisitions and acquired intangibles.
Impairment and Disposal of Long-lived Assets
100%
Loss on impairment and disposal of long-lived assets for the quarter ended March 31, 2022, increased to $13.8 million from zero for the three months ended March 31, 2021. The increase is primarily due to the write off of certain leases due to market changes in our Southeast hub and the disposal of certain long-lived assets.
Total Other Expense, Net
Total other expense, net
18,823
7,936
137%
Total other expense, net for the three months ended March 31, 2022, was expense of $18.8 million, an increase of $10.9 million from expense of $7.9 million for the three months ended March 31, 2021. The overall increase is primarily the result of an increase in interest expense related to additional finance leases to support business growth and loss on disposal of non-operational assets during the three months ended March 31, 2022.
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22%
Income tax expense for the three months ended March 31, 2022, increased to $42.3 million from $34.5 million for the three months ended March 31, 2021. 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. The increase in income tax expense is primarily due to the increase in gross profit as a result of increased revenue.
Net Income
Three Months EndedMarch 31,
Net (loss) income and comprehensive income
-208%
Net loss for the three months ended March 31, 2022, was $32.5 million a decrease of $62.6 million, from net income of $30.1 million for the three months ended March 31, 2021. The decrease was driven primarily by lower gross margin, increased sales and marketing and general and administrative costs related to the expanded organization, losses on disposal of long-lived assets, increased other expense, and increased tax expense, as due to the restrictions of 208E, the Company is not able to deduct many of their operating expenses for tax purposes.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have funded our operations and capital spending through cash flows from product sales, loans from affiliates and entities controlled by our affiliates, third-party debt, and proceeds from the sale of our capital stock. 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 long 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. Cash and cash equivalents were $267.2 million as of March 31, 2022.
We believe our existing cash balances will be sufficient to meet our anticipated cash requirements from the report issuance date through at least the next twelve months.
Our primary uses of cash are for working capital requirements, capital expenditures and debt service payments. Additionally, from time to time, we may use capital for acquisitions and 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, improvements in existing facilities and product development.
To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. There can be no assurance that we will be able to obtain additional funds on terms acceptable to us, on a timely basis, or at all. The failure to obtain sufficient funds on acceptable terms when needed could have a material adverse effect on the results of operations and financial condition.
Cash Flows
The table below highlights our cash flows for the periods indicated.
Cash Flow from Operating Activities
Net cash provided by operating activities was $45.1 million for the three months ended March 31, 2022, a decrease of $14.4 million, compared to $59.6 million net cash provided by operating activities during the three months ended March 31, 2021. This is primarily due to the current net loss versus net income in the prior year period, and increases in net working capital requirements, including inventory, as we ramp the business to support our growth.
Cash Flow from Investing Activities
Net cash used in investing activities was $83.8 million for the three months ended March 31, 2022, an increase of $30.5 million, compared to the $53.4 million net cash used in investing activities for the three months ended March 31, 2021. The increase is primarily due to the acquisition completed during the period.
Cash Flow from Financing Activities
Net cash provided by financing activities was $72.2 million for the three months ended March 31, 2022, an increase of $62.7 million, compared to the $9.5 million net cash provided by financing activities for the three months ended March 31, 2021. The increase was primarily due to proceeds from the closing of the second tranche of the Senior Secured Notes.
Funding Sources
Private Placement Note Liabilities - “June Warrants” and “November Warrants”
On June 18, 2019, we completed an offering using our Canadian prospectus of 70,000 units (the “June Units”), comprised of an aggregate principal amount of US$70.0 million of 9.75% senior secured notes maturing in 2024 (the “June Notes”) and an aggregate amount of 1,470,000 subordinate voting share warrants (each individual warrant being a “June Warrant”) at a price of US$980 per June Unit for gross proceeds of US$68.6 million. Each June Unit was comprised of one June Note issued in denominations of $1,000 and 21 June Warrants.
On November 7, 2019, we completed an offering using our Canadian prospectus of 60,000 units (the “November Units”), comprised of an aggregate principal amount of US$60.0 million of 9.75% senior secured notes maturing in 2024 (the “November Notes”) and an aggregate amount of 1,560,000 subordinate voting share warrants (each individual warrant being a “November Warrant”) at a price of US$980 per November Unit for gross proceeds of US$61.1 million. Each November Unit was comprised of one November Note issued in denominations of $1,000 and 26 November Warrants.
Private Placement Note Liabilities - Secured Promissory Notes
On October 6, 2021, the Company closed on a private placement of 8% Senior Secured Notes (the "“Notes") for aggregate gross proceeds of $350.0 million and net proceeds of $342.6 million. The Notes were issued at 100% face value, bear an interest rate of 8% per annum payable semi-annually in equal installments until the maturity date, unless earlier redeemed or repurchased. The Notes mature on October 6, 2026 and may be redeemed in whole or in part, at any time from time to time, on or after October 6, 2023 at the applicable redemption price set forth in the trust indenture dated as of June 18, 2019 (the “Base Indenture”), as supplemented by a supplemental trust indenture dated as of October 6, 2021 (the “Supplemental Indenture” and, the Base Indenture as supplemented by the Supplemental Indenture, the “Indenture”), by and between the Company and Odyssey Trust Company, as trustee. The Company used a portion of the net proceeds to redeem certain outstanding indebtedness of Harvest, and intends to use the remaining net proceeds for capital
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expenditures and other general corporate purposes. The Indenture governing the Notes contains covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to, among other things, declare or pay dividends or make certain other payments; purchase, redeem or otherwise acquire or retire for value any equity interests or otherwise make any restricted payments; conduct certain asset sales or consolidate, merge or transfer all or substantially all of the assets of the Company and its subsidiaries on a consolidated basis; make certain restricted investments, incur certain indebtedness or grant certain liens, or enter into certain affiliate transactions. These covenants are subject to a number of other limitations and exceptions as set forth in the Indenture.
On January 28, 2022, the Company closed on a second tranche private placement of 8% Senior Secured Notes for aggregate gross proceeds of $75.6 million. The Notes bear an interest rate of 8% per annum payable semi-annually in equal installments until the maturity date, unless earlier redeemed or repurchased. The Notes will mature on October 6, 2026, and may be redeemed in whole or in part, at the Company's option, at any time, on or after October 6, 2023, at the application redemption price set forth in the Indenture.
Balance Sheet Exposure
As of March 31, 2022, the entirety 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 2021 Form 10-K.
Contractual Obligations
As of March 31, 2022, 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
9,543
2,525
Private placement notes
23,079
44,439
42,739
113,321
13,043
27,877
22,816
44,327
22,892
47,341
48,980
421,629
180,241
252,182
539,550
580,207
1,552,180
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 financial measures that are 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. These non-GAAP financial measures 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 inventory step-up for fair value adjustments in purchase accounting, integration and transition costs, acquisition and transaction costs, other non-recurring costs, expenses related to the COVID-19 pandemic, impairments and disposals of long-lived assets, the results of entities consolidated as VIEs but not legally controlled and operated by the Company, 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 period ended March 31, 2021, has been adjusted to reflect this current definition. Additionally, certain reclassifications have been made to Adjusted EBITDA for prior periods to conform to 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
105,544
90,797
16%
Adjusted EBITDA for the Three months ended March 31, 2022 was $105.5 million, an increase of $14.7 million from $90.8 million for the three months ended March 31, 2021. The following table presents a reconciliation of GAAP net income to non-GAAP Adjusted EBITDA, for each of the periods presented:
Net (loss) income and comprehensive (loss) income attributable to common shareholders
Add impact of:
17,877
7,899
EBITDA
68,215
81,627
Inventory step up, fair value
385
2,528
Integration and transition costs
5,274
390
Acquisition and transaction costs
3,297
1,652
Other non-recurring costs
8,629
COVID related expenses
431
3,822
2,681
Results of entities not legally controlled
Other (income) expense, net
(915
Total adjustments
37,329
9,170
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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, 2021.
Item 4. Controls and Procedures
Material Weakness in Internal Control Over Financial Reporting
Evaluation of Internal Controls 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, 2022. 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, 2022, 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 2021 Annual Report on Form 10-K, filed with the SEC on March 30, 2022.
Notwithstanding the material weaknesses described in the 2021 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.
Management’s Remediation Measures
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, has taken actions toward the remediation of the respective material weakness in internal control over financial reporting as outlined below.
While significant 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
There have been no changes in internal controls over financial reporting during the three months ended March 31, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Management believes these actions will help remediate internal control deficiencies related to the Company’s financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act).
PART II - OTHER INFORMATION
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may”, “will”, “would”, “could”, “should”, “believes”, “estimates”, “projects”, “potential”, “expects”, “plans”, “intends”, “anticipates”, “targeted”, “continues”, “forecasts”, “designed”, “goal”, or the negative of those words or other similar or comparable words. Any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical facts may be deemed to be forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition, results of operations and future growth prospects. The forward-looking statements contained herein are based on certain key expectations and assumptions, including, but not limited to, with respect to expectations and assumptions concerning receipt and/or maintenance of required licenses and third party consents and the success of our operations, are based on estimates prepared by us using data from publicly available governmental sources, as well as from market research and industry analysis, and on assumptions based on data and knowledge of this industry that we believe to be reasonable. These forward-looking statements are not guarantees of future performance or development and involve known and unknown risks, uncertainties and other factors that are in some cases beyond our control. As a result, any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be inaccurate. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under “Risk Factors” and discussed elsewhere in this Quarterly Report on Form 10-Q and in “Part I, Item 1A – Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021. 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
Risks Related to Being a Public Company
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.
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, 2021 includes a detailed discussion of our risk factors under the heading “Part I, Item 1A—Risk Factors.” There have been no material changes from such risk factors during the quarter ended March 31, 2022. You should consider carefully the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2021 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, 2021 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.
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.
Item 6. Exhibits.
Exhibit
Number
Description
4.1
Trust Indenture, dated as of June 18, 2019, between Trulieve Cannabis Corp. and Odyssey Trust Company (incorporated by reference to Exhibit 4.7 to the Company’s Registration Statement on Form S-1 (File No. 333-252052))
4.2
Supplemental Trust Indenture, dated as of October 6, 2021, between Trulieve Cannabis Corp. and Odyssey Trust Company (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 000-56248))
4.3
Form of 2026 Note (included in Exhibit 4.2)
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.
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 12, 2022
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/ Rebecca Young
Rebecca Young
Chief Accounting Officer
(Principal Accounting Officer)