TPCO HOLDING CORP. INTRODUCTION
This Management's Discussion and Analysis ("MD&A") should be read together with
other information, including the Company's audited consolidated financial
statements and accompanying notes as of and for the years ended
In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those in this discussion as a result of various factors, including but not limited to those discussed in Part 1, Item 1A, "Risk Factors" in this Annual Report.
The Company is an "emerging growth company," as defined in Section 2(a) of the Securities, as modified by the JOBS Act, and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards.
The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non- emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company's financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
The Company will remain an emerging growth company until the earlier of (1) the
last day of the Company's fiscal year following the fifth anniversary of the
date of the first sale of common equity securities of the Company pursuant to an
effective registration statement under the Securities Act, (2) the last day of
the fiscal year in which the Company has total annual gross revenue of at least
BUSINESS OVERVIEW
We are a consumer-focused cannabis company based in
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As part of our cost reduction initiatives, we recently took the following actions:
· Pause of In-House Cultivation Activities. In mid-September 2022 , we paused
our in-house cultivation activities in response to the availability of
lower cost flower that meets our quality specifications for our first
party brands.
· Sale of Bulk Wholesale Business. On October 31, 2022 , we finalized the
sale of our bulk wholesale business (SISU Extraction LLC ) for $317,000
cash. In addition, the purchaser of our bulk wholesale business entered
into a multi-strategic supply agreement providing us with the right, but
not the obligation, to purchase cannabis oil and flower brokerage services
from the business at preferred terms through October 2024.s.
· Outsourcing of Manufacturing. During October 2022 , product manufacturing
was outsourced to third-party processors, which the Company expects will
achieve an average of 27% cost savings on these products. In addition to
margin improvement, we expect to benefit from strong R&D capabilities of
its third-party processors to produce innovative products for our future.
· Supply Chain. On November 18, 2022 , we began our transformation of the
supply chain team, moving from an internal distribution model to an
external drop ship model to all TPCO stores and wholesale account stores.
These changes began with the reduction of our labelling and serialization
team, as all first party product began moving through NABIS, a leading
cannabis wholesale platform in California , in mid-December 2022 . By the
end of 2022, we reduced the team of 43 to 12 FTEs, amounting to
approximately $2.2 million in annualized payroll savings.
· Optimization of Delivery Footprint. In response to changes to California's
cannabis delivery regulations to increase the allowed delivery "case pack
value" limit that took effect in November 2022 , we have acted to optimize
our delivery footprint. Under prior regulations, delivery drivers were
allowed to carry a maximum of $5,000 worth of product in a vehicle, of
which a maximum of $3,000 of which was permitted to be product that was
not part of an order made before the driver left the delivery depot. The
new regulations have doubled the "case pack value" limit to $10,000 , all
of which can be product not part of a previously made order. In response
to these new regulations, we have elected to dispose of select redundant
delivery depot locations, including Culver City , Chula Vista and
Sacramento operations, as many geographic regions can now be more
efficiently managed. We continue to have a dedicated delivery depot in
Brisbane . These dispositions resulted in $500,000 in gross sale proceeds
and annual cost savings of $1.8 million .
· Workforce Reduction. We continue to consolidate operational functions
within the organization, which we expect to lead to further cost
reductions overall. Including an estimated $4 million in annual payroll
savings expected to be achieved by pausing cultivation in mid-September
2022 . As of December 31, 2022 , we had reduced our workforce by 40% from
the beginning of 2022 and expect to realize annual payroll savings of
approximately $17 million .
While we are focused on the recreational and wellness markets, a small portion (estimated to be less than 1%) of our revenues is derived Medical-Use Cannabis.
Our operational footprint spans production and manufacturing, brands, retail and delivery. Our management team and directors bring together deep expertise in cannabis, consumer packaged goods, investing and finance, from start-ups to publicly traded companies. We aim to leverage the collective industry experience of our management and directors.
Following our exit from the bulk wholesale business, we view our business as
having one sales channel: omni-channel retail, comprised of brick and mortar
retail, e-commerce pick up & delivery, as well as the sale of various branded
wholesale products. As of
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Our continuing operations revenue for the year ended
As we continue to scale and integrate our business, we are incurring operating
losses. Our operating losses for the year ended
Our financial results for the period ended
Through a combination of (i) professional leadership, (ii) omni-channel operations, (iii) technology and data driven practices, (iv) brand and product expertise, and (v) social justice and equity advocacy, we intend to set the example globally as a best-in-class cannabis operation.
Growth Strategy
Below is a summary of the key components of
· Branded Product: We believe there are additional opportunities to expand
The Parent Company's brand portfolio through innovation and acquisitions.
· Omni-channel Access: We believe that The Parent Company's omni-channel
platform is a rapidly and efficiently scalable way to directly reach
cannabis consumers throughout California than brick-and-mortar retail
expansion alone. We also believe that an omnichannel platform, when
coupled with a integrated supply chain such as The Parent Company's ,
allows for greater product margins due to the full capture of the price to
consumer as well as low input and production costs.
Factors Affecting Our Performance
The Company's performance and future success depends on a number of factors. These factors are also subject to a number of inherent risks and challenges, some of which are discussed below.
Branding
We have built our brand with a focus on the growing direct to consumer
("DTC") market. We understand that it is critical to establish trust at all
levels of our operations, starting with an executive team and board of directors
that believe in "doing business the right way", focusing on long-term
shareholder value and creating trust with our various stakeholders. We strive to
prioritize our consumers and our employees (
Regulation
The Company is subject to the local and federal laws in the jurisdictions in
which it operates. Outside of
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Product Innovation and Consumer Trends
The Company's business is subject to changing consumer trends and preferences,
which is dependent, in part, on continued consumer interest in new products. The
success of new product offerings depends upon a number of factors, including
COVID-19
In
The Company's priorities during the COVID-19 pandemic and any future pandemic
are protecting the health and safety of its employees and its customers,
following the recommended actions of government and health authorities. In the
future, a resurgence of COVID-19 or a new pandemic in
The COVID-19 outbreak in
We took the following steps in response to the COVID-19 pandemic:
· Issued a remote work directive for all non-essential employees?
· Instituted a mandatory face mask policy in all The Parent Company
locations and for all customer deliveries?
· Implemented staggered work schedules, employee breaks and redesigned
workstations and processes to minimize employee interaction and ensure
appropriate social distancing?
· Minimized the number of essential employees moving between The Parent
Company locations?
· Banned all non-essential contractors, vendors and visitors from our
locations to reduce flow of traffic into and out of our facilities, as
well as encouraged meetings with third parties to be virtual?
· Enhanced sanitation of work areas, both in terms of breadth and depth of
cleanings, including industrial cleaning and sanitizing protocols upon
detection of a COVID-19 positive test?
· Required employees to stay home if not feeling well, informing employees
of government and health authority guidelines, and facilitating testing?
· Implemented contact tracing system and mandatory 14-day quarantines for
all workers potentially exposed to someone testing positive for COVID- 19
and any employees returning from out of country visits?
· Issued directives to customer-facing teams in retail and delivery with
regard to frequent cleaning, social distancing, and customer safety?
· Suspended all but critical business travel? and
· Enhanced communication creating a 24-hour Employee Hotline, a COVID-19
resource, policy and information page on The Parent Company's intranet,
frequent employee communications and training.
Currently, our business is largely unaffected by COVID-19, due to the significant decrease in the number of cases that have developed where we have facilities.
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HIGHLIGHTS FOR THE YEAR ENDED DECEMBER 31, 2022 Strengthened Management Team
The Company strengthened its leadership team during 2022 with the additions of
The Company eliminated its Corporate Development department given the change in
focus from a
Revenue Growth and Gross Margin Improvement Initiatives
To drive revenue growth and margin improvement in stores, the Company:
· Focused on increasing new and returning traffic by introducing and
expanding high quality, limited batch Flower brands which include: BLEM,
Teds Budz, Alien Labs , Connected, Fig Farms and Marathon;
· Focused on increasing our average basket size by introducing and expanding
Ounces and Half Ounces to our Flower assortment;
· Continued to focus on curating a localized assortment that is relevant and
consistently appealing;
· Rolled out Treez point of sale system in all locations. Treez is a leading
commerce platform for cannabis retailers;
· Significantly increased exposure and advertising on Weedmaps, e.g., push
messaging, side banners, improved placement on search pages and
programmatic marketing. Weedmaps is a third party platform for users
interested in purchasing cannabis;
· Held several vendor supported promotions for various brand launches;
· Hired street teams to help localize brand awareness and purchased
significant billboard space;
· Built out a robust product demonstration schedule to develop brand
engagement with customers and increase sell through;
· Opened the Coastal Concord location during September 2022 ;
· Closed unproductive delivery depots in San Luis Obispo and Chula Vista ;
and
· Revised operational processes to direct ship from third party vendors to
our store locations to get products from our vendors onto store shelves
faster.
Product Updates
The Company developed a plan to consolidate TPCO brands down to five first party brands: Caliva, Cruisers, Mirayo by Santana and Chill and Monogram.
The Company launched "RCVRY", a premium cannabis product in
Revised Strategic Agreement with ROC Nation, SC Branding and Affiliates
On
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The Roc Modification Agreement supplants the Roc Binding Heads of Terms. The Roc
Modification Agreement, among other things, terminated various ongoing Roc
Nation service obligations and eliminated future
Under the SC Branding Agreements, among other things, (A) the parties terminated
the Brand Strategy Agreement, (B) the parties cancelled the Company's obligation
to make all future annual payments pursuant to such Brand Strategy Agreement,
(C) the parties created a three-year plan of collaboration with respect to
resolving issues of social equity associated with harms created by the
prohibition of cannabis, (D) the Company and certain of its subsidiaries
transferred all rights to the Monogram brand to
Closing of Coastal Acquisition
On
Completion of Acquisition of
During the three months ended
Social Equity
Through
During the first quarter of 2022, we entered into a 50/50 agreement with
On
We have repositioned our social equity venture fund to become the centralized owner of all corporate social responsibility activities undertaken with the mission to provide Black and underrepresented minorities with the foundation to succeed in the legal cannabis industry through education, advocacy and access to capital.
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Sale and Leaseback of Pullman Property
During the first quarter of 2022, we completed the sale and leaseback of our
property on
SUBSEQUENT EVENTS
Shares Issued
Subsequent to
Return of Shares
On
Sale ofCulver City
On
Proposed Business Combination with
On
Upon completion of the transaction,
Key Transaction Benefits & Strategic Rationale
· Increased size and scale to become a leading operator in the world's
largest cannabis market. The combined company is expected to operate a
footprint of 20 retail stores, 12 house brands, 3 distribution centers,
and 1 manufacturing facility and 6 cultivation facilities, providing the
size and scale to position the combined company as a leader in California .
· Establishing a strongly positioned vertically-integrated platform to
achieve financial and operational efficiency, as one of the largest indoor
cultivators and retail operators in California . The combined company will
have an indoor cultivation canopy of approximately 72,000 square feet,
with the opportunity to expand to a further approximately 240,000 square
feet, critical to controlling its supply chain and inventory levels while
providing consistent high-quality flower, as well as flower-driven
products that leverage an exceptional proprietary genetics library to
deliver exclusive offerings that align with consumer demands.
· Significant synergies expected to drive margin improvement and enhance
profitability across all verticals. Through the streamlining of retail
operations, utilizing scale to access bulk purchasing power, and
eliminating third-party contracts, the combined company is expected to
achieve annualized cost savings of between $20 and $25 million , to further
improve gross margin and profitability while delivering value for
shareholders.
· Reduction in third-party costs through supply-chain optimization. The
combined company will reduce third-party contracts when strategically and
cost effectively appropriate by utilizing the capabilities of Gold Flora
and controlling its value chain.
· Combined company is expected to be well-positioned as a top 10 brand
portfolio by revenue. As two of the premier operators in the state, the
Business Combination will result in a diversified and highly complementary
customer product offering, with a variety of form factors and brands for
differentiated consumer profiles. Additionally, with only 13% overlap in
current company retail store footprints, there is a significant
opportunity for cross-selling brands into diverse customer bases to drive
organic growth.
· Enhanced financial profile with strong balance sheet. The combined company
would have pro forma revenue of $151.9 million for the nine-month period
ended December 31, 2022 , with a gross margin of 28%. Providing a robust
foundation to accelerate growth, the combined company will be
well-positioned to capitalize on the market opportunities ahead as a
leading public cannabis company in California .
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Proposed Transaction Summary
The Business Combination will be completed, subject to the Merger Agreement, by
way of a court-approved plan of arrangement under the Business Corporations Act
(
Subject to the terms and conditions set forth in the Business Combination
Agreement, the Plan of Arrangement and the Plan of Merger, holders of TPCO
Common Shares will receive one Newco Share for each TPCO Share held and holders
of Gold Flora Units will receive 1.5233 Newco Shares for each Gold Flora Unit
held, resulting in the issuance of an aggregate of approximately 312,138,271 New
Parent Shares. The Business Combination values Gold Flora at
Following completion of the Business Combination, current holders of TPCO Common Shares will hold approximately 49% of New Parent and current holders of Gold Flora Units will hold approximately 51% of New Parent.
In connection with the Business Combination,
In connection with the Business Combination, Newco will redomicile to the United
Stated as a
Gold Flora has entered into voting and support agreements with each manager and the majority holder of its membership interests holding an aggregate of 75.9% of the issued and outstanding Gold Flora Units, pursuant to which these parties have agreed, subject to certain rights of withdrawal, to vote in favor of the Business Combination and not to dispose of their Gold Flora Units.
The Business Combination contains certain customary provisions, including
covenants in respect of non-solicitation of alternative business combination
proposals for
In connection with the Business Combination, the Company anticipates filing a
proxy statement and management information circular (the "Circular") in
connection with an annual general and special meeting of holders of TPCO Common
Shares (the "Meeting") expected to be held in the second quarter of this year
(unless the
Approvals
The Business Combination is expected to close before the end of the third
quarter of 2023, following the satisfaction or waiver of closing conditions
including, among others, approval by two-thirds of the votes cast by the
shareholders of
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RESULTS OF OPERATIONS
December 31, 2022 December 31, 2021
Sales, net of discounts $ 83,637,407 $ 79,924,941
Cost of sales 57,627,364 66,906,654
Gross profit 26,010,043 13,018,287
Impairment loss 130,566,825 575,498,897
Operating expenses 138,381,437 171,404,414
Loss from operations (242,938,219 ) (733,885,024 )
Other income (expense)
Interest income 845,863 1,244,606
Interest expense (4,928,475 ) (5,155,217 )
Gain on debt forgiveness - 3,358,686
Loss on disposal of assets (5,091,541 ) (2,447,985 )
Credit losses and changes in fair value
of investments (947,813 ) (1,250,990 )
Change in fair value of contingent
consideration (967,726 ) 229,819,070
Other income 1,360,724 3,572,217
Loss before income taxes (252,667,187 ) (504,744,637 )
Income tax recovery (expense) 14,967,779 6,418,167
Loss and comprehensive loss from
continuing operations (237,699,408 ) (498,326,470 )
Loss from discontinued operations, net
of income tax (5,087,408 ) (88,705,864 )
Loss from disposal of discontinued
operations, net of income tax recovery
of $8,856,409 (151,971 ) -
Net loss from discontinued operations
Loss and comprehensive loss attributable to shareholders of the company$ (242,631,834 ) $ (587,060,124 ) Loss and comprehensive loss attributable to redeemable non-controlling interest (306,953 ) 27,790 Net loss$ (242,938,787 ) $ (587,032,334 ) Per share - basic and diluted Loss per share from continuing operations $ (2.31 ) $ (5.25 ) Loss per share from discontinued operations (0.05 ) (0.93 ) Loss per share $ (2.36 ) $ (6.18 ) Weighted average number of common shares 102,632,433 95,006,080
Discontinued Operations - Bulk Wholesale Business
The Company was successful in disposing of its bulk wholesale business on
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Sales Revenue
The Company's sales revenues for the year ended
Our results for the year ended
Following our exit from the bulk wholesale business, we view our business as
having one sales channel: omni-channel retail comprised of brick and mortar
retail, e-commerce pick up & delivery, as well as the sale of various branded
wholesale products. The Company directly sells first party and selected third
party products into dispensaries across
As of
Gross Profit
Gross Profit reflects our revenue less our cost of sales, which consist of costs primarily consisting of labor, materials, consumable supplies, overhead, amortization of production equipment, shipping, packaging and other expenses.
The Company's continuing operations gross profit for the year ended
Operating Expenses
December 31, 2022 December 31, 2021
General and administrative $ 42,170,219 $ 42,395,204
Allowance for accounts receivable and
notes receivable 3,216,310 3,933,081
Sales and marketing 12,679,477 42,413,733
Salaries and benefits 39,441,476 35,119,133
Share-based compensation 6,009,593 20,456,297
Lease expense 8,068,405 4,647,233
Depreciation of property plant and
equipment 3,953,038 3,213,376
Amortization of intangible assets 22,842,919 19,226,357
$ 138,381,437 $ 171,404,414 Operating expenses primarily include salaries and benefits, professional fees, rent and facilities expenses, travel-related expenses, advertising and promotion expenses, licenses, fees and taxes, office supplies and pursuit expenses related to outside services, stock-based compensation and other general and administrative expenses.
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For the year ended
General and administrative costs were
The allowance for doubtful accounts was
Sales and marketing costs were
Salaries and benefits totaled
Share based compensation totaled
Lease expense totaled
Depreciation of property, plant & equipment totaled
Amortization of intangible assets totaled
Non-Cash Impairment
In accordance with Accounting Standard Codification (ASC) Topic 350, the Company is required to assess its goodwill and other indefinite-lived intangible assets for impairment annually or in between tests if events or changes in circumstances indicate the carrying value of its assets may not be recovered. Further, under ASC 360, the Company is required to assess definite lived-intangible assets and long-lived assets whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
Impairment charges totaled
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The following is a detailed summary of the impairment losses recorded by the
Company:
December 31, 2022 December 31, 2021
Right-of-use assets (i) $ 4,307,578 $ -
Impairment (ii) 119,443,343 567,947,515
Impairment prior to classification as
held for sale 6,815,904 1,995,945
Non-THC business - 5,555,437
$ 130,566,825 $ 575,498,897 (i) Right of use assets - During the year ended
(ii) Impairment of long-lived assets - At each reporting period end, the Company
considers if there have been any triggers that indicate that its long-lived
assets are not recoverable. Based on the softening of the
The following table outlines the impairment of long-lived assets by class of asset, recognized during the year endedDecember 31, 2022 , as a result of impairment testing: Carrying value Carrying value Total before after impairment Asset impairment impairment loss Right of use assets$ 1,680,224 $ 825,424 $ 854,800 License 52,304,385 9,699,829 42,604,556 Brand 78,189,441 23,624,000 54,565,441 Goodwill 21,418,546 - 21,418,546$ 153,592,596 $ 34,149,253 $ 119,443,343 Other Items Interest Income
In the year ended
Interest Expense
In the year ended
Gain on debt forgiveness
In the year ended
Loss on disposal of assets
In the year ended
Credit losses and change in fair value of investments at fair value through profit and loss
In the year ended
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Change in fair value of contingent consideration
In year ended
Other income
In the year ended
Discontinued Operations
The Company recorded a net of tax loss from discontinued operations (its bulk
wholesale business) of
Net loss
In the year ended
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MANAGEMENT'S USE OF NON-GAAP FINANCIAL MEASURES
This MD&A contains certain financial performance measures, including "EBITDA" and "Adjusted EBITDA," that are not recognized under GAAP and do not have a standardized meaning prescribed by GAAP. As a result, these measures may not be comparable to similar measures presented by other companies. For a reconciliation of these measures to the most directly comparable financial information presented in the Financial Statements in accordance with GAAP, see the section entitled "Reconciliation of Non-GAAP Measures" of this MD&A.
EBITDA
We believe EBITDA is a useful measure to assess the performance of the Company as it provides more meaningful operating results by excluding the effects of expenses that are not reflective of our underlying business performance and other one-time or non-recurring expenses. We define EBITDA as net income (loss) before (i) depreciation and amortization? (ii) income taxes? and (iii) interest expense and debt amortization.
Adjusted EBITDA
We believe Adjusted EBITDA is a useful measure to assess the performance of the Company as it provides more meaningful operating results by excluding the effects of expenses that are not reflective of our underlying business performance and other one-time or non-recurring expenses. We define Adjusted EBITDA as EBITDA adjusted to exclude extraordinary items, non-recurring items and, other non-cash items, including, but not limited to (i) stock-based compensation expense, (ii) fair value change in contingent consideration and investments measured at Fair Value Through Profit and Loss ("FVTPL") (iii) non-recurring legal and professional fees, human-resources, inventory and collections-related expenses, (iv) non-recurring tax charges (v) intangible and goodwill impairments and loss on disposal of assets, (vi) transaction costs related to merger and acquisition activities, and (vii) non-cash sales and marketing expenses.
Year-ended
December 31, 2022 December 31, 2021
Net loss and comprehensive loss from
continuing $ (237,699,408 ) $ (498,326,470 )
Income taxes from continuing operations (14,967,779 ) (6,418,167 )
Depreciation and amortization from
continuing operations 26,795,957 22,439,733
Interest expense from continuing
operations 4,928,475 5,155,217
EBITDA (220,942,755 ) (477,149,687 )
Adjustments:
Share based compensation expense 6,009,593 20,456,297 Other non-recurring items: Fair value change of contingent consideration 967,726 (229,819,070 ) Change in fair value of investments at FVTPL 947,813 1,250,990 Loss on disposal of assets 5,091,541 2,447,985 Impairment loss 130,566,825 575,498,897 Other taxes - 2,243,441 De-SPAC costs - 5,341,154 Restructuring costs 5,566,058 3,878,782 Sales and marketing expense - 30,166,667 Adjusted EBITDA$ (71,793,199 ) $ (65,684,544 ) EBITDA
The Company's EBITDA loss for the year ended
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Adjusted EBITDA
The Company's Adjusted EBITDA loss was
LIQUIDITY AND CAPITAL RESOURCES
We manage liquidity risk by reviewing, on an ongoing basis, our sources of
liquidity and capital requirements. As at
In evaluating our capital requirements, including the impact, if any, on our business from the COVID-19 pandemic, and our ability to fund the execution of our strategy, we believe we have adequate available liquidity to enable us to meet our working capital and other operating requirements, fund growth initiatives and capital expenditures, settle our liabilities and repay scheduled principal and interest payments on debt for at least the next twelve months.
Our objective is to generate sufficient cash to fund our operating requirements
and expansion plans. Since the closing of the Qualifying Transaction on
We expect to continue funding operating losses as we integrate and optimize operations with our available cash. Therefore, we are subject to risks including, but not limited to, our inability to raise additional funds through debt and/or equity financing to support our continued development, including capital expenditure requirements, operating requirements and to meet our liabilities and commitments as they come due.
The Company made the strategic decision to exit its low margin bulk wholesale
business during the third quarter of 2022 to reduce complexity, prioritize
higher-margin activities and conserve cash. As such, this bulk wholesale
business has been presented as discontinued operations commencing in the third
quarter of 2022 in our financial statements including in the statement of cash
flow. During the year ended
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CASH FLOW
(in United States dollars) December 31, 2022 December 31, 2021
Cash provided by (used in)
Operating activities
Net loss from continuing operations $ (237,699,408 ) $ (498,326,470 )
Adjustments for items not involving cash
Impairment loss 130,566,825 575,498,897
Interest expense 4,928,475 5,183,817
Interest income (133,744 ) (1,149,041 )
Loss on disposal of assets 5,091,541 2,447,985
Loss on lease termination (117,806 ) -
Allowance for accounts receivable and
notes receivable 2,273,302 4,396,783
Gain on debt forgiveness - (3,358,686 )
Credit losses and changes in fair value
of investments 947,813 1,250,990
Depreciation and amortization 26,795,957 22,439,733
Shares issued for long-term strategic
contracts - 25,000,000
Share-based compensation expense, net of
withholding tax
settlement 5,474,533 19,663,385
Non-cash marketing expense 3,718,402 5,166,666
Non-cash operating lease expense 6,857,552 4,507,630
Fair value change of contingent
consideration 967,726 (229,819,070 )
Deferred income tax recovery (32,326,433 ) (5,590,409 )
Repayment of operating lease liabilities (6,707,387 ) (4,836,963 )
Net changes in non-cash working capital
items 22,889,489 (43,417,594 )
Net cash used in continued operating
activities (66,473,163 ) (120,942,347 )
Net cash used in discontinued operating
activities (5,375,734 ) (7,430,934 )
Total operating activities (71,848,897 ) (128,373,281 )
Financing activities
Repayment of consideration payable (1,533,333 ) (1,034,417 )
Repayment of finance lease liabilities (4,490,443 ) (4,385,528 )
Proceeds from private placement - 51,635,000
Redemption of Class A restricted voting
shares - (264,318,686 )
Proceeds from exercise of options - 12,972
Repurchase of shares - (6,542,196 )
Repayment of line of credit - (1,000,000 )
Total financing activities (6,023,776 ) (225,632,855 )
Investing activities
Net cash paid in the Qualifying
Transaction - (28,143,886 )
Net cash paid in other business
combinations - (20,612,867 )
Purchases of property and equipment (3,322,873 ) (9,359,417 )
Advances for investments and note
receivables (350,000 ) (5,650,000 )
Proceeds (advances) from investments at
fair value through profit or loss 304,052 (1,000,000 )
Net cash paid for the acquisition of NCI (8,430,000 ) -
Proceeds from notes receivable 1,759,318 374,984
Proceeds from sale of assets, net of
selling costs 6,401,402 11,068,537
Net cash used in continued investing
activities (3,638,101 ) (53,322,649 )
Net cash from (used in) discontinued
investing activities 316,005 (400,942 )
Total investing activities (3,322,096 ) (53,723,591 )
Net change in cash during the period (81,194,769 ) (407,729,727 )
Cash, restricted cash and restricted
cash equivalents
Beginning of year $ 174,892,298 $ 582,622,025
End of year $ 93,697,529 $ 174,892,298
Cash 93,697,529 165,310,609
Restricted cash and restricted cash
equivalents - 9,581,689
Cash, restricted cash and restricted
cash equivalents $ 93,697,529 $ 174,892,298
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Operating Activities
Cash used in continued operating activities in the year ended
The Company is evaluating a number of options to improve operating results including: subleasing excess real estate, combining operations for lower performing locations, closing or disposing of non-core assets, and general and administrative cost reductions.
Cash used in discontinued operating activities in the year ended
Financing Activities
Cash used in financing activities totaled
Investing Activities
Cash used in investing activities totaled
CONTRACTUAL OBLIGATIONS
Lease Obligations
The Company leases real estate used for dispensaries, production plants, and corporate offices. Lease terms for real estate generally range from 1 to 14.75 years. Most leases include options to renew for varying terms at the Company's sole discretion. Certain leases include escalation clauses or payment of executory costs such as property taxes, utilities, or insurance and maintenance. Rent expense for leases with escalation clauses is accounted for on a straight-line basis over the lease term. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The maturity of the contractual undiscounted lease liabilities as ofDecember 31, 2022 : Operating Lease Finance Lease 2023$ 5,521,022 $ 4,625,156 2024 5,002,948 4,763,910 2025 5,139,443 4,906,828 2026 5,288,213 5,054,033 2027 4,775,402 5,205,654 Thereafter 18,295,466 59,679,244
Total undiscounted lease liabilities 44,022,494 84,234,825
Marketing Agreement ("MA")
The Company had engaged a third-party for strategic and promotional services.
During the year ended
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The Company was obligated to issue shares to the value of
The Company recognized an expense of
Brand Strategy Agreement ("BSA")
The Company was party to the BSA, whereby the Company received the services of
During the year ended
On
COMMITMENTS AND CONTINGENCIES
The Company's primary activity is engaging in state-legal commercial cannabis
business, including the cultivation, manufacture, distribution, and sale of
cannabis and cannabis products pursuant to
The Company's operation is sanctioned by the
Effective
In
Licensees issued a provisional license are expected to be diligently working
toward completing all annual license requirements in order to maintain a
provisional license. The Company obtained its provisional licenses in 2019 and
continues to work with the
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The Company's prior licenses obtained from the local jurisdictions it operated in have been continued by such jurisdictions and are necessary to obtain State licensing.
The Company has received annual licenses from each local jurisdiction in which it actively operates. Although the Company believes it will continue to receive the necessary licenses from the State and applicable local jurisdictions to conduct its business in a timely fashion, there is no guarantee its clients will be able to do so and any failure of its clients receive necessary licenses may have a negative effect on the Company's business and results of operations.
Other legal matters
From time to time in the normal course of business, the Company may be subject to legal matters such as threatened or pending claims or proceedings. The Company is not currently a party to any material legal proceedings or claims, nor are we aware of any pending or threatened litigation or claims that could have a material adverse effect on our business, operating results, cash flows or financial condition should such litigation or claim be resolved unfavorably.
Mosaic.Ag
On
The purchase price for Mosaic.Ag under the arrangements was
Social equity fund
The Company formed SEV in 2021 as its social equity investment vehicle. The
Company intends to fund SEV with
COVID-19
In
The Company's priorities during the COVID-19 pandemic continue to be protecting the health and safety of its employees and its customers, following the recommended actions of government and health authorities. In the future, COVID-19 or future pandemics may cause reduced demand for the Company's products and services if, for example, the pandemic results in a recessionary economic environment or potential new restrictions on business operations or the movement of individuals.
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The COVID-19 outbreak in
The Company has incurred incremental costs to implement proactive measures to prevent the spread of COVID-19. Additionally, the Company closely monitors its supply chain and third-party product availability in light of the pandemic. To date, the business has not experienced negative consequences due to interruptions in its supply chain. However, the Company continues to undertake preemptive measures to ensure alternate supply sources as needed.
Inflation
The Company is not immune to the widespread cost inflation experienced in
OFF-BALANCE SHEET ARRANGEMENTS
As of the date hereof the Company does not have any off-balance sheet financing arrangements and has not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
SHARE CAPITAL AND CAPITAL MANAGEMENT
As of
The Company has an equity incentive plan (the "Equity Incentive Plan") that
permits the grant of stock options, RSUs, deferred share units, performance
share units ("PSUs") and stock appreciation rights to non-employee directors and
any employee, officer, consultant, independent contractor or advisor providing
services to the Company or any affiliate. As of
Prior to closing of the Qualifying Transaction, Caliva maintained the
Prior to closing of the Qualifying Transaction, LCV maintained the Amended and
Restated 2018 Equity Incentive Plan (the "LCV Equity Plan") which authorized LCV
to grant to its employees, directors and consultants stock options and other
equity-based awards. In connection with the Qualifying Transaction, LCV and the
Company agreed that the Company would maintain the LCV Equity Plan and that
outstanding awards thereunder will entitle the holder to receive Common Shares.
At
The Company manages its capital with the following objectives:
· To ensure sufficient financial flexibility to achieve the ongoing business
objectives including of future growth opportunities, and pursuit of
accretive acquisitions; and
· To maximize shareholder return through enhancing the share value.
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The Company considers its capital to be total equity. The Company manages
capital through its financial and operational forecasting processes. The Company
reviews its working capital and forecasts its future cash flows based on
operating expenditures, and other investing and financing activities. Selected
information is provided to the Company Board. The Company's capital management
objectives, policies and processes have remained unchanged during the year ended
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in conformity with GAAP requires the Company's management to make judgments, estimates and assumptions about future events that affect the amounts reported in the consolidated financial statements. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results may differ from those estimates. Estimates and judgments are continuously evaluated and are based on management's experience and other factors, including expectations of future events that management considers to be reasonable.
See Note 3: Significant Accounting Policies to the consolidated financial statements included in this Annual Report on Form 10-K for further information.
Revisions to accounting estimates are recognized in the period in which the estimates are revised and in any future periods affected.
Variable interest entities
The Company assesses all variable interests in entities and uses judgment when determining if the Company is the primary beneficiary. Other qualitative factors that are considered include decision-making responsibilities, the VIE capital structure, risk and rewards sharing, contractual agreements with the VIE, voting rights and the level of involvement of other parties. .
Business combinations
In determining the fair value of net identifiable assets acquired in a business combination, including any acquisition-related contingent consideration, estimates including market based and appraisal values are used. One of the most significant areas of judgment and estimation relates to the determination of the fair value of these assets and liabilities, including the fair value of contingent consideration, if applicable. If any intangible assets are identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent external valuation expert may develop the fair value, using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. These valuations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied. In addition, management applies judgment in determining the amount, if any, that leases acquired in a business combination are off-market resulting in an adjustment to the right-of-use assets. In particular, management's judgment is used in determining the premium over basic market rents that would be applied by a lessor where the leased premise is being used for cannabis-related businesses. Finally, determining whether amounts should be included as part of consideration requires judgment.
Leases
The Company applies judgment in determining whether a contract contains a lease and whether a lease is classified as an operating lease or a finance lease. The Company determines the lease term as the non-cancellable term of the lease, which may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The lease term is used in determining classification between operating lease and finance lease, calculating the lease liability and determining the incremental borrowing rate.
The Company has several lease contracts that include extension and termination options. The Company applies judgment in evaluating whether it is reasonably certain to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date of the lease, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., construction of significant leasehold improvements or significant customization to the leased asset).
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The Company also applies judgment in allocating the consideration in a contract between lease and non-lease components. It considers whether the Company can benefit from the right-of-use asset either on its own or together with other resources and whether the asset is highly dependent on or highly interrelated with another right-of-use asset.
The Company is required to discount lease payments using the rate implicit in the lease if that rate is readily available. If that rate cannot be readily determined, the lessee is required to use its incremental borrowing rate. The Company generally uses the incremental borrowing rate when initially recording real estate leases. Information from the lessor regarding the fair value of underlying assets and initial direct costs incurred by the lessor related to the leased assets is not available. The Company determines the incremental borrowing rate as the interest rate the Company would pay to borrow over a similar term the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.
Stock-based compensation
In determining the fair value of stock-based payments, the Company makes assumptions, such as the expected life of the award, the volatility of the Company's stock price, the risk-free interest rate, and the rate of forfeitures.
Goodwill
Long-lived assets
Depreciation and amortization of property and equipment, right-of-use assets and intangible assets are dependent upon estimates of useful lives, which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that consider factors such as economic and market conditions and the useful lives of assets. The Company uses judgment in: (i) assessing whether there are impairment triggers affecting long-lived assets, (ii) determining the asset groups and (iii) determining the recoverable amount and if necessary, estimating the fair value.
Fair value measurement
The Company uses valuation techniques to determine the fair value of financial instruments (where active market quotes are not available) and non- financial assets. This involves developing estimates and assumptions consistent with how market participants would price the instrument. The Company bases its assumptions on observable data as far as possible, but this is not always available. In that case, the Company uses the best information available. Estimated fair values may vary from the actual prices that would be achieved in an arm's length transaction at the reporting date.
Deferred tax assets and uncertain tax positions
The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases of its assets and liabilities. The Company measures deferred tax assets and liabilities using current enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. The Company routinely evaluates the likelihood of realizing the benefit of its deferred tax assets and may record a valuation allowance if, based on all available evidence, it determines that some portion of the tax benefit will not be realized.
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In evaluating the ability to recover deferred tax assets within the jurisdiction from which they arise, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies and results of operations. In projecting future taxable income, the Company considers historical results and incorporates assumptions about the amount of future state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. The Company's assumptions regarding future taxable income are consistent with the plans and estimates that are used to manage its underlying businesses. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income/(loss). The income tax expense, deferred tax assets and liabilities and liabilities for unrecognized tax benefits reflect the Company's best assessment of estimated current and future taxes to be paid. Deferred tax asset valuation allowances and liabilities for unrecognized tax benefits require significant judgment regarding applicable statutes and their related interpretation, the status of various income tax audits and the Company's particular facts and circumstances. Although the Company believes that the judgments and estimates discussed herein are reasonable, actual results, including forecasted COVID-19 business recovery, could differ, and the Company may be exposed to losses or gains that could be material. To the extent the Company prevails in matters for which a liability has been established or is required to pay amounts in excess of the established liability, the effective income tax rate in a given financial statement period could be materially affected.
Accounting standards issued but not yet effective
Allowance for credit losses
In
Business combinations
In
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