Form 10-Q TPCO Holding Corp. For: Mar 31
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E-mailUNITED 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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
(Address of principal executive offices) |
(Zip Code) | |
Registrant’s telephone number, including area code: (669 )
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered | ||
NONE |
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, a 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 16, 2022, there were 100,822,474 common shares of the registrant issued and outstanding.
Table of Contents
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Unless otherwise noted or the context indicates otherwise, in this
Form 10-Q
(the “Quarterly Report”), the “Company”, “The Parent Company”, “we”, “us” and “our” refer to TPCO Holding Corp. and its subsidiaries and joint ventures to which it is a party. References in this Quarterly Report Statement to “cannabis” mean all parts of the plant
cannabis sativa L.
containing more than 0.3 percent
tetrahydrocannabinol
(“THC”), including all compounds, manufactures, salts, derivatives, mixtures, or preparations.
References in this Quarterly Report to the Company’s websites, social media pages or mobile application or third party websites or applications does not constitute incorporation by reference of the information contained at or available through the Company’s websites, social media pages or mobile application or third party websites or applications, and you should not consider such information to be a part of this Quarterly Report.
This Quarterly Report contains references to our trademarks and trade names and to trademarks and trade names belonging to other entities. Solely for convenience, trademarks and trade names referred to in this report may appear without the
®
or ™
symbols, but such references are not intended to indicate, in any way, that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto. We do not intend our use or display of other companies’ trademarks or trade names to imply a relationship with, or endorsement or sponsorship of us or our business by, any other companies.i
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Interim condensed consolidated financial statements
TPCO Holding Corp.
For the three months ended March 31, 2022 and 2021
(Unaudited)
Contents
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TPCO Holding Corp.
Interim condensed consolidated balance sheets
(Unaudited, in United States dollars)
| As at |
Note |
March 31, 2022 |
December 31, 2021 |
|||||||||
| Assets |
||||||||||||
| Current |
||||||||||||
| Cash |
$ |
$ | ||||||||||
| Restricted cash and restricted cash equivalents |
||||||||||||
| Accounts receivable, net |
2 7 |
|||||||||||
| Income tax receivable |
||||||||||||
| Inventory |
5 |
|||||||||||
| Notes and other receivables, net |
6 |
|||||||||||
| Prepaid expenses and other current assets |
4 |
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| |
|
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|
|||||||||
| Total current asset |
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| |
|
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|
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| Investments |
7 |
|||||||||||
| Security deposits |
||||||||||||
| Prepaid expenses and other assets |
||||||||||||
| Property and equipment |
8 |
|||||||||||
| Right-of-use |
12 |
|||||||||||
| Right-of-use |
12 |
|||||||||||
| Intangibles |
9 |
|||||||||||
| Goodwill |
9 |
|||||||||||
| |
|
|
|
|||||||||
| Total assets |
$ |
$ | ||||||||||
| |
|
|
|
|||||||||
| Liabilities |
||||||||||||
| Current |
||||||||||||
| Accounts payable and accrued liabilities |
11 |
$ |
$ | |||||||||
| Consideration payable – current portion |
||||||||||||
| Operating lease liability – current portion |
12 |
|||||||||||
| Finance lease liability – current portion |
12 |
|||||||||||
| Cash settled share-based payments |
16 |
|||||||||||
| Contingent consideration |
2 7 |
|||||||||||
| |
|
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|
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| Total current liabilities |
||||||||||||
| |
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|
|
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| Operating lease liabilities |
12 |
|||||||||||
| Finance lease liabilities |
12 |
|||||||||||
| Consideration payable |
||||||||||||
| Deferred tax liabilities |
21 |
|||||||||||
| |
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|
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| Total liabilities |
||||||||||||
| |
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|
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| Mezzanine equity |
||||||||||||
| Redeemable non-controlling interest |
1 5 |
|||||||||||
| |
|
|
|
|||||||||
| Total mezzanine equity |
||||||||||||
| |
|
|
|
|||||||||
| Shareholders’ equity |
||||||||||||
| Common p i at March 31, 2022 and |
17 |
|||||||||||
| Additional paid in capital |
||||||||||||
| Accumulated deficit |
( |
) |
( |
) | ||||||||
| |
|
|
|
|||||||||
| Total shareholders’ equity |
||||||||||||
| |
|
|
|
|||||||||
| Total liabilities, mezzanine equity and shareholders’ equity |
$ |
$ | ||||||||||
| |
|
|
|
|||||||||
Commitments and contingencies (Note 26)
Subsequent events (Note 32)
See accompanying notes to the interim condensed consolidated financial statements
3
TPCO Holding Corp.
Interim condensed consolidated statements of operations and comprehensive (loss) income
(Unaudited, in United States dollars)
Three months ended |
||||||||||
Note |
March 31, 2022 |
March 31, 2021 |
||||||||
| Sales, net of discounts |
14 |
$ |
$ | |||||||
| Cost of sales |
||||||||||
| |
|
|
|
|||||||
| Gross profit |
||||||||||
| |
|
|
|
|||||||
| Impairment loss |
13 |
|||||||||
| Operating expenses |
22 |
|||||||||
| |
|
|
|
|||||||
| Loss from operations |
( |
) |
( |
) | ||||||
| Other income (expense) |
||||||||||
| Interest expense |
( |
) |
( |
) | ||||||
| Loss on disposal of assets |
1 2 |
( |
) |
|||||||
| Change in fair value of investments |
7 |
|||||||||
| Change in fair value of contingent consideration |
28 |
|||||||||
| Other income |
( |
) | ||||||||
| |
|
|
|
|||||||
( |
) |
|||||||||
| |
|
|
|
|||||||
| (Loss) Income before income taxes |
( |
) |
||||||||
| Income tax (expense) recovery |
2 1 |
( |
) |
|||||||
| |
|
|
|
|||||||
| (Loss) income and comprehensive (loss) income |
$ |
( |
) |
$ | ||||||
| |
|
|
|
|||||||
| (Loss) income and comprehensive (loss) income attributable to shareholders of the company |
$ |
( |
) |
$ | ||||||
| Income and comprehensive income attributable to redeemable non-controlling interest |
||||||||||
| |
|
|
|
|||||||
| (Loss) income and comprehensive (loss) income |
$ |
( |
) |
$ | ||||||
| |
|
|
|
|||||||
| (Loss) income per share |
||||||||||
| Basic |
20 |
$ |
( |
) |
$ | |||||
| Diluted |
20 |
$ |
( |
) |
$ | |||||
| Weighted average number of common shares |
||||||||||
| Basic |
20 |
|
||||||||
| Diluted |
20 |
|
||||||||
See accompanying notes to the int
e
rim condensed consolidated financial statements 4
TPCO Holding Corp.
Interim condensed consolidated statements of changes in shareholders’ (deficit) equity
(Unaudited, in United States dollars)
Number of |
||||||||||||||||||||||||||||||
Note |
Common Shares |
Warrants |
Class B Shares |
Common Shares to be Issued |
Additional Paid in Capital |
Accumulated Deficit |
Total |
|||||||||||||||||||||||
| Balance December 31, 2020 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) | |||||||||||||||||||||
| Conversion to Class B shares |
— | ( |
) | — | — | — | — |
|||||||||||||||||||||||
| Founders’ shares forfeited |
— | — | ( |
) | — | ( |
) | — |
||||||||||||||||||||||
| Shares issued in a private placement |
— | — | — | — | ||||||||||||||||||||||||||
| Conversion of Class A restricted voting shares |
|
— | — | — | — | |||||||||||||||||||||||||
| Shares issued for long-term strategic contracts |
16 |
— | — | — | — | |||||||||||||||||||||||||
| Shares issued in the Qualifying Transaction |
— | — | — | |||||||||||||||||||||||||||
| Shares issued to extinguish liabilities in the Qualifying Transaction |
— | — | — | — | ||||||||||||||||||||||||||
| Contingent shares to be issued in the Qualifying Transaction |
— | — | — | — | ||||||||||||||||||||||||||
| Replacement options issued in a business acquisition |
— | — | — | — | — | |||||||||||||||||||||||||
| Share-based compensation |
19 |
— | — | — | — | — | ||||||||||||||||||||||||
| Net income |
— | — | — | — | — | |||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance March 31, 2021 |
$ |
$ |
$ |
|||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance December 31, 2021 |
( |
) |
||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Shares issued for long-term strategic contract |
16 | — | — | — | — | |||||||||||||||||||||||||
| Shares issued to settle contingent consideration |
17 | — | — | ( |
) | — | ||||||||||||||||||||||||
| Shares issued for RSUs vested |
17, 19 | — | — | — | — | — | — |
|||||||||||||||||||||||
| Tax settlements associated with RSUs |
— | — | — | — | ( |
) | — | ( |
) | |||||||||||||||||||||
| Share-based compensation |
19 | — | — | — | — | — | ||||||||||||||||||||||||
| Net loss |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Balance March 31, 2022 |
$ |
$ |
( |
) | $ |
|||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
See accompanying notes to the interim condensed consolidated financial statements
5
TPCO Holding Corp.
Interim condensed consolidated statements of cash flows
(Unaudited, in United States dollars)
Three months ended |
||||||||||
Note |
March 31, 2022 |
March 31, 2021 |
||||||||
| Cash provided by (used in) |
||||||||||
| Operating activities |
||||||||||
| Net (loss) income |
$ |
( |
) | $ | ||||||
| Adjustments for items not involving cas h |
|
|
|
|
|
|
|
|
|
|
| Impairment loss |
13 | — |
||||||||
| Interest expense |
||||||||||
| Interest income |
( |
) | ||||||||
| Loss on disposal of assets |
8, 12 | |||||||||
| Allowance for accounts receivable and notes receivable |
||||||||||
| Fair value change of investments |
7 |
( |
) | |||||||
| Depreciation and amortization |
22 |
|||||||||
| Shares issued for long-term strategic contracts |
1 6 |
|||||||||
| Share-based compensation expense, net of withholding tax settlement |
||||||||||
| Non-cash marketing expense |
1 6 |
|||||||||
| Non-cash operating lease expense |
12 |
|||||||||
| Fair value change of contingent consideration |
27 |
( |
) | ( |
) | |||||
| Deferred income tax recovery |
21 |
( |
) | ( |
) | |||||
| Repayment of operating lease liabilities |
( |
) | ( |
) | ||||||
| Net changes in non-cash working capital items |
23 |
( |
) | ( |
) | |||||
| |
|
|
|
|||||||
| Total operating activities |
( |
) | ( |
) | ||||||
| |
|
|
|
|||||||
| Financing activities |
||||||||||
| Receipt of payments on notes receivable |
— | |||||||||
| Repayment of consideration payable |
( |
) |
— | |||||||
| Repayment of finance lease liabilities |
( |
) |
( |
) | ||||||
| Proceeds from private placement |
||||||||||
| Redemption of Class A restricted voting shares |
( |
) | ||||||||
| Repayment of line of credit |
( |
) | ||||||||
| |
|
|
|
|||||||
| Total financing activities |
( |
) | ( |
) | ||||||
| |
|
|
|
|||||||
| Investing activities |
||||||||||
| Net cash paid in the Qualifying Transaction |
( |
) | ||||||||
| Purchases of property and equipment |
8 |
( |
) | ( |
) | |||||
| Proceeds from sale of property and equipment, net of selling costs |
12 |
— | ||||||||
| Acquisition of investments |
7 |
( |
) |
— | ||||||
| |
|
|
|
|
|
|
|
|
|
|
| Total investing activities |
( |
) | ||||||||
| |
|
|
|
|||||||
| Net change in cash during the period |
( |
) | ( |
) | ||||||
| Cash, restricted cash and restricted cash equivalents Beginning of period |
$ |
$ | ||||||||
| |
|
|
|
|||||||
| End of period |
$ |
$ | ||||||||
| |
|
|
|
|||||||
| Cash |
||||||||||
| Restricted cash and restricted cash equivalents |
||||||||||
| |
|
|
|
|||||||
| Cash, restricted cash and restricted cash equivalents |
$ |
$ | ||||||||
| |
|
|
|
|||||||
Supplemental cash-flow information (Note 23)
See accompanying notes to the interim condensed consolidated financial statements
6
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
1. Nature of operations
TPCO Holding Corp. (“TPCO” or the “Company”) was a special purpose acquisition corporation incorporated on June 17, 2019
under the laws of the Province of British Columbia for the purpose of effecting, directly or indirectly, an acquisition of one or more businesses or assets, by way of merger, amalgamation, arrangement, share exchange, asset acquisition, share purchase, reorganization, or any other similar business combinations involving the Company (a “Qualifying Transaction”). As more fully described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “10-K”), the Company completed the Qualifying Transaction on January 15, 2021 and at which time the Company changed its name to TPCO Holding Corp.
The Company’s registered office is located at 595 Burrard Street, Suite 2600, P.O. Box 49314, Vancouver, BC, V7X 1L3, Canada, and the Company’s head office is located at 1550 Leigh Avenue, San Jose, California, 95125, United States of America. Commencing on the date of the Qualifying Transaction, the Company became integrated as a cultivator, retailer, manufacturer and distributor of adult use cannabis products through the sale to omni-channel retail and wholesale customers under the “Medical Marijuana Programs Act” and the proposition 64 “The Adult Use of Marijuana Act”.
The common shares of the Company are listed on the Aequitas NEO Exchange (“NEO”) and the OTCQX Best Market tier of the electronic over-the-counter marketplace operated by OTC Markets Groups Inc. (“OTCQX”) under the trading symbols “GRAM.U” and “GRAMF”, respectively. The warrants of the Company are listed on the NEO under the trading symbol “GRAM.WT.U”.
2. Basis of presentation
These accompanying interim condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”).
These interim condensed consolidated financial statements are presented in U.S. dollars, which is also the Company’s and its subsidiaries’ functional currency.
These interim condensed consolidated financial statements are unaudited and reflect adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary to provide a fair statement of results for the interim periods in accordance with GAAP. The results reported in these interim condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for an entire fiscal year.
These interim condensed consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will continue in operation for the foreseeable future and, accordingly, will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due.
Certain information and footnote disclosures normally included in the audited annual consolidated financial statements prepared in accordance with GAAP have been omitted or condensed. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s 10-K and have been prepared on a basis consistent with the accounting policies as described in the 10-K.
i) |
Basis of consolidation |
These interim condensed consolidated financial statements include the accounts of the Company and all subsidiaries. Subsidiaries are entities in which the Company has a controlling voting interest or is the primary beneficiary of a variable interest entity. Subsidiaries are fully consolidated from the date control is transferred to the Company and are
de-consolidated
from the date control ceases. All intercompany accounts and transactions have been eliminated on consolidation. The interim condensed consolidated financial statements include all the assets, liabilities, revenues, expenses and cash flows of the Company and its subsidiaries after eliminating intercompany balances and transactions. ii) |
Use of estimates |
The preparation of these interim condensed consolidated financial statements and accompanying notes in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported. Actual results could differ from those estimates.
7
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
2. Basis of presentation
iii) |
Emerging growth company |
The Company is an “Emerging Growth Company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it has taken advantage of certain exemptions from various reporting requirements that are not 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 the Sarbanes-Oxley Act, 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 shareholder 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. 3. Significant accounting policies
(i
)
Sale lease back
From time to time, the Company may enter into sale-leaseback transactions pursuant to which the Company sells the property to a third party and agrees to lease the property back for a certain period of time. To determine whether the transfer of the property should be accounted for as a sale, the Company evaluates whether it has transferred control to the third party in accordance with the revenue recognition guidance set forth in ASC 606 - .
Revenue
If the transfer of the asset is deemed to be a sale at market terms, the Company recognizes the transaction price for the sale based on the proceeds, derecognizes the carrying amount of the underlying asset and recognizes a gain or loss in the consolidated statements of operations and comprehensive loss for any difference between the carrying value of the asset and the transaction price. The Company then accounts for the leaseback in accordance with its lease accounting policy.
If the transfer of the asset is determined not to be a sale at market terms, the Company accounts for the transaction as a financing arrangement, and accordingly no sale is recognized. The Company retains the historical costs of the property and the related accumulated depreciation on its books and continues to depreciate the property over the lesser of its remaining useful life or its initial lease term. The asset is presented within property and equipment, net on the consolidated balance sheets. All proceeds from these transactions are accounted for as finance obligations and presented as non-current obligation on the consolidated balance sheets. A portion of the lease payments is recognized as a reduction of the financing obligation and a portion is recognized as interest expense based on an imputed interest rate.
8
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
3. Significant accounting policies
(ii) Account standards adopted
Debt with conversion options and other options
In August 2020, the FASB issued ASU
2020-06,
Debt – Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”),
which is intended to address issues identified as a result of the complexity associated with applying GAAP for certain financial instruments with characteristics of liabilities and equity. The Company adopted ASU 2020-06
effective January 1, 2022, and such adoption did not have a material effect on its interim condensed consolidated financial statements. Government Assistance
In November 2021, the FASB issued ASU
2021-10,
Government Assistance (Topic 832) (“ASU 2021-10”).
This ASU requires business entities to disclose information about government assistance they receive if the transactions were accounted for by analogy to either a grant or a contribution accounting model. The disclosure requirements include the nature of the transaction and the related accounting policy used, the line items on the balance sheets and statements of operations that are affected and the amounts applicable to each financial statement line item and the significant terms and conditions of the transactions. The Company adopted ASU 2021-10
effective January 1, 2022, and as the Company did not have any government assistance outstanding, such adoption did not have an effect on its interim condensed consolidated financial statements. 9
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
4. Prepaid expenses and other current assets
March 31, 2022 |
December 31, 2021 |
|||||||
Prepaid expenses |
$ |
$ | ||||||
Prepaid insurance |
||||||||
Prepaid inventory |
||||||||
Prepaid rent |
||||||||
Other prepaid assets |
||||||||
Indemnification assets |
||||||||
$ |
$ | |||||||
5. Inventory
March 31, 2022 |
December 31, 2021 |
|||||||
Packaging supplies |
$ |
$ | ||||||
Biological assets |
||||||||
Raw materials |
||||||||
Work in progress |
||||||||
Finished goods |
||||||||
$ |
$ | |||||||
6. Notes receivable
March 31, 2022 |
December 31, 2021 |
|||||||
Upfront payment |
$ |
$ | ||||||
Promissory note receivable |
||||||||
Other receivable |
||||||||
Total notes receivable |
||||||||
Less allowance for credit losses |
( |
) | ( |
) | ||||
Note receivable |
$ |
$ | ||||||
7. Investments
Marketable securities |
Non- marketable securities |
Available for sale securities |
Other |
Total |
||||||||||||||||
Balance, December 31, 2021 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
Acquired in the period |
||||||||||||||||||||
Interest income |
||||||||||||||||||||
Change in fair value |
||||||||||||||||||||
Balance, March 31, 2022 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
10
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
8. Property and equipment
Leasehold improvements |
Production equipment |
Furniture and fixtures |
Vehicles |
Office equipment |
Building |
Total |
||||||||||||||||||||||
| Gross carrying amount |
||||||||||||||||||||||||||||
| Balance, December 31, 2021 |
$ | $ | $ | $ | $ | $ | $ |
|||||||||||||||||||||
| Additions |
||||||||||||||||||||||||||||
| Disposals |
( |
) |
( |
) | ||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance, March 31, 2022 |
$ | $ | $ | $ | $ | $ |
$ |
|||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Depreciation |
||||||||||||||||||||||||||||
| Balance, December 31, 2021 |
$ | $ | $ | $ | $ | $ | $ |
|||||||||||||||||||||
| Additions |
||||||||||||||||||||||||||||
| Disposals |
( |
) | ( |
) | ||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance, March 31, 2022 |
$ | $ | $ | $ | $ | $ |
$ |
|||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Carrying amount December 31, 2021 |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Carrying amount March 31, 2022 |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Depreciation expense for the three months ended March 31, 2022 was $1,058,030 (March 31, 2021 - $754,401 ).
As at March 31, 2022, the Company has leasehold improvements of $2,091,182
(December 31, 2021 - $966,192 ) in progress which are not available for use and therefore not depreciated.
Refer to Note 12 for additional information on the building disposal.
1
1
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
9
. Goodwill and intangibles | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets |
||||||||||||||||||||||||
Goodwill |
License |
Cultivation Network |
Brand |
Customer Relationship |
Total |
|||||||||||||||||||
| Gross carrying amount |
||||||||||||||||||||||||
| Balance, December 31, 2021 |
$ | $ | $ | $ | $ | $ |
||||||||||||||||||
| Additions |
||||||||||||||||||||||||
| Disposals |
||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance, March 31, 2022 |
$ | $ | $ | $ | $ | $ |
||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Amortization |
||||||||||||||||||||||||
| Balance, December 31, 2021 |
$ | $ | $ | $ | $ |
|||||||||||||||||||
| Additions |
||||||||||||||||||||||||
| Disposals |
||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Balance, March 31, 2022 |
$ | $ | $ | $ | $ |
|||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Carrying amount December 31, 2021 |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Carrying amount March 31, 2022 |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Amortization expense for the three months ended March 31, 2022 was $5,374,512 (March 31, 2021 - $6,333,342 ).
The following table outlines the estimated future annual amortization expense related to intangible assets as of March 31, 2022:
| |
|
|
|
|
Estimated Amortization |
||||
| Remainder of 2022 |
$ |
|||
| 2023 |
||||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| Thereafter |
||||
| |
|
|||
$ |
||||
| |
|
|||
1
2
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
10. Business combinations
(i) Coastal
On October 1, 2021, the Company executed a Unit Purchase Agreement (the “Purchase Agreement”) to acquire 100 % equity interest in Coastal Holding Company, LLC (“Coastal Holding”). The closing of the transaction is subject to multiple conditions, including the receipt of municipal approval to transfer licenses at seven (7) locations.
At the same time, the Company advanced $20,700,000 of cash to Coastal Holding, as well as entered into Management Service Agreements (“MSA’s”) with Coastal Holding and certain of its subsidiaries (collectively “Coastal”). As part of the arrangement, the Company received 9.5 % direct interest in Varda Inc., an operating dispensary, as well as an agreement to acquire the remaining 90.5 % for $4,500,000 when approval for the transfer of that entity’s license is received.
The Purchase Agreement and the MSA’s grant the Company the power to manage and make decisions that affect the operations of Coastal and Varda Inc., including the management and development of dispensary operations. Pursuant to the Purchase Agreement and MSA’s with Coastal, the Company is entitled to a management fee equal to 100 % of the revenues generated and is responsible for 100 % of the costs and expenses of Coastal. With respect to Varda Inc., the Company is entitled to 100 % of the revenues generated and 100 % of the costs and expenses, while the 45.25 % of any profit distributions.
is
responsible for non-controlling
interest (“NCI”) holder is entitled to As a result, the Company has determined that Coastal and Varda Inc. are VIEs and the Company is the primary beneficiary by reference to the power and benefits criterion under ASC 810, . The transaction has been accounted for as a business combination under ASC 805 with 100 % of the equity interest in Coastal and 90.5 % of the equity interest in Varda Inc., being presented as redeemable NCI.
Consolidation
Upon closing of the transaction, the funds advanced to Coastal Holding will be forgiven and the NCI will be redeemed by issuing shares of the Company’s subsidiary, Coast L Acquisition Corp, which are exchangeable into shares of the Company on a basis. The number of shares to be issued is based on an initial value of $39,880,000 , with adjustments for various holdbacks and claw-backs. The claw-backs relate to certain liabilities of Coastal Holding that are to be extinguished by the current equity owners with the $20,700,000 of cash advanced by the Company.
one-for-one
The number of shares to be issued becomes fixed at various points during the closing period as milestones, which are primarily receipt of approval for licenses to transfer, are met. Although the NCI is not redeemable in cash, it has been presented as mezzanine equity as there is no limit in the arrangement on the number of shares that may be issued. The Company has the right to pay cash in lieu of common shares of the Company to the extent the payment of common shares is prohibited or limited by applicable stock exchange rules.
(ii) Calma Weho, LLC (“Calma”)
On October 1, 2021, the Company acquired 85 % of the equity interest of Calma, an operating dispensary located in West Hollywood, California.
Total consideration comprised $8,500,000 in cash and $1,468,474 in equity of the Company. In addition, the Company is committed to acquiring the remaining 15 % when local regulations permit, for $1,500,000 in common shares of the Company. In accordance with the agreement, the Company transferred $1,500,000 in cash into escrow, which will be released to the Company when the remaining 15% is acquired and the Company issues the related common shares to the seller.
1
3
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
10. Business combinations
Because the acquisition of the remaining 15% interest is contingent upon local regulations permitting, and the obligation is to be settled in shares and not in cash or other assets, the Company has presented the 15% as redeemable
non-controlling
interest in the interim condensed consolidated balance sheet. (iii) Kase’s Journey
On August 2, 2021, the Company, through its wholly owned subsidiary Caliva CARECE1 LLC, acquired all of the issued and outstanding equity interests of Kase’s Journey Inc., an operating retail dispensary located in Ceres, California, from the existing shareholders for $1,300,000 cash, subject to adjustments, and $1,221,902 of consideration payable.
(iv) Martian Delivery
On August 16, 2021, the Company, through its wholly owned subsidiary TPCO US Holding LLC, acquired all of the issued and outstanding membership interests of Martian Delivery LLC, an operating retail dispensary located in the City of Sacramento, California, from the existing shareholders for $237,500 cash and $237,500 in promissory notes payable.
The Company is still in the process of assessing the fair value of the net assets acquired, liabilities assumed and measurement of consideration, and, as a result, the fair value of the net assets acquired may be subject to adjustments pending completion of final valuations and post-closing adjustments. Management will finalize the accounting for the acquisitions no later than one year from the date of the respective acquisition date and will reflect these adjustments in the reporting period in which the adjustments are determined. Differences between these provisional estimates and the final acquisition accounting may occur and these differences could have a material impact on the Company’s future financial position and results of operations.
11. Accounts payable and accrued liabilities
March 31, 2022 |
December 31, 2021 |
|||||||
| Trade payables |
$ |
$ | ||||||
| Other accrued expenses |
||||||||
| Accrued payroll expenses |
||||||||
| Accrued severance expenses |
||||||||
| Accrued income and other taxes |
||||||||
| Goods received but not yet invoiced |
||||||||
| |
|
|
|
|||||
$ |
$ | |||||||
| |
|
|
|
|||||
1
4
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
12. Leases
The Company leases real estate used for dispensaries, production plants, and corporate offices. Lease terms for real estate generally range from 1 to 16.5 1 to 2 years. 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.
years. Most leases include options to renew for varying terms at the Company’s sole discretion. Lease terms for these assets generally range from
The following table provides the components of lease cost:
March 31, 2022 |
March 31, 2021 |
|||||||
| Operating lease costs |
$ |
$ |
||||||
| Short term lease expense |
||||||||
| |
|
|
|
|||||
| Lease expense |
||||||||
| Finance lease cost: |
||||||||
| Depreciation and amortization of lease assets |
||||||||
| Interest on lease liabilities |
||||||||
| |
|
|
|
|||||
| Finance lease cost |
||||||||
| |
|
|
|
|||||
| Total lease costs |
$ |
$ |
||||||
| |
|
|
|
|||||
The maturity of the contractual undiscounted lease liabilities as of March 31, 2022:
Operating Lease |
Finance Lease |
|||||||
| Remainder of 2022 |
$ |
$ |
||||||
| 2023 |
||||||||
| 2024 |
||||||||
| 2025 |
||||||||
| 2026 |
||||||||
| Thereafter |
||||||||
| |
|
|
|
|||||
| Total undiscounted lease liabilities |
||||||||
| Interest on lease liabilities |
( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total present value of minimum lease payments |
||||||||
| Lease liability – current portion |
||||||||
| |
|
|
|
|||||
| Lease liability |
$ |
$ |
||||||
| |
|
|
|
|||||
Additional information on the assets is as follows:
right-of-use
Operating lease |
Finance lease |
|||||||
| Gross carrying amount |
||||||||
| Balance, December 31, 2021 |
$ | $ | ||||||
| Additions (i) |
||||||||
| Disposals |
||||||||
| |
|
|
|
|||||
| Balance, March 31, 2022 |
$ | $ | ||||||
| |
|
|
|
|||||
| Depreciation |
||||||||
| Balance, December 31, 2021 |
$ | $ | ||||||
| Additions |
||||||||
| |
|
|
|
|||||
| Balance, March 31, 2022 |
$ | $ | ||||||
| |
|
|
|
|||||
| Carrying amount December 31, 2021 |
$ |
$ |
||||||
| |
|
|
|
|||||
| Carrying amount March 31, 2022 |
$ |
$ |
||||||
| |
|
|
|
|||||
The Company capitalized $352,365 of depreciation to inventory for the three months ended March 31, 2022 (March 31, 2021 - $217,036 ).
1
5
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
12. Leases
i) During the three month period ended March 31, 2022, the Company entered into a sale-leaseback arrangement whereby it sold its building for $6,500,000 less closing costs and entered into a lease with the buyer for a non-cancellable period of five years with the option to extend the lease for three additional five year periods. The Company received $6,000,000 upfront and 500,000 which is payable over five years. The fair value of the promissory note on initial recognition was $389,816 . The Company recorded a loss on sale which was calculated as follows:
received
a promissory note for $March 31, 2022 |
||||
Sale price |
$ |
|||
Selling costs |
( |
) | ||
Carrying value of building |
( |
) | ||
Loss on disposal of asset |
$ |
( |
) | |
13. Impairment
Three months ended |
||||||||
March 31, 2022 |
March 31, 2021 |
|||||||
Non-THC business |
$ |
$ | ||||||
In February 2021, the Company became committed to a plan to sell its
f $non-THC
business, which was acquired as part of the Caliva and OGE and LCV acquisitions on January 15, 2021. As a result of the decision to sell, the assets were tested for impairment and an impairment loss o14. Revenue
The following table represents the Company’s disaggregated revenue by sales channel:
Three months ended |
||||||||
March 31, 2022 |
March 31, 2021 |
|||||||
Omni-channel retail |
$ |
$ | ||||||
Wholesale |
||||||||
$ |
$ | |||||||
15. Redeemable
non-controlling
interest The following table summarizes the redeemable NCI as at March 31, 2022:
Coastal Holding (a) |
Varda Inc. (b) |
Calma (c) |
Total |
|||||||||||||
Balance, December 31, 2021 |
$ | $ | $ | $ |
||||||||||||
Net (loss) income attributable to redeemable non-controlling interest |
( |
) | ||||||||||||||
Balance, March 31, 2022 |
$ |
$ |
$ |
$ |
||||||||||||
| a) | The Company is obligated to acquire Refer to Note 10. |
| b) | The Company is obligated to acquire the remaining Refer to Note 10. |
| c) | The Company is obligated to acquire the Class A shares of Calma when regulatory approval is received for the license to transfer. The Calma NCI will be redeemed for a variable number of shares to the value of $ Refer to Note 10. |
1
6
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
16. Long term strategic contracts
Marketing Agreement (“MA”)
The Company has engaged a third-party for strategic and promotional services. During the three months ended March 31, 2021, the Company issued
The Company is obligated to issue shares to the value of $1,875,000 quarterly over the second and third year of the contract. During the three months ended March 31, 2022, the Company issued 1,348,921 common shares to settle the first quarterly payment.
The Company recognized an expense of $1,363,636 during the three months ended March 31, 2022 (March 31, 2021 - $1,075,758 ) in operating expenses as a sales and marketing expense. As at March 31, 2022, the cash-settled liability is $4,655,302 (December 31, 2021 - $5,166,666 ).
The arrangement can be terminated by the counterparty in certain circumstances, one of which is any change of control of the Company. In that case, the Company is required to settle the agreement in a lump sum payment that consists of all unpaid amounts. As at March 31, 2022, the amount that the Company would be liable for if the contract is terminated is $13,125,000 .
Brand Strategy Agreement (“BSA”)
The Company is party to the BSA whereby the Company receives the services of Shawn C. Carter p/k/a JAY-Z’s related promotion and advertising for the remaining non-cancellable period of 5 years. The Company is committed to settle
in either cash or common shares at the option of the counterparty over the remaining non-cancellable period.
The Company is recognizing the cost associated with the arrangement over the same period it is receiving services.
During the three months ended March 31, 2022, the Company recognized an expense
in operating expenses related to this arrangement an
accounts payable and accrued liabilities as at March 31, 2022 (December 31, 2021 -
). During the three months ended March 31, 2022, the Company made a cash payment of $3,000,000 (March 31, 2021- $2,000,000 ).
The agreement can be terminated by the counterparty in certain circumstances, including a change in control of the Company or an involuntary 18,500,000 less the amount already paid under the arrangement. As at March 31, 2022, the amount of damages that the Company would be liable for if the contract is terminated was $13,500,000 .
de-listing.
In these circumstances, the Company will be obligated to pay damages equal to $17
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
1
7
. Shareholders’ equity Common shares
a) |
Authorized |
The Company is authorized to issue an unlimited number of common shares with no par value.
a) |
Common shares issued |
| |
|
|
|
|
Number of common shares |
||||
| Balance, December 31, 2021 |
||||
| |
|
|||
| (i) Shares issued to settle contingent consideration |
||||
| (ii) Shares issued to settle contingent consideration |
||||
| Shares issued for Marketing Arrangement (Note 16) |
||||
| Shares issued for vested RSUs (Note 19) |
||||
| |
|
|||
| Balance, March 31, 2022 |
||||
| |
|
|||
(i) |
During the year ended December 31, 2021, the Company settled a portion of the contingent shares to be issued as part of the Qualifying Transaction. During the three months ended March 31, 2022, |
(ii) |
During the three months ended March 31, 2022, the Company issued |
On
lock-up
agreements with certain members of the Company’s leadership team and the entire board of directors, covering over approximately lock-up
agreements, each counterparty has agreed that, subject to certain exceptions, they will not, without assign or dispose of any of their locked-up
shares until January 28, 2023. 18. Warrants
The following table reflects the continuity of warrants:
| |
|
|
|
|
|
|
|
|
Number of Warrants |
Weighted Average Exercise Price |
|||||||
| Balance, December 31, 2021 and March 31, 2022 |
$ |
|||||||
| |
|
|
|
|||||
The warrants expire on January 14, 2026 . The Company has the right to accelerate expiry 20 trading days in a 30 -day trading period the closing price of the share is $18.00 or greater.
of the warrants (excluding the warrants held by the Subversive Capital Sponsor LLC in certain circumstances),
if for any 19
. Share-based compensation Effective January 2021, the Company established the Equity Incentive Plan (the “Plan”), which provides for the granting of incentive share options, nonqualified share options, share appreciation rights (“SARs”), restricted share units (“RSUs”), deferred share units (“DSUs”) and performance share units (“PSUs”), herein collectively referred to as “Awards”.
(a) Share options
The Company grants options to purchase its common shares, generally at fair value as at the date of grant. The maximum number of common shares that may be issued under the Plan is fixed by the Board to be 10 % of the common shares outstanding, from time to time, subject to adjustments in accordance with the plan.
Options generally vest over a four-year period, specifically at a rate of 25 % upon the first anniversary of the issuance date and 1/36th per month thereafter and expire after 10 years from the date of grant.
The Company options outstanding relate to replacement options issued in a business combination that occurred in 2021
18
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
19
. Share-based compensation The following table reflects the continuity of the share options during the three months ended March 31, 2022:
March 31, 2022 |
||||||||||||||||
Number of options |
Weighted average exercise price $ |
Weighted average remaining contractual term |
Aggregate intrinsic value |
|||||||||||||
| Outstanding, beginning of period |
||||||||||||||||
| Expired |
( |
) |
||||||||||||||
| Forfeited |
( |
) |
||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Outstanding, end of period |
$ |
|||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Vested and expected to vest in the future |
$ |
|||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Exercisable |
$ |
|||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
As at March 31, 2022, there was $688,540 of total unrecognized compensation cost related to 2.35 years.
non-vested
replacement options. That cost is expected to be recognized over a weighted average period of (b) Equity-settled RSUs
The following table reflects the continuity of RSUs granted during the three months ended March 31, 2022:
March 31, 2022 |
||||||||
Number of RSUs |
Weighted average grant date fair value $ |
|||||||
| |
|
|
|
|
|
|
|
|
| Outstanding, beginning of period |
||||||||
| Granted |
||||||||
| Vested |
( |
) |
||||||
| Forfeited |
( |
) |
||||||
| |
|
|
|
|||||
| Outstanding, end of period |
|
|||||||
| |
|
|
|
|||||
As at March 31, 2022, there was $8,490,993 of total unrecognized compensation cost related to 2.53 532,222 .
non-vested
RSUs. That cost is expected to be recognized over a weighted average period of years. The total fair value of shares vested during the three months ended March
31, 2022, was $Of the 398,714 RSUs that vested, 201,380 were settled in shares and 197,334 were settled in cash to cover withholding taxes on behalf of the
employees
. The range of grant date fair values related to RSUs granted during the three months ended March 31, 2022 was $1.30 - $1.41 .
19
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
19. Share-based compensation
The Company estimates forfeitures based on historical forfeiture trends. If actual forfeiture rates are not consistent with the Company’s estimates, the Company may be required to increase or decrease compensation expenses in future periods.
During the three months ended March 31, 2022 and 2021, the Company recognized the following total compensation expense, net of estimated forfeitures:
Three months ended |
||||||||
March 31, 2022 |
March 31, 2021 |
|||||||
| Options |
$ |
$ | ||||||
| Equity-settled RSUs |
||||||||
| Cash-settled RSUs |
||||||||
| Rights to contingent consideration |
||||||||
| |
|
|
|
|||||
$ |
$ | |||||||
| |
|
|
|
|||||
20. (Loss) earnings per share
Three months ended |
||||||||
March 31, 2022 |
March 31, 2021 |
|||||||
| (Loss) income available to common shareholders |
|
$ |
( |
) |
$ | |||
| Consequential effect on profit or loss from the assumed conversion of cash-settled share-based payments |
|
( |
) | |||||
| |
|
|
|
|||||
| (Loss) income available to common shareholders adjusted for the effect of dilution |
|
$ |
( |
) |
$ | |||
| |
|
|
|
|||||
| Weighted average number of shares, basic |
|
|||||||
| Dilutive securities – RSUs |
|
|
— |
|
|
|
|
|
| Dilutive securities – Other share-based payments |
|
|
— |
|
|
|
|
|
| Weighted average number of shares, diluted |
|
|||||||
| |
||||||||
| Basic (loss) earnings per share |
|
$ |
( |
) |
$ | |||
| Diluted (loss) earnings per share |
|
( |
) |
|||||
Approximately 63,407,960 of potentially dilutive securities for the three months ended March 31, 2022 were excluded in the calculation of diluted loss per share as their impact
would have been anti-dilutive.
21. Income taxes
The following table summariz
e
s the Company’s income tax expe
nse and effective tax rates for the three months ended March 31, 2022 and 2021: Three months ended |
||||||||
March 31, 2022 |
March 31, 2021 |
|||||||
| (Loss) income before income taxes |
$ |
( |
) | $ | ||||
| Income tax (expense) recovery |
$ |
( |
) | |||||
| Effective tax rate |
% |
% | ||||||
2
0
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
21. Income taxes
The Company has computed its provision for income taxes under the discrete method which treats the period as if it were the annual period and determines the income tax expense or benefit on that basis. The discrete method is applied when application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The Company believes that, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method as the estimated annual effective tax rate method is not reliable due to the high degree of uncertainty in estimating annual
year-to-date
pre-tax
income due to the industry within which the Company operates. Due to its cannabis operations, the Company is subject to the limitations of Internal Revenue Code (“IRC”) Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed
non-allowable
under IRC Section 280E. The effective tax rate for the three months ended March 31, 2022 varies from the three months ended March 31, 2021, primarily due to the reduction in
non-deductible
expenses as a proportion of total expenses in the current year. The Company incurs expenses that are not deductible due to IRC Section 280E limitations which results in significant income tax expense. The Company operates in a number of tax jurisdictions and are subject to examination of its income tax returns by tax authorities in those jurisdictions who may challenge any item on those returns. Significant judgment is required in evaluating the Company’s uncertain tax positions and determining the provision for income taxes.
The Company’s unrecognized tax assets were approximatel
The federal statute of limitation remains open for the 2019 tax year to the present. The state income tax returns generally remain open for the 2018 tax year through the present. Net operating losses arising prior to these years are also open to examination if and when utilized.
22. Operating expenses
| |
|
|
|
|
|
|
|
|
Three months ended |
||||||||
March 31, 2022 |
March 31, 2021 |
|||||||
| General and administrative |
$ |
$ | ||||||
| Allowance for accounts receivable and notes receivable |
||||||||
| Sales and marketing |
||||||||
| Salaries and benefits |
||||||||
| Share-based compensation (Note 19) |
||||||||
| Lease expense (Note 12) |
||||||||
| Depreciation of property and equipment and amortization of right-of-use |
||||||||
| Amortization of intangible assets (Note 9) |
||||||||
| |
|
|
|
|||||
$ |
$ | |||||||
| |
|
|
|
|||||
2
1
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
23. Supplemental cash flow information
Three months ended |
||||||||
Change in working capital |
March 31, 2022 |
March 31, 2021 |
||||||
| Accounts receivable |
$ |
$ | ( |
) | ||||
| Income tax receivable |
||||||||
| Inventory |
( |
) | ||||||
| Prepaid expenses and other current assets |
( |
) | ||||||
| Security deposits |
( |
) | ( |
) | ||||
| Prepaid expenses |
( |
) | ||||||
| Accounts payable and accrued liabilities |
( |
) |
( |
) | ||||
| |
|
|
|
|||||
$ |
( |
) | $ | ( |
) | |||
| |
|
|
|
|
|
|
|
|
24. Related party transactions and balances
The following table outlines the amounts paid to a related party:
Three months ended |
||||||||
March 31, 2022 |
March 31, 2021 |
|||||||
| Lease payments – interest and principal (i) |
$ |
$ | ||||||
| Administrative fees and other costs |
||||||||
| |
|
|
|
|||||
$ |
$ | |||||||
| |
|
|
|
|||||
| (i) | A director of the Company is a close family member to an owner of R&C Brown Associates, LP (“R&C”). The Company has 2 operating leases and 1 finance lease with R&C. Included in lease liabilities and right-of-use |
In addition to the items described above, the Company entered into the following transaction with a related party:
(i) |
The counterparty to the Marketing Agreement described in Note 16 became a related party in May 2021, when its Chief Executive Officer joined the Company’s Board of Directors. During the three months ended March 31, 2022, the Company expensed $ |
25. Segmented information
The Company’s operations comprise a operating segment engaged in the cultivation, manufacturing, distribution and sale of cannabis within the State of California. All revenues assets and intangible assets
we
re generated in the State of California for the three months ended March 31, 2022 and 2021 and all property and equipment, right-of-use
we
re located in the State of California. 2
2
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
26. Commitments and contingencies
a) |
California operating licenses |
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 California law. However, this activity is not in compliance with the United States Controlled Substances Act (the CSA). The Company’s assets are potentially subject to seizure or confiscation by Federal governmental agencies, and the Company could face criminal and civil penalties for noncompliance with the CSA, although such events would be without relevant precedent. Management of the Company believes they are in compliance with all California and local jurisdiction laws and monitor the regulatory environment on an ongoing basis along with counsel to ensure the continued compliance with all applicable laws and licensing agreements.
The Company’s operation is sanctioned by the State of California and local jurisdictions. There have been no instances of federal interference with those who adhere to those guidelines. Due to the uncertainty surrounding the Company’s noncompliance with the CSA, the potential liability from any noncompliance cannot be reasonably estimated and the Company may be subject to regulatory fines, penalties or restrictions in the future.
Effective January 1, 2018, the State of California allowed for adult use cannabis sales. Beginning on January 1, 2018, the State began issuing temporary licenses that expired 120 days after issuance for retail, distribution, manufacturing and cultivation permits. Temporary licenses could be extended in
90-day
increments by the State upon submission of an annual license application. All temporary licenses had been granted extensions by the State during 2018. In September 2019, Senate Bill 1459 (SB 1459) was enacted which enabled state licensing authorities to issue provisional licenses through 2021. A provisional license could be issued if an applicant submitted a completed annual license application to the Bureau of Cannabis Control. A completed application for purposes of obtaining a provisional license is not the same as a sufficient application to obtain an annual license. The provisional cannabis license, which is valid for 12 months from the date issued, is said to be in between a temporary license and an annual license and allows a cannabis business to operate as they would under local and state regulations. 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 State to obtain annual licensing.
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 to conduct its business in a timely fashion, there is no guarantee its clients will be able to do so and any failure to do so may have a negative effect on its business and results of operations.
b) |
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.
c) |
Social equity fund |
The Company formed Social Equity Ventures LLC (“SEV”) in 2021 as its social equity investment vehicle. The Company intends to fund SEV with $10,000,000 and contribute 2 % g $150,000 (December 31, 2021 - $1,000,000 ).
of its net income to allow SEV to make further social equity investments. During the three months ended March 31, 2022, SEV made one social equity investments totallin
Refer to Note 7 for further details.
2
3
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
27. Financial instruments
Contingent consideration
Financial instruments recorded at fair value in the interim condensed consolidated balance sheet are classified using a fair value hierarchy that reflects the observability of significant inputs used in making the measurements.
The fair value hierarchy requires the use of observable market inputs whenever such inputs exist. A financial instrument is classified based on the lowest level of the hierarchy for which a significant input has been considered in measuring fair value.
All contingent consideration is classified as level 3 in the fair value hierarchy as volatility is a key input into the valuation models and volatility is an unobservable input.
The following provides a breakdown of contingent consideration as at March 31, 2022 and 2021:
Contingent consideration |
||||||||||||
Trading price consideration (i) |
Other (ii) |
Total |
||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2020 |
$ | $ | $ |
|||||||||
| Additions |
||||||||||||
| Change in fair value |
( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|||||||
| Balance March 31, 2021 |
$ | $ | $ | |||||||||
| |
|
|
|
|
|
|||||||
| Balance, December 31, 2021 |
$ |
$ |
$ |
|||||||||
| Change in fair value |
( |
) |
( |
) |
( |
) | ||||||
| Transferred to equity |
( |
) |
( |
) | ||||||||
| |
|
|
|
|
|
|||||||
| Balance, March 31, 2022 |
$ | $ |
$ |
|||||||||
| |
|
|
|
|
|
|||||||
(i) |
Trading price consideration – As part of the acquisition of Caliva and OGE and LCV during the three months ended March 31, 2021, the former shareholders received a contingent right for up to one-third issuable upon the achievement of each price threshold, respectively. |
The fair value of the trading price consideration was determined using a Monte Carlo simulation methodology that included simulating the share price using a risk-neutral Geometric Browni500,000 iterations. The methodology recorded the likelihood of the share price achieving the price hurdle associated with the payout and calculated the discounted value of the payout based on the share price on the date the
a
n Motion-based pricing model over price
hurdle was met and the corresponding 20-day
volume-we
ighted average price. Key Inputs |
March 31, 2022 |
December 31, 2021 |
March 31, 2021 |
|||||||||
| Key unobservable inputs |
||||||||||||
| Expected volatility |
% |
|
|
|
% |
% | ||||||
| |
|
|
|
|||||||||
| Key observable inputs |
|
|
|
|
||||||||
| Share price |
$ |
|
$ |
|
|
$ | ||||||
| Risk-free interest rate |
% |
|
|
|
% |
% | ||||||
| Dividend yield |
% | % | % | |||||||||
| Number of shares |
||||||||||||
A 15% change in the volatility assumption will have the following impact on the fair value of the contingent consideration:
Change in volatility |
March 31, 2022 |
December 31, 2021 |
March 31, 2021 |
|||||||||
| +15% |
$ | |
|
$ |
|
|||||||
| -15% |
$ | ( |
) | |
$ |
( |
) |
( |
) | |||
(ii) |
Other |
| |
24
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
27. Financial instruments
Interest risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company is subject to minimal interest rate risk.
Credit risk
Credit risk arises from deposits with banks, security deposits, trade receivables, notes receivable and other receivables.
Gross |
Allowance |
Net |
||||||||||
| Cash |
$ |
$ |
$ |
|||||||||
| Restricted cash and restricted cash equivalents |
||||||||||||
| Accounts receivable (i) |
( |
) | ||||||||||
| Security deposits |
||||||||||||
| Notes and other receivables (ii) |
( |
) | ||||||||||
| |
|
|
|
|
|
|||||||
| $ | $ |
( |
) | $ |
||||||||
| |
|
|
|
|
|
|||||||
(i) |
For trade receivables, the Company does not hold any collateral as security but mitigates this risk by dealing with counterparts that management has determined to be financially sound and, accordingly, does not anticipate significant loss due to non-performance. The Company determines the allowance for doubtful accounts by firstly allowing for specific receivables that are at-risk of non-collection, and then applying a standard percentage by bucket of aging to the remainder. The gross accounts receivable by aging are laid out below: |
As at March 31, 2022 the Company’s aging of receivables was a
s
follows:
March 31, 2022 |
||||
| 0 - 30 days |
$ |
|||
| 31 - 60 days |
||||
| 61 - 90 days |
||||
| 91 – 120 days |
||||
| Over 120 days |
||||
| |
|
|||
| Gross receivables |
||||
| Less allowance for doubtful accounts |
( |
) | ||
| |
|
|||
$ |
||||
| |
|
|||
| (ii) | For notes and other receivables, the Company determines the allowance for doubtful accounts by considering, for each debtor, if there has been any indication that a loss has been incurred. In making that determination, the Company considers the credit rating of the debtor as well as any collateral that underlies the receivable. Refer to Note 6 for additional information. |
28. Fair value measurement
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as at March 31,
2022:
Carrying amount |
Fair value |
Level 1 |
Level 3 |
Total gains |
||||||||||||||||
| Equity securities |
$ | $ | $ | $ | $ | |||||||||||||||
| Debt securities |
||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total investments |
$ | $ | $ | $ | $ | |||||||||||||||
| Contingent consideration – trading price consideration |
$ | $ | $ | $ | $ | |||||||||||||||
| Contingent consideration - other |
||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total contingent consideration (Note 2 7 ) |
$ | $ | $ | $ | $ | |||||||||||||||
2
5
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three months ended March 31, 2022 and 2021
29. VIE arrangements
As discussed in Note 10, the Company has determined it is the primary beneficiary of VIEs and as such, the Company has consolidated the financial position, results of operations and cash flows of these VIEs. All intercompany balances and transactions between the Company and these VIEs are eliminated in the interim condensed consolidated financial statements.
The aggregate carrying values of the VIEs’ assets and liabilities, after elimination of any intercompany transactions and balances, in the interim condensed consolidated balance sheets were as
follows:
March 31, 2022 |
December 31, 2021 |
|||||||
| Assets |
||||||||
| Current assets |
||||||||
| Cash |
$ |
$ | ||||||
| Restricted cash |
||||||||
| Accounts receivable, net |
||||||||
| Income tax receivable |
||||||||
| Inventory |
||||||||
| Prepaid expenses and other current assets |
||||||||
| Total current assets |
||||||||
| |
|
|
|
|
|
|
|
|
| Property and equipment, net |
||||||||
| Goodwill |
||||||||
| Intangible assets |
||||||||
| Right-of-use |
||||||||
| |
|
|
|
|||||
| Total assets |
$ |
$ |
||||||
| |
|
|
|
|||||
| Liabilities |
||||||||
| Current liabilities |
||||||||
| Accounts payable and accrued liabilities |
$ |
$ | ||||||
| Consideration payable – current portion |
||||||||
| Operating lease liability- current portion |
||||||||
| |
|
|
|
|||||
| Total current liabilities |
||||||||
| Operating lease liabilities |
||||||||
| Deferred tax liabilities |
||||||||
| Consideration payable |
||||||||
| |
|
|
|
|||||
| Total liabilities |
$ |
$ |
||||||
| |
|
|
|
|||||
The assets and liabilities in the table above include the carrying value of the goodwill, intangible assets and fair value adjustments recognized as a result of the business combination. Included in restricted cash is $5,597,991 (December 31, 2021 -
$that is only available to settle certain VIE obligations, and the creditors of
$
of the liabilities have no recourse against the Company.
30. Comparative figures
Certain comparative figures have been restated where necessary to conform with current period presentation.
31. COVID-19
In March 2020, the World Health Organization categorized coronavirus disease 2019 (“COVID-19”) as a pandemic. COVID-19 continues to impact the U.S. and other countries across the world, and the duration and severity of its effects remain unknown. The Company continues to implement and evaluate actions to maintain its financial position and support the continuity of its business and operations in the face of this pandemic and other events.
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, the pandemic 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.
The COVID-19 outbreak in the United States has caused business disruption both to the Company and throughout its customer base and supply chain through mandated and voluntary closings of many businesses. While this disruption is expected to negatively impact The Company’s operating results, the related financial impact and duration cannot be reasonably estimated at this time. The Company has taken and continues to take, important steps to protect its employees, customers and business operations since the beginning of the pandemic.
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.
32. Subsequent events
Share issuance
Subsequent to March 31, 2022, the Company issued
shares, of which 1,441,093 were issued to a related party related to the Marketing Agreement described in Note 16.
RSU Issuance
Subsequent to March 31, 2022, the Company issued 660,000 RSUs.
PSU Issuance
Subsequent to March 31, 2022, the Company issued 2,150,000 PSUs.
Kase’s Journey
On April 11, 2022, the license related to Kase’s Journey transferred to the Company, resulting in the payment of $655,549 included in consideration payable.
26
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Introduction
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read together with other information, including our unaudited interim condensed consolidated financial statements and the related notes to those statements included in Part I, Item 1 of this Quarterly Report (the “Interim Financial Statements”). Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report contains certain information that may constitute forward-looking information and forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, and under Canadian securities laws (collectively, “Forward-Looking Statements”) which are based upon the Company’s current internal expectations, estimates, projections, assumptions and beliefs. Such statements can be identified by the use of forward-looking terminology such as “expect”, “likely”, “may”, “will”, “should”, “intend”, “anticipate”, “potential”, “proposed”, “estimate” and other similar words, including negative and grammatical variations thereof, or statements that certain events or conditions “may” or “will” happen, or by discussions of strategy. Forward-Looking Statements include estimates, plans, expectations, opinions, forecasts, projections, targets, guidance, or other statements that are not statements of fact. Forward-Looking Statements in this Quarterly Report include, but are not limited to, statements with respect to:
| • | the performance of the Company’s business and operations; |
| • | the Company’s expectations regarding revenues, expenses, liquidity and anticipated cash needs; |
| • | the Company’s ability to complete future strategic alliances and the expected impact thereof; |
| • | the Company’s ability to source investment opportunities and complete future acquisitions, including in respect of entities in the United States, the ability to finance such acquisitions, and the expected impact thereof; |
| • | expected future sources of financing; |
| • | the expected future business strategy, competitive strengths, goals, expansion and growth of the Company’s business, including operations and plans, new revenue streams and cultivation and licensing assets; |
| • | the Company’s ability to grow revenue and reach long-term profitability; |
| • | the implementation and effectiveness of the Company’s distribution platform; |
| • | expectations with respect to future production costs; |
| • | the expected methods to be used by the Company to distribute cannabis; |
| • | the competitive conditions of the industry; |
| • | laws and regulations and any amendments thereto applicable to the business and the impact thereof; |
| • | the competitive advantages and business strategies of the Company; |
| • | the application for additional licenses and the grant of licenses or renewals of existing licenses that have been applied for; |
| • | the medical benefits, viability, safety, efficacy, dosing and social acceptance of cannabis; |
| • | the Company’s future product offerings; |
| • | the anticipated future gross margins of the Company’s operations; |
| • | the Company’s ability to source and operate facilities in the United States; |
| • | expansion into additional U.S. and international markets; |
| • | expectations of market size and growth in the United States and the states in which the Company operates or contemplates future operations; |
| • | expectations for regulatory and/or competitive factors related to the cannabis industry generally; and |
27
| • | general economic trends. |
Certain of the Forward-Looking Statements contained herein concerning the cannabis industry and the general expectations of the Company concerning the cannabis industry are based on estimates prepared by the Company 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 the cannabis industry which the Company believes to be reasonable. However, although generally indicative of relative market positions, market shares and performance characteristics, such data is inherently imprecise. While the Company is not aware of any misstatement regarding any industry or government data presented herein or information presented herein which is based on such data, the cannabis industry involves risks and uncertainties that are subject to change based on various factors, which factors are described further below.
Forward-Looking Statements contained in this Quarterly Report reflect management’s current beliefs, expectations and assumptions and are based on information currently available to management, management’s historical experience, perception of trends and current business conditions, expected future developments and other factors which management considers appropriate. With respect to the Forward-Looking Statements contained in this Quarterly Report, the Company has made assumptions regarding, among other things
(i) its ability to generate cash flows from operations and obtain any necessary financing on acceptable terms; (ii) general economic, financial market, regulatory and political conditions in which the Company operates; (iii) the output from the Company’s operations; (iv) consumer interest in the Company’s products; (v) competition; (vi) anticipated and unanticipated costs; (vii) government regulation of the Company’s activities and products and in the areas of taxation and environmental protection; (viii) the timely receipt of any required regulatory approvals; (ix) the Company’s ability to obtain qualified staff, equipment and services in a timely and cost efficient manner; (x) the Company’s ability to conduct operations in a safe, efficient and effective manner; (xi) the Company’s ability to meet its future objectives and priorities; (xii) the Company’s access to adequate capital to fund its future projects and plans; (xiii) the Company’s ability to execute on its future projects and plans as anticipated; (xiv) industry growth rates; and (xv) currency exchange and interest rates.
Readers are cautioned that the above list of cautionary statements is not exhaustive. Known and unknown risks, many of which are beyond the control of the Company, could cause actual results to differ materially from the Forward-Looking Statements in this Quarterly Report. Such lists include, without limitation, those discussed under the heading “Risk Factors” in Company’s Annual Report on Form
10-K
for the year ended December 31, 2021 filed with the SEC on March 31, 2022 (our “2021 Form 10-K”)
and in the Company’s periodic reports subsequently filed with the SEC and in the Company’s filings on SEDAR at www.sedar.com. The purpose of Forward-Looking Statements is to provide the reader with a description of management’s expectations, and such Forward-Looking Statements may not be appropriate for any other purpose. You should not place undue reliance on Forward-Looking Statements contained in this Quarterly Report. Although the Company believes that the expectations reflected in such Forward-Looking Statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Forward-Looking Statements contained herein are made as of the date of this Quarterly Report and are based on the beliefs, estimates, expectations and opinions of management on the date such Forward-Looking Statements are made. The Company undertakes no obligation to update or revise any Forward-Looking Statements, whether as a result of new information, estimates or opinions, future events or results or otherwise or to explain any material difference between subsequent actual events and such Forward-Looking Statements, except as required by applicable law. The Forward-Looking Statements contained in this Quarterly Report are expressly qualified in their entirety by this cautionary statement. Results for First Quarter of 2021 Do Not Reflect Complete Quarterly Period
Our financial results for the quarterly period ended March 31, 2021 (“Q1 2021”) did not include operating results form January 1, 2021 to January 15, 2021 due to the fact that our qualifying transaction, pursuant to which the Company’s business operations began, closed on January 15, 2021. Accordingly, our results of operations are not necessarily comparable between those two periods.
28
Part 1 - Business Overview
The Company is a consumer-focused cannabis company based in the United States focused on the recreational and wellness markets. The Company’s high quality integrated operations in California are focused on building winning brands supported by its omni-channel ecosystem. The Company’s platform was designed to create one of the most socially responsible and culturally impactful companies in the United States, producing consistent, well-priced products and culturally relevant brands that are distributed to third-party retailers as well as via the Company’s delivery service and strategically located storefront retail locations across California. A full portfolio of products and brands that appeal to a broad range of user groups, need-states and occasions, offered at all price points, and with various brand value propositions, are produced at low cost and high caliber of quality through integrated cultivation and manufacturing. The Company believes its delivery and storefront retail outlets will allow it to achieve high gross-margins on many of its products, forge relationships between its brands and consumers and collect proprietary consumer data and insights.
seed-to-sale
direct-to-consumer
one-on-one
The Company’s operational footprint spans cultivation, extraction, manufacturing, distribution, brands, retail and delivery. The management team and directors of the Company bring together deep expertise in cannabis, consumer packaged goods, investing and finance from
start-ups
to publicly traded companies. The Company aims to leverage the collective industry experience of its management and directors. As at March 31, 2022, the Company views its business as having the following two sales channels:
| 1) | Omni-channel retail (retail, pick up and, delivery): the Company currently operates eleven omni-channel retail locations: three in northern California, three in central California, five in southern California and six consumer delivery hubs. |
| 2) | Wholesale: the Company directly sells first party (i.e. produced in-house) and selected third party products into 450 dispensaries across California. Additional wholesale revenue comes from sales of sourced bulk flower and oil produced in-house. |
Revenues from these two sales channels were as follows:
Three-months ended March 31, 2022 |
Three-months ended March 31, 2021 |
|||||||
| Omni-channel retail |
$ | 19,087,337 | $ | 9,698,133 | ||||
| Wholesale |
14,143,854 | 30,219,255 | ||||||
| |
|
|
|
|||||
| $ | 33,231,191 | $ | 39,917,388 | |||||
| |
|
|
|
|||||
As the Company continues to scale and integrate its business, it is incurring operating losses. The Company’s loss from operations for the three months ended March 31, 2022 and March 31, 2021 totaled $32,431,061 and $113,959,101, respectively. The comparative period results include impairment charges of $58,030,387, while no impairment charges were incurred in our first quarter ended March 31, 2022. The Company is focused on reducing operating losses as it scales and integrates its businesses.
Through a combination of (i) professional leadership, including the addition of Troy Datcher on September 8, 2021, (ii) omni-channel operations, (iii) technology and data driven practices, (iv) brand and product expertise, and (v) social justice and equity advocacy, the Company intends to set the example globally as the cannabis operation. The Company is actively evaluating cost reductions and business optimization to reduce its cash burn in the near term.
best-in-class
First Quarter Highlights
Operations
During the quarterly period ended March 31, 2022 (“Q1 2022”) the Company focused on optimizing its operations and leveraging the assets it acquired in 2021 to achieve higher gross margins and reduce cash burn. The Company aggressively changed its product mix in Q1 2022 by shifting its focus to higher margin omni-channel retail business from lower gross margin wholesale business and has demonstrated substantial gross margin improvement: Q1 2022 realized gross margin of 24.6% compared with 17.6% in Q1 2021. Gross profit also improved in absolute dollars terms: $8,184,382 in Q1 2022 compared with $7,043,120 in Q1 2021, despite a reduction in top line revenue.
29
To further improve operating results, the Company is evaluating options including: subleasing excess real estate, combining operations for lower performing locations, closing or disposing of
non-core
assets, a strategic review of its wholesale business, and general & administrative cost reductions. The Company has also changed its mergers & acquisitions strategy going forward to be more opportunistic and selective rather than as a core function to achieve rapid growth.
Senior Leadership Changes
During the first quarter of 2022, the Company strengthened the senior management team with the appointments of Tanisha Robinson as Chief Transformation Officer, Esther Song as Chief Marketing Officer and Mindi Basha as Vice-President of Retail.
On February 7, 2022, the Company announced that Dennis O’Malley, the Company’s Chief Operating Officer elected to step down with a March 15, 2022 effective date. Troy Datcher, Chief Executive Officer of the Company, has assumed Mr. O’Malley’s duties and responsibilities. On April 27, 2022, Desiree Perez resigned from the Company’s Board of Directors.
Sale and Leaseback of Pullman Property
During the first quarter of 2022, the Company completed the sale and leaseback of its property on Pullman Avenue, San Jose, California. The Company received $6,000,000 up front and a $500,000 promissory note receivable over five years. The Company leased back the space for a ten year term with an option to terminate early after five years and with two five-year options to extend the term at a base rent of $552,500.
Social Equity
During the first quarter of 2022, the Company entered into a 50/50 agreement with Peakz NFT, LLC, an entity formed by social equity entrepreneur Jessie Grundy, to develop and launch a collection of cannabis-focused
non-fungible
token’s (“NFT’s”) referred to as “Digistrains”. The Company invested $150,000 to seed the initiative (the “Initial Capital Contribution”) and expects the Digistrain NFT collection to be launched in the near future. Any distributions from this initiative must first be utilized to repay the Initial Capital Contribution before being shared amongst members of the joint venture. 30
Results of Operations
TPCO Holding Corp.
Interim condensed consolidated statements of operations and comprehensive (loss) income
(Unaudited, in United States dollars)
Three-months ended |
||||||||
March 31, 2022 |
March 31. 2021 | |||||||
| Sales, net of discounts |
$ |
33,231,191 |
$ | 39,917,388 | ||||
| Cost of sales |
25,046,809 |
32,874,268 | ||||||
| |
|
|
|
|||||
| Gross profit |
8,184,382 |
7,043,120 | ||||||
| |
|
|
|
|||||
| Impairment loss |
— |
58,030,387 | ||||||
| Operating expenses |
40,615,443 |
62,971,834 | ||||||
| |
|
|
|
|||||
| Loss from operations |
(32,431,061 |
) |
(113,959,101 | ) | ||||
| Other income (expense) |
||||||||
| Interest expense |
(1,250,568 |
) |
(1,173,872 | ) | ||||
| Loss on disposal of assets |
(254,473 |
) |
— | |||||
| Change in fair value of investments |
297,864 |
— | ||||||
| Change in fair value of contingent consideration |
388,622 |
131,093,854 | ||||||
| Other income |
307,956 |
(110,249 | ) | |||||
| |
|
|
|
|||||
(510,599 |
) |
129,809,733 | ||||||
| |
|
|
|
|||||
| (Loss) income before income taxes |
(32,941,660 |
) |
15,850,632 | |||||
| Income tax (recovery) expense |
(594,872 |
) |
3,210,622 | |||||
| |
|
|
|
|||||
| (Loss) income and comprehensive (loss) income |
$ |
(33,536,532 |
) |
$ | 19,061,254 | |||
| |
|
|
|
|||||
| (Loss) income and comprehensive (loss) income attributable to controlling shareholders |
(33,691,877 |
) |
19,061,254 | |||||
| (Loss) income and comprehensive (loss) income attributable to non-controlling shareholders |
155,345 |
— | ||||||
| |
|
|
|
|||||
(33,536,532 |
) |
19,061,254 |
||||||
| |
|
|
|
|||||
On January 15, 2021 the Company closed its qualifying transaction (the “Qualifying Transaction”), pursuant to which the Company acquired CMG Partners, Inc. (“Caliva”) and Left Coast Ventures, Inc. (“LCV”). Concurrent with the completion of the Qualifying Transaction, LCV acquired SISU Extraction, LLC (“SISU”).
During 2021, the Company acquired (or acquired the right to operate, with closing of the acquisition subject to satisfaction of certain closing conditions) several higher margin omni-channel retail businesses as part of its growth strategy including: Martian Delivery, LLC (“Martian Delivery”) (during Q3 2021), Kase’s Journey Inc. (“Kase’s Journey”) (during Q3 2021), Calma and Coastal (both during Q4 2021). The results of these operations are consolidated in the Q1 2022 reported results and have contributed to a substantially higher realized gross margin compared to Q1 2021.
The lower sales revenue reported in Q1 2022 ($33,231,191) compared to Q1 2021 ($39,917,388) reflect the
re-focus
onto the higher gross margin omni-channel retail as opposed to higher revenue but lower margin wholesale business. This shift in business mix is evidenced by the significantly higher gross margin of 24.6% in Q1 2022 compared to 17.6% in Q1 2021. Gross profit realized in absolute dollars terms also increased to $8,184,382 in Q1 2022 from $7,043,120 in Q1 2021 on a lower revenue base reflecting the higher margin nature of the business. 31
Sales Revenue
Revenue by sales channel for the three months ended March 31, 2022 compared to March 31, 2021 was as follows:
Three-months ended March 31, 2022 |
Three-months ended March 31, 2021 |
|||||||
| Omni-channel retail |
$ | 19,087,337 | $ | 9,698,133 | ||||
| Wholesale |
14,143,854 | 30,219,255 | ||||||
| |
|
|
|
|||||
| $ | 33,231,191 | $ | 39,917,388 | |||||
| |
|
|
|
|||||
Our financial results for the quarterly period ended Q1 2021 did not include the operating results from January 1, 2021 to January 15, 2021 due to the fact that our qualifying transaction, pursuant to which the company’s business operations began did not occur until January 15, 2021. Accordingly, our results of operations are not necessarily comparable between those two periods.
Omni-channel retail (Retail, Pick up, Delivery)
As of March 31, 2022, the Company operated eleven retail locations and six consumer delivery hubs. We have four store brands, Caliva, Deli by Caliva, Coastal and Calma.
Revenues earned from omni-channel retail sales in the three months ended March 31, 2022 totaled $19,087,337 compared with $9,698,133 in the three months ended March 31, 2021 for an increase of $9,389,204 or 96.8% growth.
The Company achieved this very strong omni-channel retail growth as the comparative period did not include the financial results contributed by Kase’s Journey, Martian Delivery, Coastal and Calma all of which were acquired subsequent to March 31, 2021.
Further, the Company changed the product mix to increase sales of first party in-house
branded product revenues at its acquired dispensaries which generates higher gross margins over third party product offerings. During Q1 2022, the Company launched Limited Harvest, new exclusive Caliva strains available only through its retail and delivery locations: Moto OG 28% THC, Durban Poison 35% THC, Wedding Cake 36% THC, GMO 42% THC and Gush Mints 36% THC.
Calma and “Deli by Caliva” (Bellflower) were named among the best dispensaries in the Los Angeles area by Thrillist as published on March 30, 2022.
Wholesale
The Company directly sells first party and selected third party products into 450 dispensaries across California, leveraging
in-house
sales teams, as well as the two wholesale distribution centers in San Jose and Costa Mesa, respectively. Our Wholesale segment also includes the bulk business and consists primarily of distillate oil manufacturing, and bulk flower sales. Revenues earned from the Wholesale sales channel in Q1 2022 totaled $14,143,854 compared with $30,219,255 in Q1 2021 for a decrease of $16,075,401 or 53.2%. As noted above, Q1 2021 had 14 fewer days of operations than Q1 2022. The decrease is primarily due to the Company dropping very low margin products and a significant price compression in flower and distillate oil in the California market over this one year period. The Company has commenced a strategic review of its wholesale business with the aim of improving margins. It is evaluating outsourcing wholesale products distribution as a way to simplify its business and improve margins. It is also evaluating selective divestments within this sales channel.
During Q1 2022, in an effort to reduce costs in this sales channel, the Company consolidated its bulk wholesale business to one location to reduce operating costs. It has also no longer offered flower trimming services and is focusing primarily on distillate oil manufacturing and bulk flower sales going forward.
32
Gross Profit
Gross Profit reflects our revenue less our cost of sales costs primarily consisting of labor, materials, consumable supplies, overhead, amortization on production equipment, shipping, packaging and other expenses required to produce cannabis products.
The Company’s gross profit for Q1 2022 was $8,184,382 (24.6% as a percentage of revenue), an increase of $1,141,262 from gross profit of $7,043,120 (17.6% as a percentage of revenue) for Q1 2021.
The increase in gross profit in both absolute dollars terms and as a percentage of revenue is due to the shift to higher margin omni-channel retail business from lower margin wholesale as described above.
Operating Expenses
Three-months ended |
||||||||
March 31, 2022 |
March 31, 2021 |
|||||||
| General and administrative |
$ |
13,630,882 |
$ | 9,360,832 | ||||
| Allowance for doubtful accouts |
2,249,706 |
174,111 | ||||||
| Sales and marketing |
3,415,737 |
28,995,745 | ||||||
| Salaries and benefits |
10,705,503 |
7,817,117 | ||||||
| Share based compensation expense |
2,242,077 |
8,127,779 | ||||||
| Lease expense |
1,897,827 |
1,168,987 | ||||||
| Depreciation |
1,099,199 |
993,921 | ||||||
| Amortization of intangible assets |
5,374,512 |
6,333,342 | ||||||
| |
|
|
|
|||||
$ |
40,615,443 |
$ |
62,971,834 |
|||||
| |
|
|
|
|||||
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.
The Company recorded operating expenses of $40,615,443 in Q1 2022 compared to $62,971,837 in Q1 2021. The majority of the decrease in operating expenses is due to the comparative period including a $25,000,000 sales and marketing payment to ROC Nation, LLC (“Roc Nation”) that was settled in common shares of the Company. In Q1 2022, ROC Nation was paid $1,875,000 in common shares of the Company as consideration pursuant to the Roc Binding Heads of Terms (as defined below).
General and administrative costs increased to $13,630,882 in Q1 2022 from $9,360,832 in Q1 2021. The increase in general administrative expenses is due mainly to higher professional fees associated with the
year-end
audit and the integration of the Coastal acquisition, as well as the fact that the results of Q1 2022 represented our operations for 14 additional days than Q1 2021. The allowance for doubtful accounts of $2,249,706 in Q1 2022 (March 31, 2021: $Nil) reflects additional provisioning on notes receivable.
Salaries and benefits totaled $10,705,503 in Q1 2022 compared to $7,817,117 in Q1 2021 reflecting primarily additional staff acquired with Coastal that were not present in Q1 2021, as well as the fact that the results of Q1 2022 represented our operations for 14 additional days than Q1 2021.
Lease expense increased to $1,897,827 in the three months ended March 31, 2022 from $1,168,987 in the comparative period reflect the numerous acquisitions made during 2021 whereby the Company increased the number of lease properties and its California footprint, as well as the fact that the results of Q1 2022 represented our operations for 14 additional days than Q1 2021.
Share based compensation expense decreased to $2,242,077 in Q1 2022 from $8,127,779 in Q1 2021. Share based compensation is a
non-cash
expense and fluctuates with the number of restricted stock units (“RSUs”) granted in a period and the stock price. The decrease in stock-based 33
compensation expense was primarily attributable to significant number of RSUs granted in connection with the Qualifying Transaction, as well as the fact that the market price of our common shares was lower in Q1 2022 than it was in Q1 2021.
Depreciation of property, plant & equipment of $1,099,199 and amortization of intangible assets of $5,374,512, respectively, were incurred during Q1 2022, are comparable to amounts in Q1 2021 of $993,921 and $6,333,342, respectively.
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.
In Q1 2022, the Company did not observe any triggers suggesting impairment and thus an impairment test was not performed. In Q1 2021, the Company recorded impairment of $58,030,387 associated with the disposal of its
non-THC
business. The impairment charge is an adjustment that did not affect the Company’s cash position. Other Items
Interest (expense)
In Q1 2022 the Company recorded interest expense of $1,250,568 compared with $1,173,872 for Q1 2021, the majority of which relates to interest expense on lease accounting for the Company’s right of use assets.
Contingent consideration
In Q1 2022, the Company recorded a gain on the change in the fair value of contingent consideration of $388,622 compared to $131,093,854 in Q1 2021. The Company agreed to pay certain contingent consideration in connection with its Qualifying Transaction. This contingent consideration will be fair valued at each
quarter-end
and the gain or loss recorded in the statement of operations and comprehensive income (loss) will be inversely related to the movement in the price of the Company’s common shares. Net Income (loss) and Comprehensive Income (Loss)
In Q1 2022, the Company recorded net loss of $33,536,532 compared with income of $19,061,254 in Q1 2021. The net income recorded by the Company in Q1 2021 was due primarily to the recognition of a $131,093,854
non-cash
revaluation gain on certain contingent consideration. Management’s Use of
Non-GAAP
Measures This MD&A contains certain financial performance measures, including “EBITDA” and “Adjusted EBITDA,” that are not recognized under generally accepted accounting principles in the United States (“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 Interim 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 (iii) non-recurring
legal and professional fees, human-resources, inventory and collections-related expenses, (iv) intangible and goodwill impairments and loss on disposal of assets, and (v) transaction costs related to merger and acquisition activities
34
Reconciliation of
Non-GAAP
Measures A reconciliation of EBITDA and Adjusted EBITDA to the most directly comparable measure determined under GAAP is set out below.
Three-months ended |
||||||||
March 31, 2022 |
March 31. 2021 | |||||||
| Net (loss) income and comprehensive (loss) income |
$ |
(33,536,532 |
) |
$ |
19,061,254 |
|||
| Income taxes |
594,872 |
(3,210,622 |
) | |||||
| Depreciation and amortization |
6,473,711 |
7,327,263 |
||||||
| Interest expense |
1,250,568 |
1,173,872 |
||||||
| EBITDA |
(25,217,381 |
) |
24,351,767 |
|||||
| Adjustments: |
||||||||
| Share based compensation expense |
2,242,077 |
8,127,779 |
||||||
| Other non-recurring items: |
||||||||
| Fair value change of contingent consideration |
(388,622 |
) |
(131,093,854 |
) | ||||
| Change in fair value of investments at fair value through profit or loss |
(297,864 |
) |
— |
|||||
| Provision for notes receivable |
2,249,706 |
— |
||||||
| Impairment loss |
— |
58,030,387 |
||||||
| De-SPAC costs |
2,178,536 |
2,618,240 |
||||||
| Restructuring costs |
— |
544,616 |
||||||
| Sales and marketing expense |
— |
27,247,039 |
||||||
| |
|
|
|
|||||
| Adjusted EBITDA |
$ |
(19,233,548 |
) |
$ |
(10,174,026 |
) | ||
| |
|
|
|
|||||
EBITDA
The Company’s EBITDA loss for Q1 2022 was $25,217,381, a decrease of $52,597,786 from Q1 2021 when the Company recorded positive EBITDA of $24,351,767 due to the $131,093,854 revaluation gain on contingent consideration recognized in Q1 2021.
Adjusted EBITDA
The Company’s Adjusted EBITDA loss for Q1 2022 was $19,233,548, an increase of $9,059,522 from the $10,174,026 loss for Q1 2021. The increased loss is primarily due the various businesses acquired in 2021 being integrated. The Company is undertaking several initiatives to improve profitability and reduce cash burn as described in this MD&A.
The Company’s management views Adjusted EBITDA as the best measure of its underlying operating performance.
Liquidity and Capital Resources
We manage liquidity risk by reviewing, on an ongoing basis, our sources of liquidity and capital requirements. As at March 31, 2022, The Parent Company had restricted cash and cash equivalents of $152,231,994 compared with restricted cash and cash equivalents of $174,892,298 as at December 31, 2021.
Cash and restricted cash equivalents are predominately invested in liquid securities issued by the United States government.
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 January 15, 2021, we have incurred net operating losses. However, management is confident in the Company’s ability to grow revenue and reach long term profitability. We also expect to have access to public capital markets through our listing on the NEO Exchange, and continue to review and pursue selected external financing sources to ensure adequate financial resources. These potential sources include, but are not limited to (i) obtaining financing from traditional or
non-traditional
investment capital organizations; (ii) obtaining funding from the sale of our common shares or other equity or debt instruments; and (iii) obtaining debt financing with lending terms that more closely match our business model and capital needs. There can be 35
no assurance that we will gain adequate market acceptance for our products or be able to generate sufficient positive cash flow to achieve our business plans, that additional capital or other types of financing will be available when needed, or that these financings will be on terms favorable to the Company or at all.
We expect to continue funding operating losses as we ramp up our 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.
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. Contractual Obligations
The Company leases real estate used for dispensaries, production plants, and corporate offices. Lease terms for real estate generally range from 1 to 16.5 years. Most leases include options to renew for varying terms at the Company’s sole discretion. Lease terms for these assets generally range from 1 to 2 years. 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 following table provides the components of lease cost:
Three-months ended |
||||||||
March 31, 2022 |
March 31, 2021 |
|||||||
| Operating lease costs |
$ |
1,824,078 |
$ |
1,118,088 |
||||
| Short term lease expense |
73,749 |
50,899 |
||||||
| |
|
|
|
|||||
| Lease expense |
1,897,827 |
1,168,987 |
||||||
| Finance lease cost: |
||||||||
| Depreciation and amortization of lease assets |
393,534 |
456,556 |
||||||
| Interest on lease liabilities |
1,104,601 |
931,079 |
||||||
| |
|
|
|
|||||
| Finance lease cost |
1,498,135 |
1,387,635 |
||||||
| |
|
|
|
|||||
| Total lease costs |
$ |
3,395,962 |
$ |
2,556,622 |
||||
| |
|
|
|
|||||
The following table provides the maturity of the Company’s contractual undiscounted lease liabilities as of March 31, 2022:
Operating Lease |
Finance Lease |
|||||||
| Remainder of 2022 |
$ | 5,884,559 | $ | 3,376,939 | ||||
| 2023 |
6,294,684 | 4,625,156 | ||||||
| 2024 |
5,878,102 | 4,763,910 | ||||||
| 2025 |
5,690,149 | 4,906,828 | ||||||
| 2026 |
5,274,121 | 5,054,033 | ||||||
| Thereafter |
23,622,067 | 64,884,896 | ||||||
| |
|
|
|
|||||
| Total undiscounted lease liabilities |
52,643,682 | 87,611,762 | ||||||
| Interest on lease liabilities |
(20,141,069 | ) | (50,835,243 | ) | ||||
| |
|
|
|
|||||
| Total present value of minimum lease payments |
32,502,613 | 36,776,519 | ||||||
| Lease liability – current portion |
3,538,466 | 45,945 | ||||||
| |
|
|
|
|||||
| Lease liability |
$ |
28,964,147 |
$ |
36,730,574 |
||||
| |
|
|
|
|||||
36
Roc Binding Heads of Terms
On November 24, 2020, the Company entered into a binding heads of terms agreement (the “Roc Binding Heads of Terms”) with Roc Nation, pursuant to which, during the Roc Term (as defined below), (a) the Company is Roc Nation’s “Official Cannabis Partner,” and (b) Roc Nation provides strategic and promotional services to the Company and its brands including the promotion of the Company’s brand portfolio, and the provision of artist and influencer relationship services, as well as various other services specifically described therein.
The Roc Binding Heads of Terms became effective on January 19, 2021 following consummation of the Qualifying Transaction and shall remain in effect for an initial period of three (3) years therefrom (the “Roc Term”); provided, that following the expiration of the Roc Term, Roc Nation’s exclusivity and non-competition obligations shall continue to remain in effect for a period of six (6) months during which period the parties may elect to extend the period of the Roc Binding Heads of Terms upon terms to be mutually agreed.
Pursuant to the terms of the Roc Binding Heads of Terms, the Company issued to Roc Nation 2,376,425 common shares following consummation of the Qualifying Transaction in settlement of the initial $25,000,000 payment owed pursuant to the terms of the Roc Binding Heads of Terms.
The full amount of the $25,000,000 was recognized as an expense in operating expenses during Q1 2021.
In addition, pursuant to the terms of the Roc Binding Heads of Terms the Company is obligated to issue common shares with a value of $1,875,000 quarterly over the second and third year of the agreement based on the price per share equal to the average of the volume-weighted average prices of the common shares for each of the 15 trading days in advance of the date of issuance. During Q1 2022, the Company issued 1,348,921 common shares to settle the first quarterly payment. Following the end of Q1 2022, the Company issued an additional 1,441,093 common shares to Roc Nation in satisfaction of the second quarterly payment.
The Company recognized an expense of $1,363,636 during Q1 2022 (Q1 2021 - $1,075,758) in operating expenses as a sales and marketing expense. As at March 31, 2022, the cash-settled liability is $4,655,302 (December 31, 2021 - $5,166,666).
The arrangement can be terminated by the counterparty in certain circumstances, one of which is any change of control of the Company. In that case, the Company is required to settle the agreement in a lump sum payment that consists of all unpaid amounts. As at March 31, 2022, the amount that the Company would be liable for if the contract is terminated is $13,125,000.
Brand Strategy Agreement
On November 24, 2020, the Company entered into a brand strategy agreement with SC Branding, LLC (the “Brand Strategy Agreement”) for the services of Shawn C. Carter p/k/a JAY-Z pursuant to which, during the BSA Term (as defined below), (a) SC Branding, LLC granted the Company the right and license to use JAY-Z’s approved name, image and likeness rights in approved content for the purposes of advertising, promoting, marketing, publicizing and otherwise commercializing the Company’s products and brands, (b) JAY-Z serves as the Chief Visionary Officer of the Company and (c) SC Branding, LLC and JAY-Z promote the Company’s brand portfolio and provide the various services specifically described therein, which include certain enhanced obligations with respect to the Company’s “MonoGram” brand.
The Brand Strategy Agreement (a) became effective as of consummation of the Qualifying Transaction and shall remain in effect for a period of ten (10) years therefrom (the “BSA Term”); provided, that either the Company or SC Branding, LLC are permitted to terminate the Brand Strategy Agreement without any further liability to either party at any time after the date that is six (6) years after the consummation of the Qualifying Transaction. The Company is committed to settle $21,500,000 in either cash or common shares at the option of SC Branding, LLC over the remaining
non-cancellable
period of 5 years. The Company is recognizing the cost associated with the arrangement over the same period it is receiving services.
During Q1 2022, the Company recognized an expense of $1,104,167 (Q1 2021 - $871,065) in operating expenses related to this arrangement and $287,731 accounts payable and accrued liabilities as at March 31, 2022 (December 31, 2021 - $2,183,565). During Q1 2022, the Company made a cash payment of $3,000,000 (Q1 2021- $2,000,000).
The Brand Strategy Agreement can be terminated in certain circumstances, including a change in control of the Company or an involuntary
de-listing.
In these circumstances, the Company will be obligated to pay damages equal to $18,500,000 less the amount already paid under the arrangement. As at March 31, 2022, the amount of damages that the Company would be liable for if the contract is terminated was $13,500,000. Mosaic.Ag
On May 16, 2021, the Company entered into a membership interest purchase agreement (the “Membership Interest Purchase Agreement”) to obtain leasehold interests of approximately 10 years duration in each of four one-acre parcels of land that are licensed for outdoor cannabis grow (collectively, the “Outdoor Grow Properties”). On May 21, 2021 (the “Effective Date”), the Company entered into series of cultivation and supply agreements with each of the leaseholders of the Outdoor Grow Properties and Mosaic. AG, Inc. (“Mosaic.Ag”), pursuant to which Mosaic.Ag agreed to cultivate cannabis on each of the Outdoor Grow Properties on the Company’s behalf for a period commencing on the Effective Date of and ending at least three years from the closing of the transactions contemplated by the Membership Interest Purchase Agreement, with options to extend for up to five years (the “Cultivation and Supply Agreements”). Under the terms of the Membership Interest Purchase Agreement, as of the Effective Date, the Company and Mosaic.Ag obtained access to the Outdoor Grow Properties and began to commence cannabis cultivation activities under the Cultivation and Supply Agreements. The purchase price under the Membership Interest Purchase Agreement is $6,000,000 in cash, $2,500,000 in common shares of the Company payable on the closing date (with the number of shares issued based on the volume-weighted average price per common share for the ten consecutive trading days prior to the closing date) and up to 1,309,263 common shares of the Company subject to an earnout based on the production value of cannabis grown on the Outdoor Grow Properties over the twenty-four months following the Effective Date. The closing of the transactions contemplated by the Membership Interest Purchase Agreement are dependent on the satisfaction of various closing conditions, which have not been met to date and are not expected to be met by the end of the second quarter of 2022 as required by the Membership Interest Purchase Agreement. Further, Mosaic.Ag was unable to produce sufficient quantities of biomass according to Company quality standards and pursuant to the Cultivation Supply Agreements. For the foregoing reasons, the parties are currently in dialogue and may restructure the transaction. Pursuant to the terms of the Membership Interest Purchase Agreement, on the Effective Date, the Company advanced to the seller $5,650,000 secured by a promissory note. In the event that the transaction does not close, the promissory note is contractually obligated to be repaid to the Company. There can be no assurance the promissory note will be repaid in full.
37
Critical Accounting Estimates
For a description of our critical accounting policies and estimates, refer to Part II, Item 7, Critical Accounting Estimates in our 2021 Form
10-K.
There have been no material changes to our critical accounting estimates from the information provided in our 2021 Form 10-K.
Cash Flow
The table below highlights our cash flows for the periods indicated:
Three-months ended |
||||||||
March 31, 2022 |
March 31. 2021 | |||||||
| Cash provided by (used in) |
||||||||
| Operating activities |
||||||||
| Net (loss) income |
$ |
(33,536,532 |
) |
$ | 19,061,254 | |||
| Adjustments for items not involving cash |
||||||||
| Impairment loss |
— | 58,030,387 | ||||||
| Change in fair value of investments |
(297,864 |
) |
— | |||||
| Interest expense |
1,250,568 |
1,173,872 | ||||||
| Interest income |
(26,932 |
) |
— | |||||
| Allowance for accounts receivable and notes receivable |
2,249,706 |
174,111 | ||||||
| Loss on disposal of assets |
254,473 |
— | ||||||
| Depreciation and amortization |
6,473,711 |
7,327,263 | ||||||
| Shares issued for long-term strategic contracts |
— |
25,000,000 | ||||||
| Stock compensation expense, net of settlement of withholding tax |
2,037,275 |
8,127,779 | ||||||
| Non-cash marketing expense |
1,363,636 |
1,075,758 | ||||||
| Non-cash operating lease expense |
1,824,078 |
1,118,088 | ||||||
| Fair value change of contingent consideration |
(388,622 |
) |
(131,093,854 | ) | ||||
| Deferred income tax recovery |
(1,083,787 |
) |
(3,405,622 | ) | ||||
| Repayment of lease liabilities |
(1,614,967 |
) |
(865,071 | ) | ||||
| Net changes in non-cash working capital items |
(4,345,366 |
) |
(38,931,471 | ) | ||||
| |
|
|
|
|||||
| Total operating activities |
(25,840,623 |
) |
(53,207,506 |
) | ||||
| |
|
|
|
|||||
| Financing activities |
||||||||
| Proceeds from notes receivable |
186,106 |
— | ||||||
| Proceeds from private placement |
— |
51,635,000 | ||||||
| Redemption of Class A restricted voting shares |
— |
(264,318,686 | ) | |||||
| Repayment of finance lease liabilities |
(1,116,504 |
) |
(722,700 | ) | ||||
| Repayment of consideration payable |
(383,333 |
) |
||||||
| Repayment of line of credit |
— |
(1,000,000 | ) | |||||
| |
|
|
|
|||||
| Total financing activities |
(1,313,731 |
) |
$ | (214,406,386 |
) | |||
| |
|
|
|
|||||
| Investing activities |
||||||||
| Advances for investments |
(150,000 |
) |
— | |||||
| Net cash paid in business combinations |
— |
(28,143,886 | ) | |||||
| Proceeds from sale of property and equipment |
5,769,040 |
|||||||
| Purchases of property and equipment |
(1,124,990 |
) |
(532,208 | ) | ||||
| |
|
|
|
|||||
| Total investing activities |
4,494,050 |
(28,676,094 |
) | |||||
| Net change in cash during the period |
(22,660,304 |
) |
(296,289,986 |
) | ||||
| Cash |
||||||||
| Beginning of year |
$ |
174,892,298 |
$ | 582,622,025 | ||||
| |
|
|
|
|||||
| End of year |
$ |
152,231,994 |
$ | 286,332,039 |
||||
| |
|
|
|
|||||
Operating Activities
Cash used in operating activities in Q1 2022 totaled $25,840,623 as compared to cash used in operating activities of $53,207,506 in Q1 2021. In the current period, this represents an average operating cash burn rate during Q1 2022 of $7,165,086 month excluding changes in
non-cash
working capital. In Q1 2021, the Company settled significant payables related to its Qualifying Transaction which closed on January 15, 2021. 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, a strategic review of its wholesale business, and general & administrative cost reductions. 38
Financing Activities
Cash used in financing activities totaled $1,313,731 in Q1 2022 compared with cash used of $214,406,386 in Q1 2021. In Q1 2022, the Company mainly settled lease liabilities associated with its real estate. Q1 2021 includes a payment of $264,318,686 in connection with the redemption of Class A restricted voting shares on closing the Qualifying Transaction.
Investing Activities
Cash provided by investing activities in the Q1 2022 totaled $4,494,050 as compared to cash used of $28,676,094 in Q1 2021. In Q1 2022, the Company recorded proceeds from the sale of property, plant and equipment primarily associated with the sale and leaseback transaction at its
90-92
Pullman property. Q1 2021 includes $28,143,886 of cash paid as part of the Qualifying Transaction acquisitions. Commitments and Contingencies
California Operating Licenses
The Company’s primary activity is the cultivation and sale of adult use cannabis pursuant to California law. However, this activity is not in compliance with the United States Controlled Substances Act (the “CSA”). The Company’s assets are potentially subject to seizure or confiscation by governmental agencies and the Company could face criminal and civil penalties for noncompliance with the CSA. Management of the Company believes the Company is in compliance with all California and local jurisdiction laws and monitor the regulatory environment on an ongoing basis along with counsel to ensure the continued compliance with all applicable laws and licensing agreements.
The Company’s operation is sanctioned by the State of California and local jurisdictions. Due to the uncertainty surrounding the Company’s noncompliance with the CSA, the potential liability from any
non-compliance
cannot be reasonably estimated, and the Company may be subject to regulatory fines, penalties or restrictions in the future. Effective January 1, 2018, the State of California allowed adult use cannabis sales. Beginning on January 1, 2018, the State began issuing temporary licenses that expired 120 days after issuance for retail, distribution, manufacturing and cultivation permits. Temporary licenses could be extended
in 90- day
increments by the State upon submission of an annual license application. All temporary licenses had been granted extensions by the State during 2018. In September 2019, Senate Bill 1459 (SB 1459) was enacted which enabled state licensing authorities to issue provisional licenses through 2021. A provisional license could be issued if an applicant submitted a completed annual license application to the California Bureau of Cannabis Control. A completed application for purposes of obtaining a provisional license is not the same as a sufficient application to obtain an annual license. The provisional cannabis license, which is valid for 12 months from the date issued, is said to be in between a temporary license and an annual license and allows a cannabis business to operate as they would under local and state regulations. 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 State to obtain annual licensing.
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 its local jurisdiction in which it actively operates. Although the Company believes it will continue to receive the necessary licenses from the State of California to conduct its business in a timely fashion, there is no guarantee its clients will be able to do so and any failure to do so may have a negative effect on its business and results of operations.
Additional regulations relating to testing that came into effect on July 1, 2018 (Phase II testing requirements) required the clients to sell products that would be
non-compliant
prior to that date, causing a loss of margin due to discounts that had to be provided to ensure that such products were sold prior to July 1. Due to the additional 39
testing requirements effective July 1, 2018, the California market and the clients experienced a shortage in supply of compliant cannabis products.
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. We are 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.
Social Equity Fund
The Company formed a wholly owned subsidiary to serve as its social equity fund during the during 2021 with an initial commitment of $10 million and planned annual contributions of at least 2% of the Company’s net income. To March 31, 2022, the Company has invested approximately $1,150,000 in three investments being Stanton Brands (dba Josephine & Billie’s), Peakz LLC and Digistrains.
Share Capital and Capital Management
As of March 31, 2022, the Company had 99,185,332 common shares and 35,837,500 common share purchase warrants (the “Warrants”) issued and outstanding. The Warrants are exercisable at an exercise price of $11.50 and will expire on January 15, 2026. The Company may accelerate the expiry date of the outstanding Warrants (excluding the Warrants held by Subversive Capital Sponsor LLC in certain circumstances) by providing 30 days’ notice, if and only if, the closing price of the Company’s common shares equals or exceeds $18.00 per common share (as adjusted for stock splits or combinations, stock dividends, extraordinary dividends, reorganizations and recapitalizations) for any 20 trading days within
a 30-trading
day period. 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 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 March 31, 2022, a total of 2,850,643 RSUs were outstanding under the Equity Incentive Plan. Prior to closing of the Qualifying Transaction, Caliva maintained the CMG Partners, Inc. 2019 Stock Option and Grant Plan (the “Caliva EIP”), which permitted awards of common stock in Caliva. In connection with the Qualifying Transaction, Caliva and the Company agreed that the Company would maintain the Caliva EIP and that outstanding awards thereunder will entitle the holder to receive common shares of the Company. There are currently 641,456 options to purchase up to 641,456 common shares under the Caliva EIP outstanding. No further awards will be granted under the Caliva EIP.
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 of the Company. There are currently 16,950 options to purchase up to 16,950 common shares under the LCV Equity Plan outstanding. No further awards will be granted under the LCV Equity Plan.
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. |
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 Board of Directors of the Company. The Company’s capital management objectives, policies and processes have remained unchanged during the three months ended March 31, 2022 and year ended December 31, 2021. The Company is not subject to any external capital requirements.
40
Intellectual Property
The Company has a portfolio of industry leading products and brands. As part of the Company’s brand strategy, it strives to protect its proprietary products and brand elements and its brand as California’s premier consumer cannabis product company. Intellectual property (“IP”) protection is pursued both in its ability to sell products and brands through first “Freedom to Operate” searches and subsequently, reviewing proprietary and protectable claims, branding, technology, or design assets. The Company evaluates opportunities for IP protection from cultivation and strain development, in manufacturing and processes, and for its portfolio of finished goods. The Company’s IP protection ranges from trademarks to patents to trade secrets and covers anything from cultivation, genetics, product development, packaging development, claims, operations, information technology, and branding.
Additionally, the Company partners from time to time with other companies and pursues further IP protection through licensing and collaboration with those partners.
The Company seeks to protect its proprietary information, in part, by executing confidentiality agreements with third parties and partners and
non-disclosure
and invention assignment agreements with its employees and consultants. These agreements are designed to protect its proprietary information and ensure ownership of technologies that are developed through its relationship with the respective counterparty. The Company cannot guarantee, however, that these agreements will afford it adequate protection of its intellectual property and proprietary information rights. Competitive Conditions
As the Company is vertically integrated it competes on multiple fronts, from manufacturing to retail to delivery, and experience competition in each of these areas. From a retail perspective, the Company competes with other licensed retailers and delivery companies in the geographies where retail and delivery services are located. These other retailers range from small local operators to more significant operators with a presence throughout the State of California and other states in the United States. From a product perspective, the Company competes with other manufactures of brands for shelf space in third-party owned dispensaries throughout California. Similar to certain competitors in the retail space, the Company competes with manufacturers ranging in size from small local operators to significant operators with a larger presence. Indirectly, the Company competes with the illicit market, including many illegal dispensaries.
Specialized Knowledge, Skills, Resources & Equipment
Knowledge with respect to cultivating and growing cannabis is important in the medical cannabis industry. The nature of growing cannabis is not substantially different from the nature of growing other agricultural products. Variables such as temperature, humidity, lighting, air flow, watering and feeding cycles are meticulously defined and controlled to produce consistent product and to avoid contamination.
The Company grows or procures the primary component of its finished products, namely cannabis. The Company’s cultivation operations are dependent on a number of key inputs and their related costs including raw materials and supplies related to its growing operations, as well as electricity, water and other utilities.
Staff with suitable horticultural and quality assurance expertise are generally available on the open market. The Company also requires client care staff, which will grow as its business grows. Customer care staff are also generally available on the open market.
Equipment used is specialized but is readily available and not specific to the cultivation of cannabis. Subject to available funding, the Company does not anticipate any difficulty in obtaining equipment.
The Company anticipates an increased demand for skilled manpower, energy resources and equipment in connection with the Company’s expected continued growth.
41
UNITED STATES REGULATORY ENVIRONMENT
Cannabis Industry Regulation
On February 8, 2018, the Canadian Securities Administrators revised their previously released Staff (“”), which provides specific disclosure expectations for issuers that currently have, or are in the process of developing, cannabis-related activities in the United States as permitted within a particular state’s regulatory framework. All issuers with U.S. cannabis-related activities are expected to clearly and prominently disclose certain prescribed information in prospectus filings and other required disclosure documents. As a result of the Company’s existing operations in California, the Company is providing the following disclosure pursuant to Staff
Notice 51-352
-Issuers with U.S.
Marijuana-Related Activities
Staff Notice
51-352
Notice 51-352.
The Company derives a substantial portion of its revenues from state legalized: (i) cannabis, and products containing cannabis, used by someone 21 or older that is not a medical cannabis patient (where use may include inhalation, consumption, or application) (“”) and (ii) to a lesser extent, cannabis and products containing cannabis used by medical cannabis patients in accordance with applicable state law, but for which no drug approval has been granted by the United States Food and Drug Administration (where use may include inhalation, consumption, or application) (“”) ((i) and (ii) collectively “”). The Regulated Cannabis industry is illegal under U.S. Federal Law. The Parent Company is directly involved (through its licensed subsidiaries) in both the
Adult-Use
CannabisMedical-Use
CannabisRegulated Cannabis
Adult-Use
Cannabis and Medical-Use
Cannabis industry in the State of California which has legalized and regulated such industries. The United States federal government regulates certain drugs through the Controlled Substances Act (21 U.S.C. §§ ”) and through the Food, Drug & Cosmetic Act (21 U.S.C. §§ ”). The CSA schedules controlled substances, including “marihuana” (defined as all parts of the plant containing more than 0.3 percent THC), based on their approved medical use and potential for abuse. Marihuana (also referred to as cannabis) and THC (“except for tetrahydrocannabinols in hemp”) are each classified as Schedule I controlled substances (21 U.S.C. § 812(c)). The Drug Enforcement Administration (“”), an agency of the U.S. Department of Justice (the “”) defines Schedule I drugs, substances or chemicals as “drugs with no currently accepted medical use and a high potential for abuse.” The United States Food and Drug Administration (the “”), which implements and enforces the FDCA, regulates, among other things, drugs used for the diagnosis or treatment of diseases. The FDA has not approved cannabis as a safe and effective treatment for any medical condition, and regularly issues letters to manufacturers of CBD products making health claims to consumers in contravention of the FDCA. The FDA has approved drugs containing THC and CBD, individual cannabinoids in the plant , for a narrow segment of medical conditions.
801-971)
(the “CSA
301-392)
(the “FDCA
cannabis sativa L.
DEA
DOJ
FDA
cease-and-desist
cannabis sativa L.
State laws that permit and regulate the production, distribution and use of
Medical-Use
Cannabis or Adult-Use
Cannabis are in direct conflict with the CSA, which makes cannabis and THC distribution and possession federally illegal. Although certain states and territories of the U.S. authorize Medical- Use Cannabis or Adult-Use
Cannabis production and distribution by licensed or registered entities, under U.S. federal law, the possession, cultivation, and/or transfer of cannabis and THC is illegal and any such acts are criminal acts under any and all circumstances under the CSA. Additionally, any manufacture, possession, distribution and/or sale of cannabis accessories, in states without laws expressly permitting such activity, are also federally illegal activity under the CSA. Although the Company’s activities are believed to be compliant with applicable California state and local law, strict compliance with state and local laws with respect to cannabis does not absolve the Company of liability under United States federal law, nor does it provide a defense to any federal proceeding which may be brought against the Company. As of the filing of March 1, 2022, 37 U.S. states, and the District of Columbia and the territories of Guam, Puerto Rico, the U.S. Virgin Islands, and the Northern Mariana Islands have legalized the cultivation and sale of
Medical-Use
Cannabis, with at least six of the remaining states expected to pass such legalization measures within the next 12 months. In 18 U.S. states, the sale and possession of both Medical-Use
Cannabis and Adult-Use
Cannabis has been legalized, though due to the time period between a state’s legalization of commercial cannabis activities and the completion of its regulatory framework and marketplace launch, the purchase of Adult-Use
Cannabis is currently possible in 12 states, with the remainder of the currently-legal states to commence sales activities in 2022 or 2023. The District of Columbia has legalized Adult-Use
Cannabis but has not yet permitted the commercial sale of Adult Use Cannabis, however, Adult-Use
sales are expected to commence in 2022. Eleven states have also enacted low-THC
/ high-CBD
only laws for medical cannabis patients. The sale and possession of both Medical-Use
Cannabis and Adult-Use
Cannabis is legal in the State of California, subject to applicable licensing 42
requirements and compliance with applicable conditions. Included in the numbers above are ballot initiatives to legalize
Adult-Use
Cannabis which passed in November 2020, with Arizona commencing Adult-Use
sales in January 2021, New Jersey and Montana to commence Adult-Use
sales in 2022, South Dakota to commence Adult-Use
sales in 2023, and Mississippi enacting Medical-Use
cannabis legislation in January 2022, following a successful ballot initiative and subsequent invalidation on technical grounds by the Mississippi State Supreme Court. Under President Barack Obama, the U.S. administration attempted to address the inconsistencies between federal and state regulation of cannabis in a memorandum which then-Deputy Attorney General James Cole sent to all United States Attorneys on August 29, 2013 (the “”) outlining certain priorities for the DOJ relating to the prosecution of cannabis offenses. The 2013 Cole Memorandum noted that in jurisdictions that have enacted laws legalizing or decriminalizing Regulated Cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, processing, distribution, sale and possession of Regulated Cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. The DOJ did not provide (and has not provided since) specific guidelines for what regulatory and enforcement systems would be deemed sufficient under the 2013 Cole Memorandum. In light of limited investigative and prosecutorial resources, the 2013 Cole Memorandum concluded that the DOJ should be focused on addressing only the most significant threats related to cannabis, a
2013 Cole Memorandum
non-exhaustive
list of which was enumerated therein. On January 4, 2018, U.S. Attorney General Jeff Sessions formally issued a new memorandum (the “”), which rescinded all “previous nationwide guidance specific to marijuana enforcement,” including the 2013 Cole Memorandum. The Sessions Memorandum stated, in part, that current law reflects “Congress’ determination that Cannabis is a dangerous drug and Cannabis activity is a serious crime”, and Mr. Sessions directed all U.S. Attorneys to enforce the laws enacted by Congress by following well-established principles when pursuing prosecutions related to cannabis activities. There can be no assurance that the federal government will not enforce federal laws relating to cannabis in the future. As a result of the Sessions Memorandum, federal prosecutors are now free to utilize their prosecutorial discretion to decide whether to prosecute cannabis activities despite the existence of State-level laws that may be inconsistent with federal prohibitions. No direction was given to federal prosecutors in the Sessions Memorandum as to the priority they should ascribe to such cannabis activities, and resultantly it is uncertain how active U.S. federal prosecutors will be in relation to such activities.
Sessions Memorandum
The Company believes it is still unclear what prosecutorial effects will be created by the rescission of the 2013 Cole Memorandum. The Company believes that the sheer size of the Regulated Cannabis industry, in addition to participation by state and local governments and investors, suggests that a large- scale enforcement operation would more than likely create unwanted political backlash for the DOJ and the Biden administration in certain states that heavily favor decriminalization and/or legalization. Regardless, cannabis and THC remain Schedule I controlled substances at the federal level, and neither the 2013 Cole Memorandum nor its rescission has altered that fact. The federal government of the United States has always reserved the right to enforce federal law in regard to the manufacture, distribution, sale and disbursement of
Medical-Use
Cannabis or Adult-Use
Cannabis, even if state law permits such manufacture, distribution, sale and disbursement. The Company believes, from a purely legal perspective, that the criminal risk today remains similar to the risk on January 3, 2018. It remains unclear whether the risk of enforcement has been altered. Additionally, under United States federal law, it is a violation of federal money laundering statutes for financial institutions to take any proceeds from the sale of Regulated Cannabis or any other Schedule I controlled substance. Canadian banks are likewise hesitant to deal with cannabis companies, due to the uncertain legal and regulatory framework of the industry. Banks and other financial institutions, particularly those that are federally chartered in the United States, could be prosecuted and possibly convicted of money laundering for providing services to Regulated Cannabis businesses. While Congress is considering legislation that may address these issues, there can be no assurance that such legislation passes. Despite these laws, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (“”) issued a memorandum on February 14, 2014 (the “”) outlining the pathways for financial institutions to bank state-sanctioned Regulated Cannabis businesses in compliance with federal enforcement priorities. The FinCEN Memorandum echoed the enforcement priorities of the 2013 Cole Memorandum and stated that in some circumstances, it is possible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. Under these guidelines, financial institutions must submit a Suspicious Activity Report (“”) in connection with all cannabis-related banking activities by any client of such financial institution, in accordance with federal money laundering laws. These cannabis-related SARs are divided into three categories-cannabis limited, cannabis priority, and cannabis
FinCEN
FinCEN Memorandum
SAR
43
terminated-based on the financial institution’s belief that the business in question follows state law, is operating outside of compliance with state law, or where the banking relationship has been terminated, respectively. On the same day that the FinCEN Memorandum was published, the DOJ issued a memorandum (the “”) directing prosecutors to apply the enforcement priorities of the 2013 Cole Memorandum in determining whether to charge individuals or institutions with crimes related to financial transactions involving the proceeds of cannabis-related conduct. The 2014 Cole Memorandum has been rescinded as of January 4, 2018, along with the 2013 Cole Memorandum, removing guidance that enforcement of applicable financial crimes against state-compliant actors was not a DOJ priority.
2014 Cole Memorandum
However, former Attorney General Sessions’ rescission of the 2013 Cole Memorandum and the 2014 Cole Memorandum has not affected the status of the FinCEN Memorandum, nor has the Department of the Treasury given any indication that it intends to rescind the FinCEN Memorandum itself. Though it was originally intended for the 2014 Cole Memorandum and the FinCEN Memorandum to work in tandem, the FinCEN Memorandum is a standalone document which explicitly lists the eight enforcement priorities originally cited in the 2013 Cole Memorandum. As such, the FinCEN Memorandum remains intact, indicating that the Department of the Treasury and FinCEN intend to continue abiding by its guidance. However, FinCEN issued further guidance on December 3, 2019, in which it acknowledged that the Agricultural Improvement Act of 2018 (the “”) removed hemp as a Schedule I controlled substance and authorized the United States Department of Agriculture (“”) to issue regulations governing, among other things, domestic hemp production. The guidance states that because hemp is no longer a controlled substance under federal law, banks are not required to file SARs on these businesses solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. The guidance further notes that for hemp-related customers, banks are expected to follow standard SAR procedures, and file a SAR if indicia of suspicious activity warrants. FinCEN noted in its December 2019 guidance that the 2014 SAR reporting structure for cannabis remains in place even with the passage of the Farm Bill and this additional guidance related to hemp. FinCEN confirmed this point in guidance issued on June 29, 2020, and clarified that, if proceeds from cannabis-related activities are kept separate, a SAR filing is only required for the cannabis-related part of a business that engages in both cannabis and hemp activity.
Farm Bill
USDA
Although the 2013 Cole Memorandum has been rescinded, one legislative safeguard for the ”) to prevent the federal government from using congressionally appropriated funds to enforce federal cannabis laws against regulated
Medical-Use
Cannabis industry has historically remained in place: Congress adopted a so-called
“rider” provision to the fiscal years 2015, 2016, 2017, and 2018, 2019 and 2020 and 2021. Consolidated Appropriations Acts (currently referred to as the “Rohrabacher/Blumenauer Amendment
Medical-Use
Cannabis actors operating in compliance with state and local law. On March 15, 2022, the Rohrabacher/Blumenauer Amendment was renewed through the signing of the fiscal year 2022 omnibus bill, which extended the protections of the Amendment through September 30, 2022. The Rohrabacher/Blumenauer Amendment may or may not be included in a subsequent omnibus appropriations package or a continuing budget resolution. Should the Rohrabacher/Blumenauer Amendment not be renewed upon expiration in subsequent spending bills, there can be no assurance that the federal government will not seek to prosecute cases involving medical cannabis businesses that are otherwise compliant with State law. Such potential proceedings could involve significant restrictions being imposed upon the Company. The United States Congress has passed appropriations bills each of the last four years that have not appropriated funds for prosecution of cannabis offenses of individuals who are in compliance with state medical cannabis laws. American courts have construed these appropriations bills to prevent the U.S. federal government from prosecuting individuals when those individuals comply with state law relating to approved medical uses. However, because this conduct continues to violate U.S. federal law, American courts have observed that should Congress at any time choose to appropriate funds to fully prosecute the CSA, any individual or business - even those that have fully complied with state law - could be prosecuted for violations of U.S. federal law. And if Congress restores funding, the government will have the authority to prosecute individuals for violations of the law that took place before received funding under the CSA’s five-year statute of limitations.
In recent years, certain temporary federal legislative enactments that protect the ”) to federal spending bills passed by Congress and signed by Presidents Obama, Trump and Biden. First adopted in the Appropriations Act of 2015, Congress has included in successive budgets since a “rider” that prohibits the DOJ from expending any funds to enforce any law that interferes with a state’s implementation of its own medical cannabis laws. The rider, discussed above, is known as the “” Amendment, and now known colloquially as the “
Medical-Use
Cannabis and industry have also been in effect. For instance, cannabis businesses that are in strict compliance with state law receive a measure of protection from federal prosecution by operation of a temporary appropriations measures that has been enacted into law as an amendment (or “rider
Rohrbacher-Blumenauer
Joyce-
44
Amendment
Despite the legal, regulatory, and political obstacles the Regulated Cannabis industry currently faces, the industry has continued to grow. Under certain circumstances, the federal government may repeal the federal prohibition on cannabis and thereby leave the states to decide for themselves whether to permit Regulated Cannabis cultivation, production and sale, just as states are free today to decide policies governing the distribution of alcohol or tobacco. Until that happens, the Company faces the risk of federal enforcement and other risks associated with the Company’s business.
To the knowledge of management of the Company, there have not been any statements or guidance made by federal authorities or prosecutors regarding the risk of enforcement action in California.
The Company’s objective is to capitalize on the opportunities presented as a result of the changing regulatory environment governing the cannabis industry in the United States. Accordingly, there are a number of significant risks associated with the business of the Company. Unless and until the United States Congress amends the CSA with respect to
Medical-Use
Cannabis or Adult-Use
Cannabis, there is a risk that federal authorities may enforce current federal law, and the business of the Company may be deemed to be producing, cultivating, extracting, or dispensing “marihuana” or aiding or abetting or otherwise engaging in a conspiracy to commit such acts in violation of U.S. federal law. The Company has received and continues to receive legal input, in verbal and written form (including opinions when required), regarding (a) compliance with applicable state and local regulatory frameworks and (b) potential exposure and implications arising from U.S. federal law in certain respects.
The 2013 Cole Memorandum and the Rohrabacher/Blumenauer Amendment gave
Medical-Use
Cannabis operators and investors in states with legal regimes greater certainty regarding federal enforcement as to establish Regulated Cannabis businesses in those states. While the Sessions Memorandum has introduced some uncertainty regarding federal enforcement, the Regulated Cannabis industry continues to experience growth in legal Medical-Use
Cannabis and Adult-Use
Cannabis markets across the United States. U.S. Attorney General Jeff Sessions resigned on November 7, 2018. Nonetheless, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, even under a Biden Administration’s DOJ or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the United States Congress amends the CSA with respect to cannabis and THC (and as to the timing or scope of any such potential amendments there can be no assurance), there is a risk that federal authorities may enforce current U.S. federal law. Despite the expanding market for Regulated Cannabis, traditional sources of financing, including bank lending or private equity capital, are lacking which can be attributable to the fact that cannabis remains a Schedule I substance under the CSA. These traditional sources of financing are expected to remain scarce unless and until the federal government legalizes cannabis cultivation and sales.
Exposure to U.S. Marijuana Related Activities
The Company operates in the United States through various subsidiaries and other entities pursuant to arrangements with third-parties on arm’s length terms as more specifically described herein. As of the date hereof, a majority of the Company’s business was directly derived from U.S. cannabis-related activities. As such, a majority of the Company’s balance sheet and operating statement for periods following closing of the Qualifying Transaction will reflects exposure to U.S. cannabis related activities.
California Regulatory Landscape
In 1996, California was the first state to legalize
Medical-Use
Cannabis through Proposition 215, the Compassionate Use Act of 1996. This legislation legalized the use, possession and cultivation of cannabis by patients with a physician recommendation for treatment of cancer, anorexia, AIDS, chronic pain, spasticity, glaucoma, arthritis, migraine, or any other illness for which cannabis provides relief. In 2003, Senate Bill 420 was signed into law establishing medical cannabis collectives and dispensaries, and an optional identification card system for
not-for-profit
Medical-Use
Cannabis patients. 45
In September 2015, the California legislature passed three bills collectively known as the Medical Cannabis Regulation and Safety Act (“ ”). The MCRSA established a licensing and regulatory framework for ”), creating an ”), which amalgamated MCRSA and AUMA and provided for a set of regulations to govern a medical and ”), CalCannabis at the California Department of Food and Agriculture (“”), and the Manufactured Cannabis Safety Branch California Department of Public Health (“”), and California Department of Tax and Fee Administration. MAUCRSA went into effect on January 1, 2018. MAUCRSA was then amended and restated in July 2021 through the annual budget trailer bill process to, among other things, consolidate the three state licensing ”). Subsequent to the agency consolidation, the newly formed DCC consolidated the three separate sets of BCC, CalCannabis, and MCSB regulations into a single set of state regulations, which regulations went into effect as of September 27, 2021.
MCRSA
Medical-Use
Cannabis businesses in California. The system created multiple license types for dispensaries, infused products manufacturers, cultivation facilities, testing laboratories, transportation companies, and distributors. Edible infused product manufacturers would require either volatile solvent or non-volatile
solvent manufacturing licenses depending on their specific extraction methodology. Multiple agencies would oversee different aspects of the program and businesses would require a state license and local approval to operate. However, in November 2016, voters in California passed Proposition 64, the Adult Use of Marijuana Act (“AUMA
Adult-Use
Cannabis program for adults 21 years of age or older. In June 2017, the California State Legislature passed Senate Bill No. 94, known as Medicinal and Adult-Use
Cannabis Regulation and Safety Act (“MAUCRSA
adult-use
licensing regime for cannabis businesses in the State of California. The four agencies that regulate cannabis at the state level are the Bureau of Cannabis Control (“ BCC
CalCannabis
MCSB
agencies-BCC,
CalCannabis and MCSB-into a single licensing authority known as the Department of Cannabis Control (“DCC
To legally operate a
Medical-Use
Cannabis or Adult-Use
Cannabis business in California, the operator must generally have both a local and state license. This requires license holders to operate in cities with cannabis licensing programs. Therefore, counties and cities in California are allowed to determine the number of licenses they will issue to cannabis operators, or can choose to outright ban the siting of cannabis operations in their jurisdictions. California Licensing Requirements
A storefront retailer license with an
“M-designation”
permits (i) the purchase of cannabis goods that are “For Medical Use Only” from licensed distributors (ii) the sale of such medicinal cannabis goods to medicinal cannabis patients in California who possesses a physician’s recommendation. Only certified physicians may provide medicinal cannabis recommendations. A storefront retailer license with an “A-designation”
permits the sale of cannabis and cannabis products to any individual age 21 years of age or older regardless of whether they possess a physician’s recommendation. A storefront retailer license with both the M-
and A-designations
is permitted to do all of the above described in this paragraph. Where the local jurisdiction permits, a state storefront retailer license allows the retailer to engage in delivery of cannabis goods to retail customers. A non-storefront
license permits the same delivery activity, but does not permit the licensee to operate a retail storefront. A distribution license permits the license holder to engage in the procurement, sale, and transport of cannabis and cannabis products between licensees.
An
adult-use
or medicinal cultivation license permits cannabis cultivation which means any activity involving the planting, growing, harvesting, drying, curing, grading or trimming of cannabis. Such licenses further permit the production of a limited number of “non-manufactured
cannabis products” and the sales of cannabis to certain licensed entities within the State of California for resale or manufacturing purposes. An
adult-use
or medical manufacturing license permits the manufacturing of “manufactured cannabis products”. Manufacturing includes the compounding, blending, extracting, infusion, packaging or repackaging, labeling or relabeling, or other preparation of a cannabis product in the State of California, only cannabis that is grown in the state by a licensed operator can be sold in the state. California neither mandates or prohibits integration, and the state allows licensees to make wholesale purchase of cannabis from, or a distribution of cannabis and cannabis product to, another licensed entity within the state. Holders of cannabis licenses in California are subject to a detailed regulatory scheme encompassing security, staffing, transport, sales, manufacturing standards, testing, inspections, inventory, advertising and marketing, product packaging and labeling, white labeling, records and reporting, and more. As with all jurisdictions, the full regulations, as promulgated by each applicable state agency, should be consulted for further information about any particular operational area.
46
California Reporting Requirements
The State of California uses METRC as the state’s system used to track commercial cannabis activity and movement across the distribution chain for all state-issued licensees. The system allows for other third-party system integration via application programming interface. Only licensees have access to METRC.
track-and-trace
California Storage and Security
To ensure the safety and security of cannabis business premises and to maintain adequate controls against the diversion, theft, and loss of cannabis or cannabis products, California’s retail cannabis businesses are generally required to do the following:
| • | limit access to dispensary premises to medical cannabis patients at least 18 years and older, and adults 21 and over maintain a fully operational security alarm system; |
| • | contract for professionally-certified security guard services; |
| • | maintain a video surveillance system that records continuously 24 hours a day; |
| • | ensure that the facility’s outdoor premises have sufficient lighting; |
| • | not dispense from its premises outside of permissible hours of operation; |
| • | limit the amount of cannabis goods dispensed to individual customers to prevent diversion; |
| • | store cannabis and cannabis product only in areas per the premises diagram submitted to the State of California during the licensing process; |
| • | store all cannabis and cannabis products in a secured, locked room or a vault; report to local law enforcement within 24 hours after being notified or becoming aware of the theft, diversion, or loss of cannabis; and |
| • | ensure the safe transport of cannabis and cannabis products between licensed facilities, maintain a delivery manifest in any vehicle transporting cannabis and cannabis products. Only vehicles registered with the BCC that meet BCC distribution requirements are to be used to transport cannabis and cannabis products. |
California Home Delivery Requirements
California law allows certain licensed retailers to deliver cannabis to adult customers at any private address within the state, including within those jurisdictions that have land use and zoning ordinances prohibiting the establishment of commercial cannabis businesses. At least 25 local jurisdictions where cannabis sales are banned sued the state, seeking to overturn the rule allowing home deliveries statewide. As of the date hereof, the suit was dismissed on procedural grounds, and the state regulation stands. To the knowledge of management, there have been no significant enforcement efforts mounted by local governments.
The State of California requires the satisfaction of various regulatory compliance obligations in order to operate a cannabis delivery service. The cannabis license that permits the operation of a storefront dispensary in the State of California (also referred to as a retail license) currently permits that entity to also establish a delivery operation. If an entity does not wish to set up and operate a storefront dispensary location at which it can sell products to customers in person, California has established a separate license which allows for a retail delivery operation (also referred to as a
non-storefront
retail license). California regulations regarding the delivery of cannabis products include the following requirements: | • | All deliveries of cannabis goods must be performed by a delivery employee (at least 21 years of age) who is directly employed by a licensed retailer. |
| • | All deliveries of cannabis goods must be made in person to a physical address that is not on public land. |
| • | Prior to providing cannabis goods to a delivery customer, a delivery employee must confirm the identity and age of the delivery customer (as is required if such customer was purchasing the product in the physical dispensary) and ensure that all cannabis goods sold comply with the regulatory requirements. |
| • | A licensed cannabis entity is permitted to contract with a service that provides a technology platform to facilitate the sale and delivery of cannabis goods, in accordance with all of the |
47
| following: (1) the licensed cannabis entity does not allow for delivery of cannabis goods by the technology platform service provider; (2) the licensed entity does not share in the profits of the sale of cannabis goods with the technology platform service provider, or otherwise provide for a percentage or portion of the cannabis goods sales to the technology platform service provider; (3) the licensed cannabis entity does not advertise or market cannabis goods in conjunction with the technology platform service provider, outside of the technology platform, and ensures that the technology platform service provider does not use the licensed cannabis entity’s license number or legal business name on any advertisement or marketing that primarily promotes the services of the technology platform; and (4) provides various disclosures to customers about the source of the delivered cannabis goods. |
Laws Applicable to Financial Services for Regulated Cannabis Industry
All banks are subject to federal law, whether the bank is a national bank or state-chartered bank. At a minimum, most banks maintain federal deposit insurance which requires adherence to federal law. Violation of federal law could subject a bank to loss of its charter. Financial transactions involving proceeds generated by cannabis-related conduct can form the basis for prosecution under the federal money laundering statutes, unlicensed money transmitter statutes and the (31 U.S.C. § 5311 ) (commonly known as the “”). For example, under the Bank Secrecy Act, banks must report to the federal government any suspected illegal activity, which would include any transaction associated with a Regulated Cannabis-related business. These reports must be filed even though the business is operating in compliance with applicable state and local laws. Therefore, financial institutions that conduct transactions with money generated by Regulated Cannabis-related conduct could face criminal liability under the Bank Secrecy Act for, among other things, failing to identify or report financial transactions that involve the proceeds of cannabis-related violations of the CSA.
Currency and Foreign Transactions Reporting Act of
1970
et seq
Bank Secrecy Act
FinCEN issued guidance in February 2014 which clarifies how financial institutions can provide services to cannabis-related businesses consistent with their obligations under the Bank Secrecy Act. Concurrently with the FinCEN guidance, the DOJ issued supplemental guidance directing federal prosecutors to consider the federal enforcement priorities enumerated in the 2013 Cole Memorandum with respect to federal money laundering, unlicensed money transmitter and Bank Secrecy Act offenses based on cannabis-related violations of the CSA. The FinCEN guidance sets forth extensive requirements for financial institutions to meet if they want to offer bank accounts to cannabis-related businesses, including close monitoring of businesses to determine that they meet all of the requirements established by the DOJ, including those enumerated in the 2013 Cole Memorandum. This is a level of scrutiny that is far beyond what is expected of any normal banking relationship. Under the 2019 FinCEN guidance discussed above, banks are not required to file SARs on businesses solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations. However, the 2014 guidance remains in place with respect to Regulated Cannabis businesses. FinCEN confirmed this point in guidance issued on June 29, 2020, and clarified that, if proceeds from cannabis-related activities are kept separate, a SAR filing is only required for the cannabis- related part of a business that engages in both cannabis and hemp activity.
As a result, many banks are hesitant to offer any banking services to Regulated Cannabis-related businesses, including opening bank accounts. While the Company currently has bank accounts, its inability to maintain these accounts or the lack of access to bank accounts or other banking services in the future, would make it difficult for the Company to operate its business, increase its operating costs, and pose additional operational, logistical and security challenges. Furthermore, it remains unclear what impact the rescission of the 2013 Cole Memorandum and 2014 Cole Memorandum will have, but federal prosecutors may increase enforcement activities against institutions or individuals that are conducting financial transactions related to cannabis activities.
Ongoing Compliance
Overview
The Company is subject to the general licensing and regulatory framework in California set out under the heading “- ”. The Company has developed a compliance program designed to achieve its strategic business goals while protecting the organization and operations. The Company’s compliance program integrates external regulations with internal rules and procedures to effectively lay out expectations for employee duties and behaviors; this aligns the goals of its employees with those of the Company
United States Regulatory Environment
California
48
and helps the Company’s operations run smoothly. The Company focuses on upholding policies and procedures that ensure the organization and its employees comply with applicable laws and regulations.
Employee Training
The Company is in process of training employees, and in completing development of and instituting a robust online training center for employees, in connection with its compliance program’s objectives, relevant policies and procedures, and the basic components of the compliance program. Such training includes additional specialized training for various policies and procedures that are applicable to specific job functions and/or departments where needed to properly perform their jobs. Training is tracked, attested to, and documented. Training is tracked, attested to, and documented.
Inventory and Security Policies
Maintaining security and inventory control is important to the Company and it has adopted a number of policies, procedures, and practices in these areas:
Security: The Company has taken extensive security measures including implementing professionally vetted policies, procedures, and systems to provide comprehensive protection, not only for its physical plant and inventory, but also for its employees, customers, and the surrounding public. Every licensed facility has strict access controls, thorough video surveillance coverage, and burglar alarms linked directly to local police departments. These controls are supported by professionally certified
on-site
security personnel in certain instances. Inventory: The Company maintains inventory control and reporting systems that document the present location, amount, and a description of all cannabis and cannabis products at all facilities. The traceability of cannabis goods is maintained using the California’s system, METRC, and the Company’s integrated enterprise resource planning system (“”). The Company conducts regular continuous cycle counts in addition to both quarterly and annual manual inventory reconciliations, in accordance with regulations and best practices.
“Track-and-Trace”
ERP
Operational Compliance
Internal audits are conducted quarterly in the normal course. These audits allow us to identify and monitor the Company’s strengths and weaknesses, highlighting continuous opportunities for improvement. These internal audits also provide us an opportunity to reinforce best practices and to institute changes in areas that are identified as opportunities for improvement. The information discovered and obtained during these internal audits is used to improve the compliance programs, when necessary, by revising policies, strengthening training, and establishing better reporting processes. The focus of the Company’s internal compliance audit is to ensure it is compliant with both state and local laws and regulations and internal policies and procedures. Internal audits may be delayed or completed remotely by video from time to time as a result of
COVID-19
precautions. Big Data Analysis
The Company has invested in a highly scalable data architecture and platform built using leading technologies and tools. By extracting data from its ERP software and the California METRC track and trace system and subsequently organizing it in its data warehouse, the Company has enabled critical data and insights for its compliance efforts. The Company’s data warehouse secures and stores all data and transactions at frequent intervals, allowing extensive access and analysis to information that is current. The Company has the ability to understand precise movement of inventory or dollars, past or present, required for review or due diligence as related to compliance requirements or inquiries. The Company is using this data infrastructure proactively to track, monitor and reconcile inventory levels and for ongoing reconciliation with METRC.
Ongoing Compliance
The Company prides itself on a robust internal compliance program encompassing both the compliance measures described above as well as monitoring compliance with U.S. state law on an ongoing basis. Key to those compliance efforts is the employment of individuals dedicated to monitoring California law for changes and updates to statutes and regulations, both at the state level and the local level, that impact business operations. Currently, the Company employs five individuals whose job function includes some aspect of compliance. Further, the Company employs a government relations employee whose primary job function is to monitor the
49
changing landscape of state and local law while employing an external consultant and two external law firms that assist in the monitoring, notification, and interpretation of any changes. Additionally, the Company currently implements and maintains standard operating procedures (“SOPs”) that are designed for monitoring compliance with California law on an ongoing basis. These SOPs include regular review of current and anticipated statutes, regulations, and ordinances and the training of employees to maintain compliance with California law.
In addition to the internal compliance team and the consultants and law firms described above, the Company also engages local regulatory compliance counsel and consultants in the jurisdictions in which it operates. Such counsel regularly provides legal advice to the Company regarding compliance with state and local laws and regulation and the Company’s legal and compliance exposures under United States federal law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
Based on an evaluation as of March 31, 2022, our management, including the Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures (as defined in Rule
13a-15(e)
under the Exchange Act) were not effective to provide reasonable assurance because of a material weakness in our internal control over financial reporting described below. Material Weakness
As reported in our 2021 Form
10-K,
we and our independent registered public accounting firm identified control deficiencies in the design and operation of our internal control over financial reporting that constituted a material weakness. 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 in a timely manner.
We did not design or maintain an effective control environment commensurate with financial reporting requirements. Specifically, we lack a sufficient number of adequately skilled professionals to appropriately analyze, record and disclose accounting matters timely and accurately while maintaining appropriate segregation of duties.
The above material weakness did not result in a material misstatement of our previously issued financial statements, however, it could result in a misstatement of our account balances or disclosures that would result in a material misstatement of our annual or interim financial statements that would not be prevented or detected. See “Risk Factors - We identified a material weakness in our internal control over our financial reporting process. If we are unable to remediate this material weakness, we may not be able to accurately or timely report our financial condition or results of operations” in our 2021 Form
10-K.
Remediation Activities
We are working to remediate the material weakness and are taking steps to strengthen our internal control over financial reporting through the continued hiring of additional appropriately skilled finance and accounting personnel with the requisite technical knowledge and skills. With the additional skilled personnel, we are taking appropriate and reasonable steps to remediate this material weakness through the implementation of appropriate segregation of duties, formalization of accounting policies and controls and retention of appropriate expertise for complex accounting transactions.
Management will continue to review and make necessary changes to the overall design of our internal control environment, as well as policies and procedures to improve the overall effectiveness of our internal control over financial reporting. The material weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
50
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended March 31, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART
II-OTHER
INFORMATION Item 1. Legal Proceedings.
To the knowledge of the Company, the Company is not a party to any material legal proceedings nor, to the Company’s knowledge, are any such proceedings contemplated by or against the Company.
Item 1A. Risk Factors.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
51
Item 6. Exhibits.
52
Incorporated by Reference From |
||||||||||||||||||
Exhibit No. |
Title of Document |
Form |
Date Filed |
Exhibit Number |
Filed Herewith |
|||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | — | — | — | X | |||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | — | — | — | X | |||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | — | — | — | X | |||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | — | — | — | X | |||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | — | — | — | X | |||||||||||||
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) | — | — | — | X | |||||||||||||
| * | Schedules and exhibits to this Exhibit omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the SEC upon request. |
| † | Certain portions of this Exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. |
| + | Management contract or compensatory plan or arrangement. |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
53
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.
| TPCO HOLDING CORP. | ||||||
| Date: May 16, 2022 | By: | /s/ Troy Datcher | ||||
| Troy Datcher Chief Executive Officer (Principal Executive Officer) | ||||||
| Date: May 16, 2022 | By: | /s/ Mike Batesole | ||||
| Mike Batesole Chief Financial Officer (Principal Financial Officer) | ||||||
54
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