UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-56348
TPCO Holding Corp. |
(Exact name of registrant as specified in its charter) |
Canada |
| 98-1566338 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
1550 Leigh Avenue San Jose, California | 95125 | |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (669) 279-5390
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 |
| NONE |
| 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 November 14, 2022, there were 107,443,515 common shares of the registrant issued and outstanding.
Table of Contents
| 2 |
| Table of Contents |
Unless otherwise noted or the context indicates otherwise, in this Form 10-Q (this “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.
| 3 |
| Table of Contents |
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Interim condensed consolidated financial statements
TPCO Holding Corp.
For the three and nine months ended September 30, 2022 and 2021 (Unaudited)
| 4 |
| Table of Contents |
| 5 |
| Table of Contents |
TPCO Holding Corp.
Interim condensed consolidated balance sheets
(Unaudited, in United States dollars)
As at |
| Note |
|
| September 30, 2022 |
|
| December 31, 2021 |
| |||
Assets |
|
|
|
|
|
|
|
|
| |||
Current |
|
|
|
|
|
|
|
|
| |||
Cash |
|
|
|
| $ | 107,111,075 |
|
| $ | 165,310,609 |
| |
Restricted cash and restricted cash equivalents |
|
|
|
|
| 2,639,732 |
|
|
| 9,581,689 |
| |
Accounts receivable, net |
|
| 27 |
|
|
| 2,155,444 |
|
|
| 4,705,563 |
|
Income tax receivable |
|
|
|
|
|
| - |
|
|
| 1,322,340 |
|
Inventory |
|
| 5 |
|
|
| 15,543,825 |
|
|
| 22,196,981 |
|
Notes and other receivables, net |
|
| 6 |
|
|
| 389,816 |
|
|
| 4,732,617 |
|
Prepaid expenses and other current assets |
|
| 4 |
|
|
| 9,869,406 |
|
|
| 11,940,043 |
|
Assets held for sale and discontinued operations |
|
| 14 |
|
|
| 3,318,065 |
|
|
| 5,042,670 |
|
Total current assets |
|
|
|
|
|
| 141,027,363 |
|
|
| 224,832,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
| 7 |
|
|
| 2,488,095 |
|
|
| 2,500,069 |
|
Security deposits |
|
|
|
|
|
| 1,205,629 |
|
|
| 1,119,754 |
|
Prepaid expenses and other assets |
|
|
|
|
|
| 800,755 |
|
|
| 756,968 |
|
Property and equipment |
|
| 8 |
|
|
| 15,558,716 |
|
|
| 22,159,470 |
|
Right-of-use assets – operating |
|
| 12 |
|
|
| 19,143,848 |
|
|
| 27,662,847 |
|
Right-of-use assets – finance |
|
| 12 |
|
|
| 23,462,364 |
|
|
| 24,639,605 |
|
Intangible assets |
|
| 9 |
|
|
| 118,908,000 |
|
|
| 212,587,865 |
|
Goodwill |
|
| 9 |
|
|
| - |
|
|
| 44,051,645 |
|
Assets held for sale and discontinued operations |
|
| 14 |
|
|
| - |
|
|
| 11,144,254 |
|
Total assets |
|
|
|
|
| $ | 322,594,770 |
|
| $ | 571,454,989 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
| 11 |
|
| $ | 25,327,121 |
|
| $ | 41,625,317 |
|
Consideration payable – current portion |
|
|
|
|
|
| 7,153,013 |
|
|
| 7,496,240 |
|
Operating lease liability – current portion |
|
| 12 |
|
|
| 2,423,413 |
|
|
| 3,177,666 |
|
Finance lease liability – current portion |
|
| 12 |
|
|
| 62,783 |
|
|
| 13,712 |
|
Cash settled share-based payments |
|
| 16 |
|
|
| 3,632,574 |
|
|
| 5,166,666 |
|
Note payable |
|
| 12 |
|
|
| 931,103 |
|
|
| - |
|
Contingent consideration |
|
| 27 |
|
|
| 1,964 |
|
|
| 943,131 |
|
Liabilities held for sale and discontinued operations |
|
| 14 |
|
|
| 2,149,220 |
|
|
| 264,044 |
|
Total current liabilities |
|
|
|
|
|
| 41,681,191 |
|
|
| 58,686,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
| 12 |
|
|
| 22,920,265 |
|
|
| 27,142,326 |
|
Finance lease liabilities |
|
| 12 |
|
|
| 36,730,577 |
|
|
| 36,774,714 |
|
Consideration payable |
|
|
|
|
|
| 520,681 |
|
|
| 1,827,515 |
|
Deferred tax liabilities |
|
| 21 |
|
|
| 25,527,230 |
|
|
| 43,847,866 |
|
Liabilities held for sale and discontinued operations |
|
| 14 |
|
|
| - |
|
|
| 644,219 |
|
Total liabilities |
|
|
|
|
|
| 127,379,944 |
|
|
| 168,923,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mezzanine equity |
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable non-controlling interest |
|
| 15 |
|
|
| 35,010,200 |
|
|
| 41,456,387 |
|
Total mezzanine equity |
|
|
|
|
|
| 35,010,200 |
|
|
| 41,456,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
|
|
|
|
Common shares, no par value, unlimited Common shares authorized, 104,914,328 issued and outstanding at September 30, 2022 and 97,065,092 at December 31, 2021 |
|
| 17 |
|
|
| - |
|
|
| - |
|
Additional paid in capital |
|
|
|
|
|
| 965,032,335 |
|
|
| 954,102,859 |
|
Accumulated deficit |
|
|
|
|
|
| (804,827,709 | ) |
|
| (593,027,673 | ) |
Total shareholders’ equity |
|
|
|
|
|
| 160,204,626 |
|
|
| 361,075,186 |
|
Total liabilities, mezzanine equity and shareholders’ equity |
|
|
|
|
| $ | 322,594,770 |
|
| $ | 571,454,989 |
|
Commitments and contingencies (Note 26)
Subsequent events (Note 32)
See accompanying notes to the interim condensed consolidated financial statements
| 6 |
| Table of Contents |
TPCO Holding Corp.
Interim condensed consolidated statements of operations and comprehensive loss
(Unaudited, in United States dollars)
|
|
|
|
| Three months ended |
|
| Nine months ended |
| |||||||||||
|
| Note |
|
| September 30, 2022 |
|
| September 30, 2021 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Sales, net of discounts |
|
|
|
| $ | 19,560,190 |
|
| $ | 18,894,135 |
|
| $ | 63,674,204 |
|
| $ | 55,385,321 |
| |
Cost of sales |
|
|
|
|
| 12,942,068 |
|
|
| 13,893,643 |
|
|
| 44,316,034 |
|
|
| 43,774,625 |
| |
Gross profit |
|
|
|
|
| 6,618,122 |
|
|
| 5,000,492 |
|
|
| 19,358,170 |
|
|
| 11,610,696 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Impairment loss |
|
| 13 |
|
|
| 127,815,307 |
|
|
| 485,601,121 |
|
|
| 130,244,837 |
|
|
| 560,500,228 |
|
Operating expenses |
|
| 22 |
|
|
| 36,838,444 |
|
|
| 30,936,988 |
|
|
| 108,036,813 |
|
|
| 128,763,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
|
|
|
| (158,035,629 | ) |
|
| (511,537,617 | ) |
|
| (218,923,480 | ) |
|
| (677,652,733 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
| (1,183,968 | ) |
|
| (1,093,562 | ) |
|
| (3,694,798 | ) |
|
| (3,757,176 | ) |
Gain on debt forgiveness |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,358,686 |
|
Loss on disposal of assets |
|
|
|
|
|
| - |
|
|
| (137,042 | ) |
|
| (317,787 | ) |
|
| (3,656,707 | ) |
Change in fair value of investments at fair value through profit loss |
|
| 28 |
|
|
| (388,878 | ) |
|
| (768,030 | ) |
|
| (421,974 | ) |
|
| (418,818 | ) |
Change in fair value of contingent consideration |
|
| 28 |
|
|
| 3,558 |
|
|
| 38,178,321 |
|
|
| 642,153 |
|
|
| 220,997,087 |
|
Other income |
|
|
|
|
|
| 524,230 |
|
|
| 1,521,164 |
|
|
| 1,633,525 |
|
|
| 4,198,444 |
|
|
|
|
|
|
|
| (1,045,058 | ) |
|
| 37,700,851 |
|
|
| (2,158,881 | ) |
|
| 220,721,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
|
|
|
| (159,080,687 | ) |
|
| (473,836,766 | ) |
|
| (221,082,361 | ) |
|
| (456,931,217 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax recovery (expense) |
|
| 21 |
|
|
| 24,460,758 |
|
|
| (3,935,160 | ) |
|
| 24,418,531 |
|
|
| 6,541,380 |
|
Loss and comprehensive loss from continuing operations |
|
|
|
|
|
| (134,619,929 | ) |
|
| (477,771,926 | ) |
|
| (196,663,830 | ) |
|
| (450,389,837 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income tax |
|
| 14 |
|
|
| (2,327,414 | ) |
|
| (83,578,124 | ) |
|
| (4,302,730 | ) |
|
| (86,074,460 | ) |
Loss from classification to discontinued operations, net of income tax |
|
| 14 |
|
|
| (11,082,725 | ) |
|
| - |
|
|
| (11,082,725 | ) |
|
| - |
|
Net loss |
|
|
|
|
| $ | (148,030,068 | ) |
| $ | (561,350,050 | ) |
| $ | (212,049,285 | ) |
| $ | (536,464,297 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and comprehensive loss attributable to shareholders of the company |
|
|
|
|
| $ | (147,985,084 | ) |
| $ | (561,350,050 | ) |
| $ | (211,800,036 | ) |
| $ | (536,464,297 | ) |
Loss and comprehensive loss attributable to redeemable non-controlling interest |
|
| 15 |
|
|
| (44,984 | ) |
|
| - |
|
|
| (249,249 | ) |
|
| - |
|
Net loss |
|
|
|
|
| $ | (148,030,068 | ) |
| $ | (561,350,050 | ) |
| $ | (212,049,285 | ) |
| $ | (536,464,297 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share – basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations |
|
| 20 |
|
| $ | (1.30 | ) |
| $ | (4.85 | ) |
| $ | (1.94 | ) |
| $ | (4.80 | ) |
Loss per share from discontinued operations |
|
| 20 |
|
|
| (0.13 | ) |
|
| (0.85 | ) |
|
| (0.15 | ) |
|
| (0.92 | ) |
Loss per share |
|
| 20 |
|
| $ | (1.43 | ) |
| $ | (5.70 | ) |
| $ | (2.09 | ) |
| $ | (5.72 | ) |
Weighted average number of common shares |
|
| 20 |
|
|
| 103,489,965 |
|
|
| 98,421,935 |
|
|
| 101,154,772 |
|
|
| 93,802,606 |
|
See accompanying notes to the interim condensed consolidated financial statements
| 7 |
| Table of Contents |
TPCO Holding Corp.
Interim condensed consolidated statements of changes in shareholders’ (deficit) equity
(Unaudited, in United States dollars)
|
|
|
|
| Number of |
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| Note |
|
| Shares |
|
| Warrants |
|
| Class B Shares |
|
| Common Shares to be Issued |
|
| Additional Paid in Capital |
|
| Accumulated Deficit |
|
| Total Stockholder's Deficit |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance December 31, 2021 |
|
|
|
|
| 97,065,092 |
|
|
| 35,837,500 |
|
|
| - |
|
|
| 743,768 |
|
| $ | 954,102,859 |
|
| $ | (593,027,673 | ) |
| $ | 361,075,186 |
| |
Shares issued for long-term strategic contract |
|
| 16 |
|
|
| 2,790,014 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,750,000 |
|
|
| - |
|
|
| 3,750,000 |
|
Shares issued to settle contingent consideration |
|
| 17 |
|
|
| 569,939 |
|
|
| - |
|
|
| - |
|
|
| (305,325 | ) |
|
| 299,014 |
|
|
| - |
|
|
| 299,014 |
|
Shares issued for RSUs vested |
|
| 17,19 |
|
|
| 459,118 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Tax settlements associated with RSUs |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (420,247 | ) |
|
| - |
|
|
| (420,247 | ) |
Share-based compensation |
|
| 19 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,703,170 |
|
|
| - |
|
|
| 3,703,170 |
|
Net loss |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (63,814,952 | ) |
|
| (63,814,952 | ) |
Balance June 30, 2022 |
|
|
|
|
|
| 100,884,163 |
|
|
| 35,837,500 |
|
|
| - |
|
|
| 438,443 |
|
| $ | 961,434,796 |
|
| $ | (656,842,625 | ) |
| $ | 304,592,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for long-term strategic contract |
|
| 16 |
|
|
| 2,136,151 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,095,546 |
|
|
| - |
|
|
| 1,095,546 |
|
Shares issued for RSUs vested |
|
| 17,19 |
|
|
| 131,589 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Shares issued to acquire NCI |
|
| 15 |
|
|
| 1,762,425 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,500,000 |
|
|
| - |
|
|
| 1,500,000 |
|
Tax settlements associated with RSUs |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (59,126 | ) |
|
| - |
|
|
| (59,126 | ) |
Share-based compensation |
|
| 19 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,061,119 |
|
|
| - |
|
|
| 1,061,119 |
|
Net loss |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (147,985,084 | ) |
|
| (147,985,084 | ) |
Balance September 30, 2022 |
|
|
|
|
|
| 104,914,328 |
|
|
| 35,837,500 |
|
|
| - |
|
|
| 438,443 |
|
| $ | 965,032,335 |
|
| $ | (804,827,709 | ) |
| $ | 160,204,626 |
|
| 8 |
| Table of Contents |
TPCO Holding Corp.
Interim condensed consolidated statements of changes in shareholders’ (deficit) equity (continued)
(Unaudited, in United States dollars)
|
|
|
|
| Number of |
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| Note |
|
| Shares |
|
| Warrants |
|
| Class B Shares |
|
| Common Shares to be Issued |
|
| Additional Paid in Capital |
|
| Accumulated Deficit |
|
| Total Stockholder's Deficit |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance December 31, 2020 |
|
|
|
|
| - |
|
|
| 35,837,500 |
|
|
| 15,218,750 |
|
|
| - |
|
| $ | (21,886,268 | ) |
| $ | (6,463,606 | ) |
| $ | (28,349,874 | ) | |
Conversion to Class B shares |
|
|
|
|
| 14,655,547 |
|
|
| - |
|
|
| (14,655,547 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
| |
Founders’ shares forfeited |
|
|
|
|
| - |
|
|
| - |
|
|
| (563,203 | ) |
|
| - |
|
|
| (496,057 | ) |
|
| 496,057 |
|
|
| - |
| |
Shares issued in a private placement |
|
|
|
|
| 6,313,500 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 63,135,000 |
|
|
| - |
|
|
| 63,135,000 |
| |
Conversion of Class A restricted voting shares |
|
|
|
|
| 31,407,336 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 318,303,338 |
|
|
| - |
|
|
| 318,303,338 |
| |
Shares issued for long-term strategic contracts |
|
|
|
|
| 2,376,425 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 25,000,000 |
|
|
| - |
|
|
| 25,000,000 |
| |
Shares issued in a business acquisition |
|
|
|
|
| 41,808,021 |
|
|
| - |
|
|
| - |
|
|
| 1,355,258 |
|
|
| 546,447,112 |
|
|
| - |
|
|
| 546,447,112 |
| |
Shares issued to extinguish liabilities in a business acquisition |
|
|
|
|
| 336,856 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,264,597 |
|
|
| - |
|
|
| 4,264,597 |
| |
Contingent shares to be issued in a business acquisition |
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 187,380 |
|
|
| 2,372,231 |
|
|
| - |
|
|
| 2,372,231 |
| |
Replacement options issued in a business acquisition |
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 4,199,788 |
|
|
| - |
|
|
| 4,199,788 |
| |
Release of shares to be issued |
|
|
|
|
| 1,080,853 |
|
|
| - |
|
|
| - |
|
|
| (1,080,853 | ) |
|
| - |
|
|
| - |
|
|
| - |
| |
Shares to be issued reclassified from contingent consideration |
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 333,868 |
|
|
| 1,957,045 |
|
|
| - |
|
|
| 1,957,045 |
| |
Shares issued for options exercised |
|
|
|
|
| 3,313 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 12,972 |
|
|
| - |
|
|
| 12,972 |
| |
Share-based compensation |
|
| 19 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 8,000,573 |
|
|
|
|
|
|
| 8,000,573 |
|
Net income |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 24,885,753 |
|
|
| 24,885,753 |
|
Balance June 30, 2021 |
|
|
|
|
|
| 97,981,851 |
|
|
| 35,837,500 |
|
|
| - |
|
|
| 795,653 |
|
| $ | 951,310,331 |
|
| $ | 18,918,204 |
|
| $ | 970,228,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Release of shares to be issued |
|
|
|
|
|
| 51,633 |
|
|
| - |
|
|
| - |
|
|
| (51,633 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
Share repurchase obligation |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (7,055,250 | ) |
|
| - |
|
|
| (7,055,250 | ) |
Shares repurchased under share repurchase agreements |
|
|
|
|
|
| (1,037,500 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Shares repurchased under NCIB |
|
|
|
|
|
| (157,600 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (603,165 | ) |
|
| - |
|
|
| (603,165 | ) |
Shares issued for RSUs vested |
|
|
|
|
|
| 340,994 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Tax settlements associated with RSUs |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (972,741 | ) |
|
| - |
|
|
| (972,741 | ) |
Modification of RSUs |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,451,365 |
|
|
| - |
|
|
| 3,451,365 |
|
Share-based compensation |
|
| 19 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,974,957 |
|
|
| - |
|
|
| 2,974,957 |
|
Net loss |
|
|
|
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (561,350,050 | ) |
|
| (561,350,050 | ) |
Balance September 30, 2021 |
|
|
|
|
|
| 97,179,378 |
|
|
| 35,837,500 |
|
|
| - |
|
|
| 744,020 |
|
| $ | 949,105,497 |
|
| $ | (542,431,846 | ) |
| $ | 406,673,651 |
|
See accompanying notes to the interim condensed consolidated financial statements
| 9 |
| Table of Contents |
TPCO Holding Corp.
Interim condensed consolidated statements of cash flows
(Unaudited, in United States dollars) |
|
|
|
| Nine months ended |
| ||||||
|
| Note |
|
| September 30, 2022 |
|
| September 30, 2021 |
| |||
|
|
|
|
|
|
|
|
|
| |||
Cash provided by (used in) |
|
|
|
|
|
|
|
|
| |||
Operating activities |
|
|
|
|
|
|
|
|
| |||
Net loss from continuing operations |
|
|
|
| $ | (196,663,830 | ) |
| $ | (450,389,837 | ) | |
Adjustments for items not involving cash |
|
|
|
|
|
|
|
|
|
|
| |
Impairment loss |
|
| 13 |
|
|
| 130,244,837 |
|
|
| 560,500,228 |
|
Interest expense |
|
|
|
|
|
| 3,694,798 |
|
|
| 3,739,340 |
|
Interest income |
|
|
|
|
|
| (75,758 | ) |
|
| (993,639 | ) |
Loss on disposal of assets |
|
|
|
|
|
| 317,787 |
|
|
| 3,656,707 |
|
Loss on lease termination |
|
| 12 |
|
|
| (114,458 | ) |
|
|
|
|
Allowance for accounts receivable and notes receivable |
|
|
|
|
|
| 3,438,664 |
|
|
| 796,403 |
|
Gain on debt forgiveness |
|
|
|
|
|
| - |
|
|
| (3,358,686 | ) |
Fair value change of investments |
|
| 7 |
|
|
| 421,974 |
|
|
| 418,818 |
|
Depreciation and amortization |
|
| 22 |
|
|
| 23,755,099 |
|
|
| 14,174,789 |
|
Shares issued for long-term strategic contracts |
|
|
|
|
|
| - |
|
|
| 25,000,000 |
|
Share-based compensation expense, net of withholding tax settlement |
|
|
|
|
|
| 4,284,916 |
|
|
| 16,765,238 |
|
Non-cash marketing expense |
|
| 16 |
|
|
| 3,311,454 |
|
|
| 3,803,030 |
|
Non-cash operating lease expense |
|
| 12 |
|
|
| 5,402,936 |
|
|
| 3,029,654 |
|
Fair value change of contingent consideration |
|
| 27 |
|
|
| (642,153 | ) |
|
| (220,997,087 | ) |
Deferred income tax recovery |
|
| 21 |
|
|
| (27,771,859 | ) |
|
| (13,714,716 | ) |
Repayment of operating lease liabilities |
|
|
|
|
|
| (5,276,778 | ) |
|
| (3,403,629 | ) |
Net changes in non-cash working capital items |
|
| 23 |
|
|
| (2,659,682 | ) |
|
| (39,995,798 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in continued operating activities |
|
|
|
|
|
| (58,332,053 | ) |
|
| (100,969,185 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in discontinued operating activities |
|
|
|
|
|
| (2,565,934 | ) |
|
| (5,528,420 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating activities |
|
|
|
|
|
| (60,897,987 | ) |
|
| (106,497,605 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Receipt of payments on notes receivable |
|
|
|
|
|
| 1,759,318 |
|
|
| - |
|
Repayment of notes payable |
|
|
|
|
|
| (4,680,000 | ) |
|
| - |
|
Repayment of consideration payable |
|
|
|
|
|
| (1,150,000 | ) |
|
| (872,021 | ) |
Repayment of finance lease liabilities |
|
|
|
|
|
| (3,342,761 | ) |
|
| (3,429,846 | ) |
Proceeds from private placement |
|
|
|
|
|
| - |
|
|
| 51,635,000 |
|
Redemption of Class A restricted voting shares |
|
|
|
|
|
| - |
|
|
| (264,318,686 | ) |
Proceeds from exercise of options |
|
|
|
|
|
| - |
|
|
| 12,972 |
|
Repurchase of shares |
|
|
|
|
|
| - |
|
|
| (4,454,571 | ) |
Repayment of line of credit |
|
|
|
|
|
| - |
|
|
| (1,000,000 | ) |
Total financing activities |
|
|
|
|
|
| (7,413,443 | ) |
|
| (222,427,152 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid in the Qualifying Transaction |
|
|
|
|
|
| - |
|
|
| (28,143,886 | ) |
Net cash paid in business combinations |
|
| 10 |
|
|
| - |
|
|
| (1,402,337 | ) |
Purchases of property and equipment |
|
|
|
|
|
| (2,733,218 | ) |
|
| (8,725,860 | ) |
Advances for note receivable |
|
|
|
|
|
| - |
|
|
| (5,650,000 | ) |
Acquisition of investments |
|
| 7 |
|
|
| (350,000 | ) |
|
| (1,000,000 | ) |
Proceeds from notes receivable |
|
|
|
|
|
| - |
|
|
| 187,954 |
|
Proceeds from sale of property and equipment, net of selling costs |
|
|
|
|
|
| 6,253,157 |
|
|
| 11,068,537 |
|
Total investing activities |
|
|
|
|
|
| 3,169,939 |
|
|
| (33,665,592 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash during the period |
|
|
|
|
|
| (65,141,491 | ) |
|
| (362,590,349 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, restricted cash and restricted cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
|
|
| $ | 174,892,298 |
|
| $ | 582,622,025 |
|
End of period |
|
|
|
|
| $ | 109,750,807 |
|
| $ | 220,031,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
|
|
|
| 107,111,075 |
|
|
| 206,677,145 |
|
Restricted cash and restricted cash equivalents |
|
|
|
|
|
| 2,639,732 |
|
|
| 13,354,531 |
|
Cash, restricted cash and restricted cash equivalents |
|
|
|
|
| $ | 109,750,807 |
|
| $ | 220,031,676 |
|
Supplemental cash-flow information (Note 23)
See accompanying notes to the interim condensed consolidated financial statements
| 10 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 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.
| 11 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
2. Basis of presentation (continued)
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 of 1934 as amended) 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 a 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.
(ii) Discontinued operations
The Company accounts for discontinued operations when there is a disposal of a component group or a group of components that represents a strategic shift that will have a major effect on the Company’s operations and financial results. The Company aggregates the results of operations for discontinued operations into a single line item in the interim condensed consolidated statements of operations and comprehensive loss for all periods presented. General corporate overhead is not allocated to discontinued operations. See Note 14 for additional information.
| 12 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
3. Significant accounting policies (continued)
(iii) Accounting 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.
4. Prepaid expenses and other current assets
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||
Prepaid expenses |
| $ | 51,456 |
|
| $ | 109,929 |
|
Prepaid insurance |
|
| 1,434,394 |
|
|
| 1,560,840 |
|
Prepaid inventory |
|
| 379,159 |
|
|
| 2,188,881 |
|
Prepaid rent |
|
| 177,740 |
|
|
| 650,000 |
|
Other prepaid assets |
|
| 1,782,502 |
|
|
| 1,386,238 |
|
Indemnification assets |
|
| 6,044,155 |
|
|
| 6,044,155 |
|
|
| $ | 9,869,406 |
|
| $ | 11,940,043 |
|
5. Inventory
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||
Packaging supplies |
| $ | 2,943,653 |
|
| $ | 2,784,846 |
|
Biological assets |
|
| 1,523 |
|
|
| 1,371,749 |
|
Raw materials |
|
| 465,204 |
|
|
| 2,009,754 |
|
Work in progress |
|
| 1,406,179 |
|
|
| 1,969,696 |
|
Finished goods |
|
| 10,727,266 |
|
|
| 14,060,936 |
|
|
| $ | 15,543,825 |
|
| $ | 22,196,981 |
|
During the three and nine months ended September 30, 2022, the Company recorded write-downs of $1,239,545 and $3,545,232, respectively, on inventory which is included in cost of sales.
6. Notes and other receivables, net
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||
Upfront payment |
| $ | 5,650,000 |
|
| $ | 5,650,000 |
|
Promissory note receivable |
|
| 389,816 |
|
|
| 543,560 |
|
Other receivable |
|
| - |
|
|
| 1,200,000 |
|
Total notes receivable |
|
| 6,039,816 |
|
|
| 7,393,560 |
|
Less allowance for credit losses |
|
| (5,650,000 | ) |
|
| (2,660,943 | ) |
Note receivable |
| $ | 389,816 |
|
| $ | 4,732,617 |
|
| 13 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
7. Investments
|
| Marketable securities |
|
| Non-marketable securities |
|
| Available for sale securities |
|
| Other |
|
| Total |
| |||||
Balance, December 31, 2021 |
| $ | 860,496 |
|
| $ | 591,545 |
|
| $ | 1,048,028 |
|
| $ | - |
|
| $ | 2,500,069 |
|
Acquired in the period |
|
| - |
|
|
| - |
|
|
| 200,000 |
|
|
| 150,000 |
|
|
| 350,000 |
|
Interest income |
|
| - |
|
|
| - |
|
|
| 60,000 |
|
|
| - |
|
|
| 60,000 |
|
Change in fair value |
|
| (421,974 | ) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (421,974 | ) |
Balance, September 30, 2022 |
| $ | 438,522 |
|
| $ | 591,545 |
|
| $ | 1,308,028 |
|
| $ | 150,000 |
|
| $ | 2,488,095 |
|
8. Property and equipment
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||
Gross carrying amounts |
|
|
|
|
|
| ||
Leasehold improvements |
| $ | 16,412,209 |
|
| $ | 13,726,734 |
|
Production equipment |
|
| 2,232,687 |
|
|
| 2,500,473 |
|
Furniture and fixtures |
|
| 814,631 |
|
|
| 858,859 |
|
Vehicles |
|
| 333,325 |
|
|
| 425,886 |
|
Office equipment |
|
| 1,007,055 |
|
|
| 1,030,216 |
|
Building |
|
| - |
|
|
| 6,549,489 |
|
|
|
| 20,799,907 |
|
|
| 25,091,657 |
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation |
|
|
|
|
|
|
|
|
Leasehold improvements |
|
| (3,343,755 | ) |
|
| (1,724,692 | ) |
Production equipment |
|
| (1,064,412 | ) |
|
| (671,688 | ) |
Furniture and fixtures |
|
| (319,085 | ) |
|
| (196,124 | ) |
Vehicles |
|
| (87,152 | ) |
|
| (51,573 | ) |
Office equipment |
|
| (426,787 | ) |
|
| (206,244 | ) |
Building |
|
| - |
|
|
| (81,866 | ) |
|
|
| (5,241,191 | ) |
|
| (2,932,187 | ) |
|
|
|
|
|
|
|
|
|
Property and equipment, net |
| $ | 15,558,716 |
|
| $ | 22,159,470 |
|
The Company recorded depreciation expense related to continuing operations of $747,765 and $2,510,132 for the three and nine months ended September 30, 2022 ($841,959 and $2,011,802 for the three and nine months ended September 30, 2021, respectively).
| 14 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
9. Goodwill and intangible assets
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||
Total goodwill |
| $ | - |
|
| $ | 44,051,645 |
|
|
|
|
|
|
|
|
|
|
Intangible assets gross carrying amounts |
|
|
|
|
|
|
|
|
License |
|
| 83,410,737 |
|
|
| 112,161,292 |
|
Brand |
|
| 69,751,919 |
|
|
| 116,700,360 |
|
Customer relations |
|
| 2,920,000 |
|
|
| 2,920,000 |
|
|
|
| 156,082,656 |
|
|
| 231,781,652 |
|
|
|
|
|
|
|
|
|
|
Intangible assets accumulated amortization |
|
|
|
|
|
|
|
|
License |
|
| (26,357,126 | ) |
|
| (13,620,757 | ) |
Brand |
|
| (10,265,773 | ) |
|
| (5,264,606 | ) |
Customer relations |
|
| (551,757 | ) |
|
| (308,424 | ) |
|
|
| (37,174,656 | ) |
|
| (19,193,787 | ) |
|
|
|
|
|
|
|
|
|
Intangible assets, net |
| $ | 118,908,000 |
|
| $ | 212,587,865 |
|
The Company recorded amortization expense related to continuing operations of $10,420,607 and $20,772,458 for the three and nine months ended September 30, 2022 ($3,271,209 and $11,806,979 for the three and nine months ended September 30, 2021, respectively).
During the three months ended September 30, 2022, the Company recognized an increase in intangible assets of $31,673,000 and decrease in goodwill of $22,633,099 as a result of measurement period adjustments related to business combinations. Refer to Note 10 for further details.
The following table outlines the estimated future annual amortization expense as of September 30, 2022:
|
| Estimated Amortization |
| |
|
|
|
| |
Remainder of 2022 |
| $ | 2,070,460 |
|
2023 |
|
| 8,253,599 |
|
2024 |
|
| 7,896,572 |
|
2025 |
|
| 7,801,531 |
|
2026 |
|
| 7,801,531 |
|
Thereafter |
|
| 85,084,307 |
|
|
| $ | 118,908,000 |
|
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 is responsible for 100% of the costs and expenses, while the non-controlling interest (“NCI”) holder is entitled to 45.25% of any profit distributions.
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, Consolidation. 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. During the three months ended June 30, 2022, approval for the transfer of the Varda Inc. license was received and the associated redeemable NCI was redeemed. Refer to Note 15.
| 15 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
10. Business combinations (continued)
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 one-for-one 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.
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. During the nine months ended September 30, 2022, approval was received for the transfer of the licenses required in order for the transaction to close, although the Company is waiting for Coastal shareholders to perform certain obligations in order to facilitate a closing of the transaction. 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 to be issued.
During the three months ended September 30, 2022, the Company finalized the purchase price allocation to the individual assets acquired and liabilities assumed using the acquisition method. The Company adjusted the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of the acquisition date.
During the three months ended September 30, 2022 the following adjustments were made to the provisional amounts:
| · | An adjustment was made to increase intangible assets by $25,618,000, due to new information regarding the fair value as at October 1, 2021. This resulted in a increase to the deferred tax liability on initial recognition of $7,644,411 and a net decrease to goodwill. |
During the three months ended September 30, 2022, as a result of the adjustments to the provisional amounts discussed above, $3,515,864 of additional amortization has been recognized relating to prior periods.
(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 was committed to acquiring the remaining 15% when local regulations permit, for $1,500,000 in common shares of the Company. During the three months ended September 30, 2022, the Company acquired the remaining 15% in exchange for 1,762,495 common shares of the Company.
During the three months ended September 30, 2022, the Company finalized the purchase price allocation to the individual assets acquired and liabilities assumed using the acquisition method. The Company adjusted the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of the acquisition date.
During the three months ended September 30, 2022 the following adjustments were made to the provisional amounts:
| · | An adjustment was made to increase intangible assets by $6,055,000 and increase right-of-use assets by $411,322, due to new information regarding the fair value as at October 1, 2021. This resulted in an increase to the deferred tax liability on initial recognition of $1,806,812 and a net decrease to goodwill. |
During the three months ended September 30, 2022, as a result of the adjustments to the provisional amounts discussed above, $365,677 of additional amortization of intangible assets and $35,700 of amortization of right of use assets has been recognized relating to prior periods.
| 16 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
10. Business combinations (continued)
(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. During the nine months ended September 30, 2022, the Company finalized the purchase price allocation to the individual assets acquired and liabilities assumed using the acquisition method.
(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. During the nine months ended September 30, 2022, the Company finalized the purchase price allocation to the individual assets acquired and liabilities assumed using the acquisition method.
11. Accounts payable and accrued liabilities
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||
|
|
|
|
|
|
| ||
Trade payables |
| $ | 4,943,448 |
|
| $ | 8,390,991 |
|
Other accrued expenses |
|
| 6,670,646 |
|
|
| 7,288,466 |
|
Accrued payroll expenses |
|
| 1,847,317 |
|
|
| 1,326,493 |
|
Accrued severance expenses |
|
| 953,830 |
|
|
| 1,331,365 |
|
Accrued income and other taxes |
|
| 6,229,451 |
|
|
| 19,062,306 |
|
Goods received but not yet invoiced |
|
| 4,682,429 |
|
|
| 4,225,696 |
|
|
| $ | 25,327,121 |
|
| $ | 41,625,317 |
|
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 15.25 years. Most leases include options to renew for varying terms at the Company’s sole discretion. Certain leases include escalation clauses or payment of executory costs such as property taxes, utilities, or insurance and maintenance. Rent expense for leases with escalation clauses is accounted for on a straight-line basis over the lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The following table provides the components of lease cost:
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| September 30, 2022 |
|
| September 30, 2021 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||||
Operating lease costs |
| $ | 1,698,539 |
|
| $ | 1,000,749 |
|
| $ | 5,402,936 |
|
| $ | 3,029,654 |
|
Short term lease expense |
|
| 242,011 |
|
|
| 35,152 |
|
|
| 404,511 |
|
|
| 136,149 |
|
Lease expense |
|
| 1,940,550 |
|
|
| 1,035,901 |
|
|
| 5,807,447 |
|
|
| 3,165,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of lease assets |
|
| 391,517 |
|
|
| 558,424 |
|
|
| 1,177,241 |
|
|
| 1,618,135 |
|
Interest on lease liabilities |
|
| 1,129,382 |
|
|
| 1,120,925 |
|
|
| 3,350,698 |
|
|
| 3,385,978 |
|
Finance lease cost |
|
| 1,520,899 |
|
|
| 1,679,349 |
|
|
| 4,527,939 |
|
|
| 5,004,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease costs |
| $ | 3,461,449 |
|
| $ | 2,715,250 |
|
| $ | 10,335,386 |
|
| $ | 8,169,916 |
|
| 17 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
12. Leases (continued)
The maturity of the contractual undiscounted lease liabilities as of September 30, 2022:
|
| Operating Lease |
|
| Finance Lease |
| ||
|
|
|
|
|
|
| ||
Remainder of 2022 |
| $ | 1,441,432 |
|
| $ | 1,147,681 |
|
2023 |
|
| 4,826,896 |
|
|
| 4,625,156 |
|
2024 |
|
| 4,552,956 |
|
|
| 4,763,910 |
|
2025 |
|
| 4,518,781 |
|
|
| 4,906,828 |
|
2026 |
|
| 4,370,472 |
|
|
| 5,054,033 |
|
Thereafter |
|
| 22,192,154 |
|
|
| 64,884,898 |
|
Total undiscounted lease liabilities |
|
| 41,902,691 |
|
|
| 85,382,506 |
|
Interest on lease liabilities |
|
| 16,559,013 |
|
|
| 48,589,146 |
|
Total present value of minimum lease payments |
|
| 25,343,678 |
|
|
| 36,793,360 |
|
Lease liability – current portion |
|
| 2,423,413 |
|
|
| 62,783 |
|
Lease liability |
| $ | 22,920,265 |
|
| $ | 36,730,577 |
|
Additional information on the right-of-use assets is as follows:
|
| Operating lease |
|
| Finance lease |
| ||
|
|
|
|
|
|
| ||
Gross carrying amount |
|
|
|
|
|
| ||
Balance, December 31, 2021 |
| $ | 30,099,933 |
|
| $ | 26,258,698 |
|
|
|
|
|
|
|
|
|
|
Measurement period adjustment (Note 10) |
|
| 411,322 |
|
|
| - |
|
Additions (i) |
|
| 2,163,935 |
|
|
| - |
|
Lease termination (ii) |
|
| (1,882,008 | ) |
|
| - |
|
Impairment (Note 13) |
|
| (4,840,390 | ) |
|
| - |
|
Transfer to assets held for sale (Note 14) |
|
| (1,406,339 | ) |
|
| - |
|
Balance, September 30, 2022 |
| $ | 24,546,453 |
|
| $ | 26,258,698 |
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
|
|
Balance, December 31, 2021 |
| $ | 2,437,086 |
|
| $ | 1,619,093 |
|
|
|
|
|
|
|
|
|
|
Additions |
|
| 2,965,519 |
|
|
| 1,177,241 |
|
Balance, September 30, 2022 |
| $ | 5,402,605 |
|
| $ | 2,796,334 |
|
|
|
|
|
|
|
|
|
|
Carrying amount December 31, 2021 |
| $ | 27,662,847 |
|
| $ | 24,639,605 |
|
Carrying amount September 30, 2022 |
| $ | 19,143,848 |
|
| $ | 23,462,364 |
|
The Company capitalized $nil and $704,732 of depreciation to inventory for the three and nine months ended September 30, 2022, respectively (three and nine months ended September 30, 2021 - $491,273 and $1,262,130, respectively).
(i) During the nine months ended September 30, 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 received a promissory note for $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:
Sale price |
| $ | 6,389,816 |
|
Selling costs |
|
| (230,960 | ) |
Carrying value of building |
|
| (6,413,329 | ) |
Loss on disposal of asset |
| $ | (254,473 | ) |
(ii) During the nine months ended September 30, 2022, the Company terminated one of its leases early by agreeing to pay the lessor $200,000 upon termination and issuing a promissory note for $950,000 due January 2, 2023. The fair value of the promissory note on initial recognition was $931,103. The Company recorded a loss on termination of $41,074 which is included in other income on the interim condensed consolidated statement of operations and comprehensive loss.
During the three months ended September 30, 2022, the Company terminated one of its leases early with no termination penalty. The Company recorded a gain on termination of $155,532 which is included in other income on the interim condensed consolidated statement of operations and comprehensive loss.
| 18 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
13. Impairment
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| September 30, 2022 |
|
| September 30, 2021 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||||
Right-of-use assets (i) |
| $ | 2,694,999 |
|
| $ | 72,529 |
|
| $ | 3,985,590 |
|
| $ | 820,616 |
|
Impairment (ii) |
|
| 119,443,343 |
|
|
| 485,528,592 |
|
|
| 119,443,343 |
|
|
| 485,528,592 |
|
Non-THC business (iii) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 58,030,387 |
|
Assets held for sale (Note 14 (b)) |
|
| 5,676,965 |
|
|
| - |
|
|
| 6,815,904 |
|
|
| 16,120,633 |
|
|
| $ | 127,815,307 |
|
| $ | 485,601,121 |
|
| $ | 130,244,837 |
|
| $ | 560,500,228 |
|
(i) Right of use assets – During the three and nine months ended September 30, 2022, the Company recorded impairment of $2,694,999 and $3,985,590, respectively related to properties which are no longer being used by the Company.
(ii) Impairment of long-lived assets –
At each reporting period end, the Company considers if there have been any triggers that indicate that its long-lived assets are not recoverable. Based on the softening of the California cannabis market and cost pressures due to higher US inflation during the three months ended September 30, 2022, the Company determined that an impairment test was appropriate.
The following table outlines the impairment of long-lived assets by class of asset, recognized during the three and nine months ended September 30, 2022 as a result of impairment testing:
Asset |
| Carrying value before impairment |
|
| Carrying value after impairment |
|
| Total impairment loss |
| |||
Right of use assets |
| $ | 1,680,224 |
|
| $ | 825,424 |
|
| $ | 854,800 |
|
License |
|
| 52,304,385 |
|
|
| 9,699,829 |
|
|
| 42,604,556 |
|
Brand |
|
| 78,189,441 |
|
|
| 23,624,000 |
|
|
| 54,565,441 |
|
Goodwill |
|
| 21,418,546 |
|
|
| - |
|
|
| 21,418,546 |
|
|
| $ | 153,592,596 |
|
| $ | 34,149,253 |
|
| $ | 119,443,343 |
|
The impairment test for long-lived assets is a two-step test, whereby management first determines the recoverable amount (undiscounted cash flows) of each asset group. If the recoverable amount is lower than the carrying value, impairment is indicated. For those asset groups where impairment is indicated, the Company then determines the fair value of each of those asset groups and allocates the impairment to the long-lived assets within that asset group. The assets are not written down below their individual fair value.
The fair value of each asset group was determined using a combination of a market and income approach. For the purposes of allocation of impairment, the fair value of the specific assets that were impaired was determined using a market approach. The key assumptions used are as follows:
Asset |
| Approach |
| Discount Rate |
| Forecasted Sales Growth Rate |
| Terminal Value Growth Rate |
Right of use assets |
| Market |
| N/A |
| N/A |
| N/A |
License |
| Market |
| N/A |
| N/A |
| N/A |
Brand |
| Income |
| 11.75% | Average of 4% |
| 3% |
Impairment of goodwill
The Company conducts goodwill impairment testing annually during the third quarter, or more often if events, changes or circumstances indicated that it is more likely than not that the fair value of a reporting unit is lower than its carrying amount. At the time of the annual impairment test, the Company determined that the existence of impairment on certain long-lived assets, together with the softening of the California cannabis market, cost pressures due to higher US inflation and changes in market expectations of cash flows since the Company acquired the goodwill, indicated the fair value of its reporting unit might be lower than the carrying value.
As at September 30, 2022, the Company identified one reporting unit and allocated the carrying value of goodwill to the reporting unit:
Direct-to-consumer (“DTC”) |
| $ | 21,418,546 |
|
(iii) Non-THC business – In February 2021, the Company became committed to a plan to sell its 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 of $58,030,387 was recognized.
| 19 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
13. Impairment (continued)
The Company determined the fair value of the reporting unit and compared it to the carrying value. The fair value of the reporting unit was determined using a discounted cash flow technique based on the following key assumptions:
Reporting unit |
| Discount Rate |
| Forecasted Sales Growth Rate |
| Terminal Value Growth Rate |
DTC |
| 10.75% | Average of 4% |
| 3% |
As a result of the impairment test, goodwill impairment of $21,418,546 has been recognized during the three and nine months ended September 30, 2022.
14. Assets held for sale and discontinued operations
The following table outlines the carrying amounts of major classes of assets and liabilities included in disposal groups:
| 20 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
14. Discontinued operations (continued)
(a) Discontinued operations
As at September 30 2022, the Company determined that its wholly owned subsidiary, SISU Extractions LLC (“SISU”), met the criteria as held for sale. The disposition of the operations represented a major strategic shift in the business and met the criteria of discontinued operations. The Company has classified the assets and liabilities of SISU as held for sale as of September 30, 2022. The Company has also re-presented the December 31, 2021 interim condensed consolidated balance sheet and three and nine months ended September 30, 2021 interim condensed consolidated statement of operations. SISU was subsequently sold on October 31, 2022. Refer to Note 32.
Summarized results of the discontinued operations were as follows:
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| September 30, 2022 |
|
| September 30, 2021 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||||
Sales, net of discounts |
| $ | 3,047,008 |
|
| $ | 20,770,924 |
|
| $ | 19,542,615 |
|
| $ | 78,400,283 |
|
Cost of sales |
|
| 4,001,322 |
|
|
| 19,683,583 |
|
|
| 18,502,556 |
|
|
| 72,099,002 |
|
Gross profit |
|
| (954,314 | ) |
|
| 1,087,341 |
|
|
| 1,040,059 |
|
|
| 6,301,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss |
|
| - |
|
|
| (84,698,926 | ) |
|
| - |
|
|
| (84,698,926 | ) |
Operating expenses |
|
| (1,628,692 | ) |
|
| (657,218 | ) |
|
| (5,164,885 | ) |
|
| (8,818,925 | ) |
Loss from operations |
|
| (2,583,006 | ) |
|
| (84,268,803 | ) |
|
| (4,124,826 | ) |
|
| (87,216,570 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
| 63,407 |
|
|
| (398,858 | ) |
|
| 51,277 |
|
|
| (334,583 | ) |
Income tax recovery (expense) |
|
| 192,185 |
|
|
| 1,089,537 |
|
|
| (229,181 | ) |
|
| 1,476,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income tax |
| $ | (2,327,414 | ) |
| $ | (83,578,124 | ) |
| $ | (4,302,730 | ) |
| $ | (86,074,460 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from classification to discontinued operations, net of income tax |
| $ | (11,082,725 | ) |
| $ | - |
|
| $ | (11,082,725 | ) |
| $ | - |
|
(b) Other assets held for sale
During the nine months ended September 30, 2022, the Company became committed to a plan to sell three licenses and transfer the related right of use asset and lease liability. Prior to reclassification to assets held for sale, the assets were tested for impairment. As a result, the cost bases of the asset groups were written down to $571,245 resulting in an impairment loss of $6,815,904 on intangible assets included in net loss from continuing operations.
| 21 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
15. Redeemable non-controlling interest
The following table summarizes the redeemable NCI as at September 30, 2022:
|
| Coastal Holding (a) |
|
| Varda Inc. (b) |
|
| Calma (c) |
|
| Total |
| ||||
Balance, December 31, 2021 |
| $ | 35,307,459 |
|
| $ | 4,648,928 |
|
| $ | 1,500,000 |
|
| $ | 41,456,387 |
|
Net (loss) income attributable to redeemable non-controlling interest |
|
| (297,259 | ) |
|
| 48,010 |
|
|
| - |
|
|
| (249,249 | ) |
Reclassification to liability |
|
| - |
|
|
| (4,696,938 | ) |
|
| - |
|
|
| (4,696,938 | ) |
Reclassification to equity |
|
| - |
|
|
| - |
|
|
| (1,500,000 | ) |
|
| (1,500,000 | ) |
Balance, September 30, 2022 |
| $ | 35,010,200 |
|
| $ | - |
|
| $ | - |
|
| $ | 35,010,200 |
|
a) | The Company is obligated to acquire 100% of the equity in Coastal Holding when the transaction closes, which is contingent upon various conditions. As at September 30, 2022, the number of shares that would be required to redeem the NCI is approximately 24,350,000. Refer to Note 10. |
|
|
b) | The Company was obligated to acquire the remaining 90.5% of Varda Inc. when regulatory approval was received for the license to transfer. On June 20, 2022, regulatory approval was received and as a result the associated redeemable NCI has been reclassified to a liability and subsequently redeemed. Refer to Note 10. |
|
|
c) | The Company was obligated to acquire the Class A shares of Calma when regulatory approval was received for the license to transfer. During the three months ended September 30, 2022, the Company issued 1,762,425 shares to redeem the Calma NCI. |
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 and nine months ended September 30, 2021, the Company issued 2,376,425 common shares in settlement of the initial $25,000,000. As the shares vested immediately, the full amount of the $25,000,000 was recognized as an expense in operating expenses during the nine months ended September 30, 2021.
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 nine months ended September 30, 2022, the Company issued 4,926,165 common shares to settle the first, second and third quarterly payments.
The Company recognized an expense of $584,181 and $3,311,454 during the three and nine months ended September 30, 2022, respectively (three and nine months ended September 30, 2021 - $1,363,636 and $3,803,030) in operating expenses as a sales and marketing expense. As at September 30, 2022, the cash-settled liability is $3,632,574 (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 September 30, 2022, the amount that the Company would be liable for if the contract is terminated is $9,375,000.
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 $21,500,000 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 and nine months ended September 30, 2022, the Company recognized an expense of $1,104,167 and $3,312,500 respectively (three and nine months ended September 30, 2021 - $1,104,167 and $3,079,399, respectively) in operating expenses related to this arrangement and $2,496,065 accounts payable and accrued liabilities as at September 30, 2022 (December 31, 2021 - $2,183,565). During the nine months ended September 30, 2022, the Company made a cash payment of $3,000,000 (September 30, 2021 - $nil).
The agreement can be terminated by the counterparty 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 September 30, 2022, the amount of damages that the Company would be liable for if the contract is terminated was $13,500,000.
| 22 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
17. Shareholders’ equity
Common shares
a) Authorized
The Company is authorized to issue an unlimited number of common shares with no par value.
b) Common shares issued
|
| Number of common shares |
| |
Balance December 31, 2021 |
|
| 97,065,092 |
|
(i) Shares issued to settle contingent consideration |
|
| 305,325 |
|
(ii) Shares issued to settle contingent consideration |
|
| 264,614 |
|
|
|
|
|
|
Shares issued for Marketing Arrangement (Note 16) |
|
| 4,926,165 |
|
Shares issued for vested RSUs and PSUs (Note 19) |
|
| 590,707 |
|
Shares issued for acquisition of Calma (Note 10) |
|
| 1,762,425 |
|
Balance, September 30, 2022 |
|
| 104,914,328 |
|
| (I) | During the nine months ended September 30, 2022, the Company issued 305,325 common shares related to contingent consideration in the acquisition of Caliva. The common shares were included in shares to be issued as at December 31, 2021. |
|
|
|
| (ii) | During the nine months ended September 30, 2022, the Company issued 264,614 common shares related to contingent consideration in the acquisition of LCV. The common shares were issued as the related contingency was resolved. |
On January 28, 2022, the Company announced a voluntary extension of the lock-up agreements with certain members of the Company’s leadership team and the entire board of directors, covering over approximately 34,000,000 issued and outstanding common shares. Pursuant to the lock-up agreements, each counterparty has agreed that, subject to certain exceptions, they will not, without the written consent of the Company, among other things, 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 September 30, 2022 |
|
| 35,837,500 |
|
| $ | 11.50 |
|
The warrants expire on January 14, 2026. The Company has the right to accelerate expiry of the warrants (excluding the warrants held by the Subversive Capital Sponsor LLC in certain circumstances), if for any 20 trading days in a 30-day trading period the closing price of the share is $18.00 or greater.
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 15% 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’s options outstanding relate to replacement options issued in a business combination that occurred in 2021.
| 23 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
19. Share-based compensation (continued)
The following table reflects the continuity of the share options during the nine months ended September 30, 2022:
|
| September 30, 2022 |
| |||||||||||||
|
| Number of options |
|
| Weighted average exercise price $ |
|
| Weighted average remaining contractual term |
|
| Aggregate intrinsic value |
| ||||
Outstanding, beginning of period |
|
| 756,703 |
|
|
| 7.85 |
|
|
|
|
|
|
| ||
Expired |
|
| (125,627 | ) |
|
| 7.94 |
|
|
|
|
|
|
| ||
Forfeited |
|
| (114,990 | ) |
|
| 7.93 |
|
|
|
|
|
|
| ||
Outstanding, end of period |
|
| 516,086 |
|
|
| 7.56 |
|
|
| 3.85 |
|
|
| - |
|
Vested and expected to vest in the future |
|
| 519,569 |
|
|
| 7.56 |
|
|
| 4.70 |
|
|
| - |
|
Exercisable |
|
| 412,586 |
|
|
| 7.50 |
|
|
| 3.85 |
|
|
| - |
|
As at September 30, 2022, there was $299,767 of total unrecognized compensation cost related to non-vested replacement options. That cost is expected to be recognized over a weighted average period of 0.86 years.
(b) Equity-settled RSUs and PSUs
The following table reflects the continuity of RSUs and PSUs granted during the nine months ended September 30, 2022:
|
| September 30, 2022 |
|
|
| |||||||||||
|
| Number of RSUs |
|
| Weighted average grant date fair value $ |
|
| Number of PSUs |
|
| Weighted average grant date fair value $ |
| ||||
Outstanding, beginning of period |
|
| 3,160,020 |
|
|
| 7.21 |
|
|
| 150,000 |
|
|
| 7.01 |
|
Granted |
|
| 2,290,050 |
|
|
| 0.99 |
|
|
| 2,510,000 |
|
|
| 1.04 |
|
Vested |
|
| (1,017,430 | ) |
|
| 7.57 |
|
|
| (86,250 | ) |
|
| 7.01 |
|
Forfeited |
|
| (738,248 | ) |
|
| 6.57 |
|
|
| (125,000 | ) |
|
| 1.04 |
|
Outstanding, end of period |
|
| 3,694,392 |
|
|
| 3.39 |
|
|
| 2,448,750 |
|
|
| 1.19 |
|
As at September 30, 2022, there was $5,820,703 of total unrecognized compensation cost related to non-vested RSUs and $2,611,920 of total unrecognized compensation cost related to non-vested PSUs. That cost is expected to be recognized over a weighted average period of 2.14 years and 0.94 years respectively. The total fair value of RSUs and PSUs vested during the nine months ended September 30, 2022, was $1,148,076 and $37,913, respectively.
Of the 1,103,680 RSUs and PSUs that vested, 590,707 were settled in shares, 484,023 were settled in cash to cover withholding taxes on behalf of the employees and 28,950 were not yet settled.
The range of grant date fair values related to RSUs and PSUs granted during the nine months ended September 30, 2022 was $0.65 - $1.41.
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 and nine months ended September 30, 2022 and 2021, the Company recognized the following total compensation expense, net of estimated forfeitures:
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| September 30, 2022 |
|
| September 30, 2021 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||||
Replacement options |
| $ | 38,011 |
|
| $ | 518,725 |
|
| $ | 317,518 |
|
| $ | 1,815,332 |
|
Equity-settled RSUs and PSUs |
|
| 1,023,108 |
|
|
| 2,900,036 |
|
|
| 4,446,771 |
|
|
| 4,810,532 |
|
Cash-settled RSUs |
|
| - |
|
|
| (72,588 | ) |
|
| - |
|
|
| 5,765,003 |
|
Rights to contingent consideration |
|
| - |
|
|
| 266,483 |
|
|
| - |
|
|
| 5,059,953 |
|
|
| $ | 1,061,119 |
|
| $ | 3,612,656 |
|
| $ | 4,764,289 |
|
| $ | 17,450,820 |
|
20. Loss per share
|
| Three months ended |
| Nine months ended | ||||
|
| September 30, 2022 |
| September 30, 2021 |
| September 30, 2022 |
| September 30, 2021 |
Loss from continuing operations available to common shareholders | $ | (134,574,945) | $ | (477,771,926) | $ | (196,414,581) | $ | (450,389,837) |
Loss from discontinued operations available to common shareholders |
| (13,410,139) |
| (83,578,124) |
| (15,385,455) |
| (86,074,460) |
Loss available to common shareholders | $ | (147,985,084) | $ | (561,350,050) | $ | (211,800,036) | $ | (536,464,297) |
|
|
|
|
|
|
|
|
|
Weighted average number of shares, basic and diluted |
| 103,489,965 |
| 98,421,935 |
| 101,154,772 |
| 93,802,606 |
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share from continuing operations | $ | (1.30) | $ | (4.85) | $ | (1.94) | $ | (4.80) |
Basic and diluted loss per share from discontinued operations |
| (0.13) | $ | (0.85) |
| (0.15) |
| (0.92) |
Basic and diluted loss per share | $ | (1.43) | $ | (5.70) | $ | (2.09) | $ | (5.72) |
Approximately 77,571,531 of potentially dilutive securities as at September 30, 2022 were excluded in the calculation of diluted loss per share as their impact would have been anti-dilutive.
| 24 |
| Table of Contents |
21. Income taxes
The following table summarizes the Company’s income tax expense and effective tax rates for the three and nine months ended September 30, 2022 and 2021:
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| September 30, 2022 |
|
| September 30, 2021 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||||
Loss and comprehensive loss from continuing operations before income taxes |
| $ | (159,080,687 | ) |
| $ | (473,836,766 | ) |
| $ | (221,082,361 | ) |
| $ | (456,931,217 | ) |
Income tax recovery (expense) |
| $ | 24,460,758 |
|
| $ | (3,935,160 | ) |
| $ | 24,418,531 |
|
| $ | 6,541,380 |
|
The Company has computed its provision for income taxes under the discrete method which treats the year-to-date 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 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 nine months ended September 30, 2022 varies widely from the nine months ended September 30, 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 approximately $61,907,748 and $42,459,208 as at September 30, 2022 and December 31, 2021, respectively.
| 25 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
21. Income taxes (continued)
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 |
|
| Nine months ended |
| ||||||||||
|
| September 30, 2022 |
|
| September 30, 2021 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||||
General and administrative |
| $ | 9,717,296 |
|
| $ | 10,713,535 |
|
| $ | 31,554,670 |
|
| $ | 29,251,275 |
|
Allowance for accounts receivable and notes receivable |
|
| 722,456 |
|
|
| 460,358 |
|
|
| 3,303,791 |
|
|
| 546,975 |
|
Sales and marketing |
|
| 2,687,884 |
|
|
| 2,478,499 |
|
|
| 9,812,259 |
|
|
| 37,901,914 |
|
Salaries and benefits |
|
| 9,149,250 |
|
|
| 8,455,719 |
|
|
| 29,039,258 |
|
|
| 26,271,625 |
|
Share-based compensation (Note 19) |
|
| 1,061,119 |
|
|
| 3,612,656 |
|
|
| 4,764,289 |
|
|
| 17,450,820 |
|
Lease expense (Note 12) |
|
| 1,940,550 |
|
|
| 1,035,901 |
|
|
| 5,807,447 |
|
|
| 3,165,803 |
|
Depreciation of property and equipment and amortization of right-of-use assets |
|
| 1,139,282 |
|
|
| 909,111 |
|
|
| 2,982,641 |
|
|
| 2,367,810 |
|
Amortization of intangible assets (Note 9) |
|
| 10,420,607 |
|
|
| 3,271,209 |
|
|
| 20,772,458 |
|
|
| 11,806,979 |
|
|
| $ | 36,838,444 |
|
| $ | 30,936,988 |
|
| $ | 108,036,813 |
|
| $ | 128,763,201 |
|
23. Supplemental cash flow information
|
| Nine months ended |
| |||||
Change in working capital |
| September 30, 2022 |
|
| September 30, 2021 |
| ||
|
|
|
|
|
|
| ||
Accounts receivable |
| $ | 564,381 |
|
| $ | (566,648 | ) |
Income tax receivable |
|
| 1,322,340 |
|
|
| - |
|
Notes and other receivables, net |
|
| - |
|
|
| (1,700,000 | ) |
Inventory |
|
| 7,357,888 |
|
|
| (834,094 | ) |
Prepaid expenses and other current assets |
|
| 2,070,637 |
|
|
| (5,308,936 | ) |
Security deposits |
|
| (85,875 | ) |
|
| 6,181 |
|
Prepaid expenses and other assets |
|
| (43,787 | ) |
|
| 37,849 |
|
Cash settled share-based payments |
|
| - |
|
|
| (1,682,898 | ) |
Accounts payable and accrued liabilities |
|
| (13,845,266 | ) |
|
| (29,947,252 | ) |
|
| $ | (2,659,682 | ) |
| $ | (39,995,798 | ) |
|
|
|
|
|
|
|
|
|
|
| Nine months ended |
| |||||
Cash paid |
| September 30, 2022 |
|
| September 30, 2021 |
| ||
|
|
|
|
|
|
|
|
|
Income taxes paid |
| $ | 6,000,000 |
|
| $ | 1,700,000 |
|
| 26 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
24. Related party transactions and balances
The following table outlines the amounts paid to a related party:
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| September 30, 2022 |
|
| September 30, 2021 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||||
Lease payments – interest and principal (i) |
| $ | 1,347,197 |
|
| $ | 1,307,015 |
|
| $ | 4,040,392 |
|
| $ | 2,213,325 |
|
Administrative fees and other costs |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 5,000 |
|
|
| $ | 1,347,197 |
|
| $ | 1,307,015 |
|
| $ | 4,040,392 |
|
| $ | 2,218,325 |
|
| (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 assets as at September 30, 2022 is $40,733,065 (December 31, 2021 - $41,053,363) and $25,117,364 (December 31, 2021 - $28,035,112), respectively, with respect to leases with R&C. |
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 (the “Counterparty”) became a related party in May 2021, when its Chief Executive Officer joined the Company’s Board of Directors. On April 27, 2022, the individual resigned from the Company’s Board of Directors and at that time the Counterparty ceased to be a related party. During the three and nine months ended September 30, 2022, the Company expensed $nil and $1,772,725, respectively related to the Marketing Agreement up to April 27, 2022. |
25. Segment information
The Company’s operations comprise a single operating segment engaged in the cultivation, manufacturing, distribution and sale of cannabis within the State of California. All revenues were generated in the State of California for the three and nine months ended September 30, 2022 and 2021 and all property and equipment, right-of-use assets and intangible assets were located in the State of California.
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 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. 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
| 27 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
26. Commitments and contingencies (continued)
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 and applicable local jurisdictions to conduct its business in a timely fashion, there is no guarantee its clients will be able to do so and any failure 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% of its net income to allow SEV to make further social equity investments. During the nine months ended September 30, 2022, SEV made two social equity investments totalling $350,000 (Nine months ended September 30, 2021 -– SEV made two social equity investments totalling $1,000,000).
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 September 30, 2022 and 2021:
|
| Contingent consideration |
|
|
| |||||||
|
| Trading price consideration (i) |
|
| Other (ii) |
|
| Total |
| |||
Balance December 31, 2020 |
| $ | - |
|
| $ | - |
|
| $ | - |
|
Additions |
|
| 232,719,246 |
|
|
| - |
|
|
| 232,719,246 |
|
Change in fair value |
|
| (222,954,132 | ) |
|
| 1,957,045 |
|
|
| (220,997,087 | ) |
Transferred to equity |
|
| - |
|
|
| (1,957,045 | ) |
|
| (1,957,045 | ) |
Balance September 30, 2021 |
| $ | 9,765,114 |
|
|
| - |
|
|
| 9,765,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2021 |
| $ | 574,687 |
|
| $ | 368,444 |
|
| $ | 943,131 |
|
Change in fair value |
|
| (572,723 | ) |
|
| (69,430 | ) |
|
| (642,153 | ) |
Transferred to equity |
|
| - |
|
|
| (299,014 | ) |
|
| (299,014 | ) |
Balance, September 30, 2022 |
| $ | 1,964 |
|
| $ | - |
|
| $ | 1,964 |
|
| 28 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
27. Financial instruments (continued)
(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 18,356,299 and 3,856,955 additional common shares, respectively, in the event the 20-day volume weighted average trading price (“VWAP”) of the common shares reaches $13.00,
$17.00 and $21.00 within three years of closing, with 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 Brownian Motion-based pricing model over 500,000 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 price hurdle was met and the corresponding 20-day volume-weighted average price.
Key Inputs |
| September 30, 2022 |
|
| December 31, 2021 |
|
| September 30, 2021 |
| |||
Key unobservable inputs |
|
|
|
|
|
|
|
|
| |||
Expected volatility |
|
| 70 | % |
|
| 65 | % |
|
| 62 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Key observable inputs |
|
|
|
|
|
|
|
|
|
|
|
|
Share price |
| $ | 0.59 |
|
| $ | 1.39 |
|
| $ | 3.19 |
|
Risk-free interest rate |
|
| 4.06 | % |
|
| 0.79 | % |
|
| 0.35 | % |
Dividend yield |
|
| 0 | % |
|
| 0 | % |
|
| 0 | % |
Number of shares |
|
| 22,001,711 |
|
|
| 21,850,404 |
|
|
| 21,836,190 |
|
A 15% change in the volatility assumption will have the following impact on the fair value of the contingent consideration:
Change in volatility |
|
| September 30, 2022 |
|
| December 31, 2021 |
|
| September 30, 2021 |
| ||||
| +15% |
| $ | 33,522 |
|
| $ | 1,597,743 |
|
|
| 9,237,376 |
| |
| -15% |
| $ | (1,822 | ) |
| $ | (528,968 | ) |
|
| (6,975,068 | ) | |
(ii) Other – As part of the acquisition of LCV that occurred on January 15, 2021, the Company could be required to issue shares to former shareholders based on certain liabilities, the final settlement of which is contingent on the outcome of certain events. During the three months ended March 31, 2022, the remaining contingency was resolved and as a result, the number of shares to be issued related to that portion became fixed. The contingent consideration was remeasured to $299,014 based on the fixed number of shares to be issued to the former LCV shareholders and reclassified as equity. The remeasurement is included in the change in fair value of contingent consideration in the interim condensed consolidated statement of operations and comprehensive loss.
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 |
| $ | 107,111,075 |
|
| $ | - |
|
| $ | 107,111,075 |
|
Restricted cash and restricted cash equivalents |
|
| 2,639,732 |
|
|
| - |
|
|
| 2,639,732 |
|
Accounts receivable (i) |
|
| 4,621,242 |
|
|
| (2,465,798 | ) |
|
| 2,155,444 |
|
Security deposits |
|
| 1,205,629 |
|
|
| - |
|
|
| 1,205,629 |
|
Notes receivables (ii) |
|
| 6,039,816 |
|
|
| (5,650,000 | ) |
|
| 389,816 |
|
|
| $ | 121,617,494 |
|
| $ | (8,115,798 | ) |
| $ | 113,501,696 |
|
(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. 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.
| 29 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
27. Financial instruments (continued)
As at September 30, 2022 the Company’s aging of receivables was as follows:
|
| September 30, 2022 |
| |
0 - 30 days |
| $ | 1,424,901 |
|
31 - 60 days |
|
| 139,410 |
|
61 - 90 days |
|
| 188,883 |
|
91 – 120 days |
|
| 73,711 |
|
Over 120 days |
|
| 2,794,337 |
|
Gross receivables |
|
| 4,621,242 |
|
Less allowance for doubtful accounts |
|
| (2,465,798 | ) |
|
| $ | 2,155,444 |
|
(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
Recurring fair value measurements
The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as at September 30, 2022 and the associated gains (losses) for the nine months ended September 30, 2022:
|
| Carrying amount |
|
| Fair value |
|
| Level 1 |
|
| Level 3 |
|
| Gains (losses) |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Equity securities |
| $ | 438,522 |
|
| $ | 438,522 |
|
| $ | 438,522 |
|
| $ | - |
|
| $ | (421,974 | ) |
Debt securities |
|
| 1,308,028 |
|
|
| 1,308,028 |
|
|
| - |
|
|
| 1,308,028 |
|
|
| - |
|
Total investments |
| $ | 1,746,550 |
|
| $ | 1,746,550 |
|
| $ | 438,522 |
|
| $ | 1,308,028 |
|
| $ | (421,974 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration – trading price consideration |
| $ | 1,964 |
|
| $ | 1,964 |
|
| $ | - |
|
| $ | 1,964 |
|
| $ | 572,723 |
|
Contingent consideration - other |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 69,430 |
|
Total contingent consideration (Note 27) |
| $ | 1,964 |
|
| $ | 1,964 |
|
| $ | - |
|
| $ | 1,964 |
|
| $ | 642,153 |
|
Non-recurring fair value measurements
Certain assets are measured at fair value on a non-recurring basis and therefore are not included in the tables above. These assets were adjusted to fair value as a result of impairment recognized in the nine months ended September 30, 2022 (Note 13). The following table presents the level within the fair value hierarchy for these fair value measurements as at their respective measurement dates, along with their carrying value at September 30, 2022:
|
| Carrying amount |
|
| Fair value |
|
| Level 3 |
| |||
Licenses |
| $ | 9,699,829 |
|
| $ | 9,699,829 |
|
| $ | 9,699,829 |
|
Brands |
| $ | 23,624,000 |
|
| $ | 23,624,000 |
|
| $ | 23,624,000 |
|
Right of use assets - operating |
| $ | 2,458,703 |
|
| $ | 2,476,399 |
|
| $ | 2,476,399 |
|
| 30 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 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:
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||
Assets |
|
|
|
|
|
| ||
Current assets |
|
|
|
|
|
| ||
Cash |
| $ | 3,851,443 |
|
| $ | 1,754,929 |
|
Restricted cash |
|
| 996,452 |
|
|
| 6,443,076 |
|
Accounts receivable, net |
|
| 149,245 |
|
|
| 91,004 |
|
Income tax receivable |
|
| - |
|
|
| 162,073 |
|
Inventory |
|
| 2,142,122 |
|
|
| 1,199,662 |
|
Prepaid expenses and other current assets |
|
| 1,405,873 |
|
|
| 1,401,117 |
|
Total current assets |
|
| 8,545,135 |
|
|
| 11,051,861 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
| 5,874,961 |
|
|
| 5,110,894 |
|
Goodwill |
|
| - |
|
|
| 36,253,294 |
|
Intangible assets |
|
| 31,596,969 |
|
|
| 25,471,611 |
|
Right-of-use assets - operating |
|
| 8,751,513 |
|
|
| 12,199,466 |
|
Total assets |
| $ | 54,768,578 |
|
| $ | 90,087,126 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
| $ | 5,177,495 |
|
| $ | 6,724,680 |
|
Consideration payable – current portion |
|
| 1,649,783 |
|
|
| 1,331,724 |
|
Operating lease liability- current portion |
|
| 545,028 |
|
|
| 935,346 |
|
Total current liabilities |
|
| 7,372,306 |
|
|
| 8,991,750 |
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities |
|
| 11,399,056 |
|
|
| 11,681,587 |
|
Deferred tax liabilities |
|
| 8,765,597 |
|
|
| 7,563,419 |
|
Consideration payable |
|
| 520,681 |
|
|
| 1,827,515 |
|
Total liabilities |
| $ | 28,057,640 |
|
| $ | 30,064,271 |
|
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 $996,452 (December 31, 2021 - $6,443,076) that is only available to settle certain VIE obligations, and the creditors of $2,667,968 (December 31, 2021 - $7,953,367) of the liabilities have no recourse against the Company.
| 31 |
| Table of Contents |
TPCO Holding Corp.
Notes to the interim condensed consolidated financial statements
(Unaudited, in United States dollars)
For the three and nine months ended September 30, 2022 and 2021
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
Shares issued
Subsequent to September 30, 2022, the Company issued 99,899 shares for RSUs and PSUs vested.
Disposal of SISU
On October 31, 2022, the Company finalized the sale of SISU for $317,000 cash. In addition, the purchaser has agreed to enter into a multi-strategic supply agreement providing the Company the right, but not the obligation, to purchase cannabis oil and flower brokerage services for a period of 24 months on preferred terms.
Closing of Coastal Acquisition
On November 14, 2022, the Company completed the acquisition of 100% of the equity of Coastal Holding Company, LLC ("Coastal") by issuing 25,000,000 shares of Coast L Acquisition Corp., a wholly owned subsidiary of the Company. The shares of Coast L Acquisition Corp. are exchangeable on a one-for-one basis into shares of the Company. The Company also paid an additional $3.1 million upon closing and assumed approximately $1.9 million of debt.
| 32 |
| Table of Contents |
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, including the Company’s ability to grow revenue and reach long-term profitability; |
|
|
|
| · | the Company’s ability to reduce its operating expenses and cash burn rate, including the expected cost savings from actions taken to date; |
|
|
|
| · | the Company’s ability to complete future strategic alliances 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 implementation and effectiveness of the Company’s distribution platform, including; |
|
|
|
| · | the expected impact of the Company’s agreement to transition its wholesale distribution to Nabis; |
|
|
|
| · | 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 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; |
|
|
|
| · | the Company’s ability to source select investment opportunities and complete future targeted acquisitions, the ability to finance any such acquisitions, and the expected impact thereof; |
|
|
|
| · | 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 |
|
|
|
| · | general economic trends. |
| 33 |
| Table of Contents |
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 Item 1A of Part II of this Quarterly Report, 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 nine Months of 2021 Do Not Reflect Complete Period
Our financial results for the nine month period ended September 30, 2021 did not include 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, closed on January 15, 2021 (the “Qualifying Transaction”). Accordingly, our results of operations are not necessarily comparable between the nine months ended September 30, 2022 and the nine months ended September 30, 2021.
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 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 direct-to-consumer via the Company’s delivery service and strategically located storefront retail locations across California. A portfolio of products and brands that appeal to a broad range of user groups, need-states and occasions, offered at many price points, and with various brand value propositions, are produced at thigh 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 one-on-one relationships between its brands and consumers and collect proprietary consumer data and insights.
| 34 |
| Table of Contents |
The Company’s operational footprint spans cultivation, manufacturing, 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 September 30, 2022, the Company views its business as having one sales channel – omni-channel retail: brick and mortar retail, e-commerce pick up & delivery, as well as the sale of various branded wholesale products. The Company currently operates twelve omni-channel retail locations and four consumer delivery hubs.
The Company made the strategic decision to exit its low margin bulk wholesale business during the third quarter of 2022 to reduce complexity, prioritize higher-margin activities and conserve cash. Ultimately, the Company was successful in disposing of its bulk wholesale business on October 31, 2022. As such, this bulk wholesale business has been presented as discontinued operations commencing in the third quarter of 2022 in our financial statements. All comparative information has been restated to remove the bulk wholesale discontinued operations results. The bulk wholesale business generated revenue from the sale of bulk flower and oil produced in-house.
Through a combination of (i) professional leadership (ii) omni-channel operations, (iii) technology and data driven practices, (iv) brand and product expertise, and (v) social justice and equity advocacy, the Company intends to set the example globally as a best-in-class cannabis operation. The Company is actively evaluating cost reductions and business optimization to reduce its cash burn in the near term.
Beginning in 2022, the Company changed its mergers & acquisitions strategy going forward to be more opportunistic and selective rather than as a core function to achieve rapid growth.
Third Quarter Highlights
Cost Reduction Initiatives
1)Cultivation Pause
Our operations continue to focus on increasing gross margin and cost reduction in high impact areas of the Company, most notably cultivation.
In mid-September 2022, in-house cultivation was paused in response to the availability of lower cost flower that meets our quality specifications for our first party brands. We expect to achieve significant margin enhancement, as well as cost certainty with strategic sourcing relationships in place. We anticipate that the pause of in-house cultivation will reduce annual cash operating expenses by approximately $1.8 million and associated annual payroll by approximately $4 million by eliminating 70 positions or approximately 14% of the workforce for total savings of approximately $5.8 million annually.
2)Delivery Depot Consolidation
In response to proposed changes to California's cannabis delivery regulations to increase the allowed delivery "case pack value" limit, the Company has acted to optimize its delivery footprint. Under existing regulations, delivery drivers are allowed to carry a maximum of $5,000 worth of product in a vehicle, of which a maximum of $3,000 can be product that was not part of an order made before the driver leaves the delivery depot. The proposed new regulations would double the "case pack value" limit to $10,000, all of which can be product not part of a previously made order.
As a result of this change, which is expected to come into effect in the fourth quarter of 2022, delivery vehicles will be able to carry significantly more product than currently allowed. This increase is also expected to increase the geographic area that can be covered by a vehicle and allow for a much greater breadth of product to be carried. Consequently, the Company has elected to dispose of select redundant delivery depot locations as many geographic regions can now be more efficiently managed, including Culver City, Chula Vista and Sacramento operations. These dispositions resulted in $500,000 in gross sale proceeds and are expected to result in additional annual cost savings of $1.8 million.
This consolidation has reduced fixed cost and operational complexity, while retaining sales though store delivery alternatives.
Revenue Growth and Gross Margin Improvement Initiatives
To drive revenue growth and margin improvement in stores, the Company:
| 1) | Focused on increasing new and returning traffic by introducing and expanding high quality, limited batch Flower brands which include: BLEM, Teds Budz, Alien Labs, Connected, Fig Farms and Marathon. |
| 2) | Focused on increase in our average basket size by introducing and expanding Ounces and Half Ounces to our Flower assortment. |
| 3) | Continued to focus on curating a localized assortment that is relevant and consistently appealing. |
| 4) | Rolled out Treez point of sale system in all Coastal and Calma locations. Caliva locations will be transitioned in the fourth quarter of 2022. Treez is a leading commerce platform for cannabis retailers. |
| 5) | Significantly increased exposure and advertising on Weedmaps, e.g., push messaging, side banners, improved placement on search pages and programmatic marketing. Weedmaps is a third party platform for users interested in purchasing cannabis. |
| 6) | Held several vendor supported promotions for various brand launches by Stiizy and Raw Garden |
| 7) | Hired street teams to help localize brand awareness and purchased significant billboard space. |
| 8) | Built out a robust product demonstration schedule to develop brand engagement with customers and increase sell through. |
| 9) | Opened the Coastal Concord location during September 2022. |
| 35 |
| Table of Contents |
New Product Updates
RCVRY: A premium cannabis product launched in September 2022 at our Calma location. RCVRY is a brand collaboration featuring Nordan Shat aka "Faze Rain" from the FaZe Clan (NASDAQ: FAZE) gaming community with a fan base of over 510 million across combined social platforms. Our RCVRY cannabis launch coincided with Nordan's "public resurfacing" following his accident that left him temporarily paralyzed two years ago. Nordan is currently filming content that will be released across his social channels that follow his road to recovery (RCVRY).
East Coast Expansion
On July 6, 2022, the Company announced its first out of California state licensing and cultivation production agreement (the “Licensing Agreement”) with Curio Wellness (“Curio”). The agreement will bring the Company’s brands and products to the State of Maryland with anticipated market launch in late 2022.
Initial brands to be introduced under the terms of the Licensing Agreement include Monogram, Caliva, Mirayo by Santana, Deli, Cruisers and other TPCO owned brands, in a variety of product form factors including jarred fresh flower, pre-rolls, premium vapes, and infused gummies and chocolates. Some of the products will feature signature strains of cannabis cultivated by Curio in collaboration with The Parent Company. The Parent Company brands are expected to initially be available at Curio’s Far & Dotter dispensaries, with broad wholesale distribution to dispensaries across the State of Maryland to follow.
Under the terms the Licensing Agreement, Curio will exclusively manufacture, distribute, market and sell the Company’s branded products in the State of Maryland according to the product specifications and quality standards established by The Parent Company. The Licensing Agreement has an initial term of four years with further renewal terms and anticipates a potential expanded partnership into additional states.
Social Equity
On July 1, 2022, the Company agreed to make a follow-on $200,000 investment in its existing Josephine & Billie’s investment. Women-founded and led, Josephine and Billie’s is LA’s first cannabis speakeasy that gives Women of Color a tailored cannabis experience. We support Josephine and Billie’s mission to be inclusive, communal and puts the needs of Women of Color at the forefront. The Parent Company is proud to make this follow-on investment to provide Josephine & Billie’s the funds needed to build a sustainable business.
The Company plans to reposition its Social Equity Ventures to become the centralized owner of all corporate social responsibility activities undertaken with the mission to provide Black and underrepresented minorities with the foundation to succeed in the legal cannabis industry through education, advocacy and access to capital. Social Equity Ventures will be rebranded as “Legacy Ventures”.
Subsequent Events
Disposal of SISU
On October 31, 2022, the Company finalized the sale of its bulk wholesale business (SISU Extraction LLC) for $317,000 cash. In addition, the purchaser has agreed to enter into a strategic supply agreement providing the Company the right, but not the obligation, to purchase cannabis oil and flower brokerage services for a period of 24 months on preferred terms.
Manufacturing Outsourcing
During October 2022, product manufacturing was outsourced to third-party processors, which the Company expects will achieve an average of 27% cost savings on these products. In addition to margin improvement, we expect to benefit from strong R&D capabilities to produce innovative products for our future.
Workforce Reduction
We also continue to consolidate operational functions within the organization, which we expect to lead to further cost reductions overall. Including the $4 million payroll savings achieved by pausing cultivation in mid-September 2022. As of the date of this Quarterly Report, the Company has reduced its workforce by 33% from the beginning of 2022 and expects realize annual payroll savings of approximately $10 million.
In summary, to the date of this MD&A, the Company has implemented initiatives that are expected to save a total of approximately $13.6 million of costs: approximately $10 million payroll, approximately $1.8 million from cultivation pause/manufacturing outsourcing and approximately $1.8 million from delivery depot consolidation.
Closing of Coastal Acquisition
On November 14, 2022, the Company completed the acquisition of 100% of the equity of Coastal Holding Company, LLC ("Coastal") by issuing 2S,000,000 shares of Coast L Acquisition Corp., a who(Iy owned subsidiary of the Company. The shares of Coast L Acquisition Corp. are exchangeable on a one-for-one basis into shares of the Company. The Company also paid an additional $3.1 million upon closing and assumed approximately $1.9 million of debt.
| 36 |
| Table of Contents |
Results of Operations
(Unaudited, in United States dollars)
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| September 30, 2022 |
|
| September 30, 2021 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Sales, net of discounts |
| $ | 19,560,190 |
|
| $ | 18,894,135 |
|
| $ | 63,674,204 |
|
| $ | 55,385,321 |
|
Cost of sales |
|
| 12,942,068 |
|
|
| 13,893,643 |
|
|
| 44,316,034 |
|
|
| 43,774,625 |
|
Gross profit |
|
| 6,618,122 |
|
|
| 5,000,492 |
|
|
| 19,358,170 |
|
|
| 11,610,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment loss |
|
| 127,815,307 |
|
|
| 485,601,121 |
|
|
| 130,244,837 |
|
|
| 560,500,228 |
|
Operating expenses |
|
| 36,838,444 |
|
|
| 30,936,988 |
|
|
| 108,036,813 |
|
|
| 128,763,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
| (158,035,629 | ) |
|
| (511,537,617 | ) |
|
| (218,923,480 | ) |
|
| (677,652,733 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (1,183,968 | ) |
|
| (1,093,562 | ) |
|
| (3,694,798 | ) |
|
| (3,757,176 | ) |
Gain on debt forgiveness |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 3,358,686 |
|
Loss on disposal of assets |
|
| - |
|
|
| (137,042 | ) |
|
| (317,787 | ) |
|
| (3,656,707 | ) |
Change in fair value of investments at fair value through profit loss |
|
| (388,878 | ) |
|
| (768,030 | ) |
|
| (421,974 | ) |
|
| (418,818 | ) |
Change in fair value of contingent consideration |
|
| 3,558 |
|
|
| 38,178,321 |
|
|
| 642,153 |
|
|
| 220,997,087 |
|
Other income |
|
| 524,230 |
|
|
| 1,521,164 |
|
|
| 1,633,525 |
|
|
| 4,198,444 |
|
|
|
| (1,045,058 | ) |
|
| 37,700,851 |
|
|
| (2,158,881 | ) |
|
| 220,721,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
| (159,080,687 | ) |
|
| (473,836,766 | ) |
|
| (221,082,361 | ) |
|
| (456,931,217 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax recovery (expense) |
|
| 24,460,758 |
|
|
| (3,935,160 | ) |
|
| 24,418,531 |
|
|
| 6,541,380 |
|
Loss and comprehensive loss from continuing operations |
|
| (134,619,929 | ) |
|
| (477,771,926 | ) |
|
| (196,663,830 | ) |
|
| (450,389,837 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income tax |
|
| (2,327,414 | ) |
|
| (83,578,124 | ) |
|
| (4,302,730 | ) |
|
| (86,074,460 | ) |
Loss from classification to discontinued operations, net of income tax |
|
| (11,082,725 | ) |
|
| - |
|
|
| (11,082,725 | ) |
|
| - |
|
Net loss |
| $ | (148,030,068 | ) |
| $ | (561,350,050 | ) |
| $ | (212,049,285 | ) |
| $ | (536,464,297 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and comprehensive loss attributable to shareholders of the company |
| $ | (147,985,084 | ) |
| $ | (561,350,050 | ) |
| $ | (211,800,036 | ) |
| $ | (536,464,297 | ) |
Loss and comprehensive loss attributable to redeemable non-controlling interest |
|
| (44,984 | ) |
|
| - |
|
|
| (249,249 | ) |
|
| - |
|
Net loss |
| $ | (148,030,068 | ) |
| $ | (561,350,050 | ) |
| $ | (212,049,285 | ) |
| $ | (536,464,297 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share – basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share from continuing operations |
| $ | (1.30 | ) |
| $ | (4.85 | ) |
| $ | (1.94 | ) |
| $ | (4.80 | ) |
Loss per share from discontinued operations |
|
| (0.13 | ) |
|
| (0.85 | ) |
|
| (0.15 | ) |
|
| (0.92 | ) |
Loss per share |
| $ | (1.43 | ) |
| $ | (5.70 | ) |
| $ | (2.09 | ) |
| $ | (5.72 | ) |
Weighted average number of common shares |
|
| 103,489,965 |
|
|
| 98,421,935 |
|
|
| 101,154,772 |
|
|
| 93,802,606 |
|
| 37 |
| Table of Contents |
Discontinued Operations – Bulk Wholesale Business
During the third quarter of 2022, the Company made the strategic decision to exit its low margin bulk wholesale business (SISU) during the third quarter of 2022 to reduce complexity, prioritize higher-margin activities and conserve cash. Ultimately, the Company was successful in disposing of its bulk wholesale business on October 31, 2022. The bulk wholesale business generated revenue from the sale of bulk flower and oil produced in-house. As such, the bulk wholesale business has been presented as discontinued operations commencing in the third quarter of 2022 in our financial statements. All comparative information has been restated to remove the bulk wholesale discontinued operations results practically meaning that in our Statement of Operations, we no longer show the revenues and costs of the bulk wholesale business consolidated with our continuing operations but rather the just the net losses incurred from this business below loss from continuing operations (i.e., discontinued operations loss of $2,327,414 and $4,302,730 for the three and nine months ended September 30, 2022 compared to a discontinued operations loss of $83,578,124 and $86,074,460 in the three and nine months ended September 30, 2021). Further, the Company recorded a loss from classification to discontinued operations of $11,082,725 in the three and nine months ended September 30, 2022 compared to $nil in the three and nine months ended September 30, 2021. The Company believes exiting this business will reduce operating losses going forward.
Sales Revenue
During the third quarter of 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. Our results for the nine months ended September 30, 2022 include the various omni-channel retail growth acquisitions we made during 2021 including: Martian Delivery, LLC (“Martian Delivery”) (during the third quarter of 2021), Kase’s Journey Inc. (“Kase’s Journey”) (during the third quarter of 2021), Calma and Coastal (both during the fourth quarter of 2021).
The Company considers itself post the exit of the bulk wholesale business to have one sales channel – omni-channel retail (brick and mortar retail, e-commerce pick up & delivery, as well as the sale of various branded wholesale products). The Company directly sells first party and selected third party products into dispensaries across California, leveraging in-house sales teams, as well as the two wholesale distribution centers in San Jose and Costa Mesa, respectively. As previously announced, the Company has transitioned its wholesale distribution activities to Nabis, a leading cannabis wholesale platform in California.
As of September 30, 2022, the Company operated twelve retail locations and four consumer delivery hubs. Subsequent to quarter-end, one delivery hub was closed. We operate four store brands, Caliva, Deli by Caliva, Coastal and Calma.
The Company’s continuing operations revenue for the three and nine months ended September 30, 2022 was $19,560,190 and $63,674,204 compared to $18,894,135 and $55,385,321 in the comparative three and nine month periods ending September 30, 2021 representing growth of 3.5% and 15%. respectively.
The Company achieved omni-channel retail growth as the comparative period did not include the financial results contributed by Coastal and Calma all of which were acquired subsequent to September 30, 2021. The consolidation of Coastal and Calma in the three and nine months ended September 30, 2022 offset a decrease in same store revenue and average order volume at several retail locations that are presented in the three and nine months ended September 30, 2021.
Gross Profit
Gross Profit reflects our revenue less our cost of sales, which consist of costs primarily consisting of labor, materials, consumable supplies, overhead, amortization of production equipment, shipping, packaging and other expenses.
The Company’s continuing operations gross profit for the three and nine months ended September 30, 2022 was $6,618,122 (33.8%) and $19,358,170 (30.4%) compared with $5,000,492 (26.5%) and $11,610,696 (21%) in the three and nine months ended September 30, 2021. The improved gross margins represent the results of the various margin enhancing initiatives the Company implemented during 2022 as described in the highlights section of this MD&A.
Operating Expenses
|
| Three months ended |
|
| Nine months ended |
| ||||||||||
|
| September 30, 2022 |
|
| September 30, 2021 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||||
General and administrative |
| $ | 9,717,296 |
|
| $ | 10,713,535 |
|
| $ | 31,554,670 |
|
| $ | 29,251,275 |
|
Allowance for doubtful amounts |
|
| 722,456 |
|
|
| 460,358 |
|
|
| 3,303,791 |
|
|
| 546,975 |
|
Sales and marketing |
|
| 2,687,884 |
|
|
| 2,478,499 |
|
|
| 9,812,259 |
|
|
| 37,901,914 |
|
Salaries and benefits |
|
| 9,149,250 |
|
|
| 8,455,719 |
|
|
| 29,039,258 |
|
|
| 26,271,625 |
|
Share-based compensation |
|
| 1,061,119 |
|
|
| 3,612,656 |
|
|
| 4,764,289 |
|
|
| 17,450,820 |
|
Lease expense |
|
| 1,940,550 |
|
|
| 1,035,901 |
|
|
| 5,807,447 |
|
|
| 3,165,803 |
|
Depreciation and amortization |
|
| 1,139,282 |
|
|
| 909,111 |
|
|
| 2,982,641 |
|
|
| 2,367,810 |
|
Amortization of intangible assets |
|
| 10,420,607 |
|
|
| 3,271,209 |
|
|
| 20,772,458 |
|
|
| 11,806,979 |
|
|
| $ | 36,838,444 |
|
| $ | 30,936,988 |
|
| $ | 108,036,813 |
|
| $ | 128,763,201 |
|
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.
For the three and nine months ended September 30, 2022, the Company recorded operating expenses of $36,838,444 and $108,036,813, respectively compared with $30,936,988 and $128,763,201 in the three and nine months ended September 30, 2021 comparative periods.
General and administrative costs were $9,717,296 and $31,554,670 in the three and nine months ended September 30, 2022 compared with $11,260,510 and $29,798,250 in the comparative ending in the three and nine months ended September 30, 2021. The $1,543,214 or 14% decrease in general administrative expenses achieved during the third quarter of 2022 due mainly to lower professional fees and savings from cost reduction initiatives implemented during the year. General and administrative costs for the nine months ended September 30, 2022 were $1,756,420 or 5.9% higher than in the nine-month comparative period due mainly to the cost of the consolidated 2021 year end audit including costs associated with accounting for the Qualifying Transaction incurred during the first quarter of 2022.
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| Table of Contents |
The allowance for doubtful accounts was $722,456 and $3,303,791 in the three and nine months ended September 30, 2022 compared with $460,358 and $546,975 in the three and nine months ended September 30, 2021. The increased allowance reflects management’s estimates for credit losses on various trade receivables and the Mosaic.Ag matter as described later in this MD&A.
Salaries and benefits totaled $9,149,250 and $29,039,258 in the three and nine months ended September 30, 2022 and $8,455,719 and $26,271,625 in the three and nine months ended September 30, 2021. The increases of $693,531 (8.2%) and $2,767,633 (10.5%) in the three and nine months ended September 30, 2022 is the result of the consolidation of additional head count acquired via the Coastal, Martian, Kase and Calma acquisitions, severances of $409,128 net of restructuring efficiencies.
Share based compensation totaled $1,061,119 and $4,764,289 in the three and nine months ended September 30, 2022 compared with $3,612,656 and $17,450,820 in the three and nine months ended September 30, 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 compensation expense was primarily attributable to the significant number of RSUs granted in connection with the Qualifying Transaction during 2021, as well as the fact that the market price of our common shares is lower in 2022 than it was in 2021.
Lease expense totaled $1,940,550 and $5,807,447 in the three months and nine ended September 30, 2022 and $876,285 and $3,165,803 in the three and nine months ended September 30, 2021. The increases reflect the numerous acquisitions made during 2021 which are consolidated in the financial results for the three and nine months ended September 30, 2022 whereby the Company increased the number of lease properties and its California footprint, as well as the Pullman property sale and lease back arrangement as previously disclosed.
Depreciation of property, plant & equipment totaled $1,139,282 and $2,982,641 in the three and nine months ended September 30, 2022 compared with $876,285 and $3,165,803 in the three and nine months ended September 30, 2021. Depreciation is a non-cash expense and the slight expense increases in the periods represents the higher property, plant & equipment asset base owned by the Company at September 30, 2022 compared to September 30, 2021 due to the various acquisitions made in 2021.
Amortization of intangible assets totaled $10,420,607 and $20,772,458 in the three and nine months ended September 30, 2022 compared with $3,271,209 and $11,806,979. Amortization is a non-cash expense. The increase in amortization expense is due to additional intangible assets acquired as part of the various acquisitions in 2021.
Non-Cash Impairment
In accordance with Accounting Standard Codification (ASC) Topic 350, the Company is required to assess its goodwill and other indefinite-lived intangible assets for impairment annually or in between tests if events or changes in circumstances indicate the carrying value of its assets may not be recovered. Further, under ASC 360, the Company is required to assess definite lived-intangible assets and long-lived assets whenever events or changes in circumstances indicate that their carrying amount may not be recoverable.
Impairment charges totaled $127,815,307 and $130,244,837 in the three and nine months ended September 30, 2022 compared with $485,601,121 and $560,500,228 in the three and nine months ended September 30, 2021. As part of the annual impairment assessment, the Company’s future forecasts considered changes in cash flow estimates due to lower cannabis industry growth rate assumptions and cost pressures due to higher U.S. inflation. While the Company remains optimistic that cannabis legalization will occur, our expected future cash flows reflect the current tax and regulatory environment. The issues faced by the Company are not unique to our operations as the entire California cannabis market has been impacted. The Company continues to focus on activities to create long-term shareholder value and restructure its business to reduce its operating costs.
Other Items
Interest (expense)
Interest expense totaled $1,183,968 and $3,694,798 for the three and nine months ended September 30, 2022 compared with $1,093,562 and $3,757,176 in the three and nine months ended September 30, 2021. The interest expense is primarily incurred on lease accounting for the Company’s right-of-use assets.
Discontinued Operations
The Company recorded a loss from discontinued operations (its bulk wholesale business) of $2,327,414 and $4,302,730 for the three and nine months ended September 30, 2022 compared to $83,578,124 and $86,074,460 in the three and nine months ended September 30, 2021. The much larger losses in the comparative period ended September 30, 2021 is primarily due to larger impairment losses recorded in this period. The Company further recorded a loss from classification to discontinued operations, net of income tax of $11,082,725 in the three and nine months ended September 30, 2022 compared with $nil in the three and nine months ended September 30, 2021.
Net loss and Comprehensive Loss
The Company recorded net losses of $148,030,068 and $212,049,285 in the three and nine months ended September 30, 2022 compared to $561,350,050 and $536,464,297 in the comparative period ended September 30, 2021. The reduction in losses is due primarily to lower impairment charges in the current periods and to a lesser extent due to higher realized margins and some operating cost efficiencies.
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| Table of Contents |
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.
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 (“FVPL”)(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.
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.
TPCO Holding Corp. |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interim condensed consolidated statements of income and comprehensive income |
|
|
|
|
|
|
|
|
|
| ||||||
(Unaudited, in United States dollars) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Three-months ended |
|
| Nine-months ended |
| ||||||||||
|
| September 30, 2022 |
|
| September 30, 2021 |
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss and comprehensive loss from continuing |
| $ | (134,619,929 | ) |
| $ | (477,771,926 | ) |
| $ | (196,663,830 | ) |
| $ | (450,389,837 | ) |
Income taxes from continuing operations |
|
| (24,460,758 | ) |
|
| 3,935,160 |
|
|
| (24,418,531 | ) |
|
| (6,541,380 | ) |
Depreciation and amortization from continuing operations |
|
| 11,559,889 |
|
|
| 4,180,320 |
|
|
| 23,755,099 |
|
|
| 14,174,789 |
|
Interest expense from continuing operations |
|
| 1,183,968 |
|
|
| 1,093,562 |
|
|
| 3,694,798 |
|
|
| 3,757,176 |
|
EBITDA |
|
| (146,336,830 | ) |
|
| (468,562,884 | ) |
|
| (193,632,464 | ) |
|
| (438,999,252 | ) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share based compensation expense |
|
| 1,061,119 |
|
|
| 3,612,656 |
|
|
| 4,764,289 |
|
|
| 17,450,820 |
|
Other non-recurring items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value change of contingent consideration |
|
| (3,558 | ) |
|
| (38,178,321 | ) |
|
| (642,153 | ) |
|
| (220,997,087 | ) |
Change in fair value of investments at fair value through profit or loss |
|
| 388,878 |
|
|
| 768,030 |
|
|
| 421,974 |
|
|
| 418,818 |
|
Loss on disposal of assets |
|
| - |
|
|
| 137,042 |
|
|
| 317,787 |
|
|
| 3,656,707 |
|
Impairment loss |
|
| 127,815,307 |
|
|
| 485,601,121 |
|
|
| 130,244,837 |
|
|
| 560,500,228 |
|
Other taxes |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 2,243,441 |
|
De-SPAC costs |
|
| - |
|
|
| 500,000 |
|
|
| - |
|
|
| 4,121,807 |
|
Restructuring costs |
|
| 1,139,128 |
|
|
| 1,500,000 |
|
|
| 1,139,128 |
|
|
| 3,878,782 |
|
Sales and marketing expense |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 30,151,147 |
|
Adjusted EBITDA |
| $ | (15,935,956 | ) |
| $ | (14,622,356 | ) |
| $ | (57,386,602 | ) |
| $ | (37,574,589 | ) |
The Company’s EBITDA loss was $146,336,830 and $193,632,464 for the three and nine months ended September 30, 2022 compared with $468,403,268 and $438,999,252 in the comparative periods ended September 30, 2021. The lower EBITDA losses are due to primarily lower impairment charges recorded in the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021.
Adjusted EBITDA
The Company’s Adjusted EBITDA loss was $15,935,956 and $57,386,602 for the three and nine months ended September 30, 2022 compared with $14,462,740 and $37,574,589 in the comparative periods ended September 30, 2021. The increased Adjusted EBITDA losses are due to the increased size of the Company with its numerous acquisitions made during 2021, which are still being integrated. The Company is focused on improving its margins and reducing operating costs.
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 September 30, 2022, The Parent Company had cash and cash equivalents of $107,111,075 compared with cash and cash equivalents of $165,310,609 as at December 31, 2021. Cash and cash equivalents are predominately invested in liquid securities issued by the United States government.
| 40 |
| Table of Contents |
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 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.
The Company made the strategic decision to exit its low margin bulk wholesale business during the third quarter of 2022 to reduce complexity, prioritize higher-margin activities and conserve cash. As such, this bulk wholesale business has been presented as discontinued operations commencing in the third quarter of 2022 in our financial statements including in the statement of cash flow. During the nine months ended September 30, 2022, discontinued operations used cash of $2,565,934 compared with a use of cash of $5,528,420 in the comparative nine months ended September 30, 2021. The divestment of the bulk wholesale business was completed subsequent to September 30, 2022. The Company expects this divestment will reduce its operating cash burn rate going forward.
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 maturity of the contractual undiscounted lease liabilities as of September 30, 2022:
|
| Operating Lease |
|
| Finance Lease |
| ||
|
|
|
|
|
|
| ||
Remainder of 2022 |
| $ | 1,441,432 |
|
| $ | 1,147,681 |
|
2023 |
|
| 4,826,896 |
|
|
| 4,625,156 |
|
2024 |
|
| 4,552,956 |
|
|
| 4,763,910 |
|
2025 |
|
| 4,518,781 |
|
|
| 4,906,828 |
|
2026 |
|
| 4,370,472 |
|
|
| 5,054,033 |
|
Thereafter |
|
| 22,192,154 |
|
|
| 64,884,898 |
|
Total undiscounted lease liabilities |
|
| 41,902,691 |
|
|
| 85,382,506 |
|
Interest on lease liabilities |
|
| 16,559,013 |
|
|
| 48,589,146 |
|
Total present value of minimum lease payments |
|
| 25,343,678 |
|
|
| 36,793,360 |
|
Lease liability – current portion |
|
| 2,423,413 |
|
|
| 62,783 |
|
Lease liability |
| $ | 22,920,265 |
|
| $ | 36,730,577 |
|
Marketing Agreement (“MA”)
The Company has engaged a third-party for strategic and promotional services. During the three months ended March 31, 2021 and the nine months ended September 30, 2021, the Company issued 2,376,425 common shares in settlement of the initial $25,000,000. As the shares vested immediately, the full amount of the $25,000,000 has been recognized as an expense in operating expenses during the nine months ended September 30, 2021.
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 nine months ended September 30, 2022, the Company issued 4,926,165 common shares to settle the first, second and third quarterly payments.
The Company recognized an expense of $584,181 and $3,311,454 during the three and nine months ended September 30, 2022, respectively (three and nine months ended September 30, 2021 - $1,363,636 and $3,803,030) in operating expenses as a sales and marketing expense. As at September 30, 2022, the cash-settled liability is $3,632,574 (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 September 30, 2022, the amount that the Company would be liable for if the contract is terminated is $9,375,000.
| 41 |
| Table of Contents |
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 $21,500,000 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 and nine months ended September 30, 2022, the Company recognized an expense of $1,104,167 and $3,312,500, respectively (three and nine months ended September 30, 2021 - $1,104,167 and $3,079,399, respectively) in operating expenses related to this arrangement and $2,496,065 accounts payable and accrued liabilities as at September 30, 2022 (December 31, 2021 - $2,183,565). During the nine months ended September 30, 2022, the Company made a cash payment of $3,000,000 (September 30, 2021 - $nil).
The agreement can be terminated by the counterparty 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 September 30, 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, multiple of which were not 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, TPCO delivered to Mosaic on June 30, 2022, notice of its exercise of its contractual rights to terminate each of the Cultivation and Supply Agreements and the Membership Interest Purchase Agreement effective on such date. 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, which note is now past its maturity date. Pursuant to the terms of the Cultivation and Supply Agreements, the Company made payments for cannabis product in advance based on a projected aggregate yield, with Mosaic owing a refund for any overpayment in the event of the actual yield (as measured at the conclusion of the growing season) being less than the projected yield, which event did transpire, triggering a refund owed to Company of approximately $1,500,000. There can be no assurance the promissory note and/or the overpayment amount will be repaid in full, or at all. The Company expects to pursue repayment of such debts through appropriate legal actions.
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.
Inflation
The Company is not immune to the widespread cost inflation experienced in the United States and many parts of the world. The Company intends to continue to work to improve its gross margins by partnering with its vendors.
Critical Accounting Policies and 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.
| 42 |
| Table of Contents |
Cash Flow
The table below highlights our cash flows for the periods indicated:
(Unaudited, in United States dollars) |
| Nine months ended |
| |||||
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||
|
|
|
|
|
|
| ||
Cash provided by (used in) |
|
|
|
|
|
| ||
Operating activities |
|
|
|
|
|
| ||
Net loss from continuing operations |
| $ | (196,663,830 | ) |
| $ | (450,389,837 | ) |
Adjustments for items not involving cash |
|
|
|
|
|
|
|
|
Impairment loss |
|
| 130,244,837 |
|
|
| 560,500,228 |
|
Interest expense |
|
| 3,694,798 |
|
|
| 3,739,340 |
|
Interest income |
|
| (75,758 | ) |
|
| (993,639 | ) |
Loss on disposal of assets |
|
| 317,787 |
|
|
| 3,656,707 |
|
Loss on lease termination |
|
| (114,458 | ) |
|
|
|
|
Allowance for accounts receivable and notes receivable |
|
| 3,438,664 |
|
|
| 796,403 |
|
Gain on debt forgiveness |
|
| - |
|
|
| (3,358,686 | ) |
Fair value change of investments |
|
| 421,974 |
|
|
| 418,818 |
|
Depreciation and amortization |
|
| 23,755,099 |
|
|
| 14,174,789 |
|
Shares issued for long-term strategic contracts |
|
| - |
|
|
| 25,000,000 |
|
Share-based compensation expense, net of tax |
|
| 4,284,916 |
|
|
| 16,765,238 |
|
Non-cash marketing expense |
|
| 3,311,454 |
|
|
| 3,803,030 |
|
Non-cash operating lease expense |
|
| 5,402,936 |
|
|
| 3,029,654 |
|
Fair value change of contingent consideration |
|
| (642,153 | ) |
|
| (220,997,087 | ) |
Deferred income tax recovery |
|
| (27,771,859 | ) |
|
| (13,714,716 | ) |
Repayment of operating lease liabilities |
|
| (5,276,778 | ) |
|
| (3,403,629 | ) |
Net changes in non-cash working capital items |
|
| (2,659,682 | ) |
|
| (39,995,798 | ) |
|
|
|
|
|
|
|
|
|
Net cash used in continued operating activities |
|
| (58,332,053 | ) |
|
| (100,969,185 | ) |
|
|
|
|
|
|
|
|
|
Net cash used in discontinued operating activities |
|
| (2,565,934 | ) |
|
| (5,528,420 | ) |
|
|
|
|
|
|
|
|
|
Total operating activities |
|
| (60,897,987 | ) |
|
| (106,497,605 | ) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Receipt of payments on notes receivable |
|
| 1,759,318 |
|
|
| - |
|
Repayment of notes payable |
|
| (4,680,000 | ) |
|
| - |
|
Repayment of consideration payable |
|
| (1,150,000 | ) |
|
| (872,021 | ) |
Repayment of finance lease liabilities |
|
| (3,342,761 | ) |
|
| (3,429,846 | ) |
Proceeds from private placement |
|
| - |
|
|
| 51,635,000 |
|
Redemption of Class A restricted voting shares |
|
| - |
|
|
| (264,318,686 | ) |
Proceeds from exercise of options |
|
| - |
|
|
| 12,972 |
|
Repurchase of shares |
|
| - |
|
|
| (4,454,571 | ) |
Repayment of line of credit |
|
| - |
|
|
| (1,000,000 | ) |
Total financing activities |
|
| (7,413,443 | ) |
|
| (222,427,152 | ) |
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Net cash paid in the Qualifying Transaction |
|
| - |
|
|
| (28,143,886 | ) |
Net cash paid in business combinations |
|
| - |
|
|
| (1,402,337 | ) |
Purchases of property and equipment |
|
| (2,733,218 | ) |
|
| (8,725,860 | ) |
Advances for note receivable |
|
| - |
|
|
| (5,650,000 | ) |
Acquisition of investments |
|
| (350,000 | ) |
|
| (1,000,000 | ) |
Proceeds from notes receivable |
|
| - |
|
|
| 187,954 |
|
Proceeds from sale of property and equipment, net of selling costs |
|
| 6,253,157 |
|
|
| 11,068,537 |
|
Total investing activities |
|
| 3,169,939 |
|
|
| (33,665,592 | ) |
|
|
|
|
|
|
|
|
|
Net change in cash during the period |
|
| (65,141,491 | ) |
|
| (362,590,349 | ) |
|
|
|
|
|
|
|
|
|
Cash, restricted cash and restricted cash equivalents |
|
|
|
|
|
|
|
|
Beginning of period |
| $ | 174,892,298 |
|
| $ | 582,622,025 |
|
End of period |
| $ | 109,750,807 |
|
| $ | 220,031,676 |
|
|
|
|
|
|
|
|
|
|
Cash |
|
| 107,111,075 |
|
|
| 206,677,145 |
|
Restricted cash and restricted cash equivalents |
|
| 2,639,732 |
|
|
| 13,354,531 |
|
Cash, restricted cash and restricted cash equivalents |
| $ | 109,750,807 |
|
| $ | 220,031,676 |
|
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Operating Activities
Cash used in continued operating activities in the nine months ended September 30, 2022 totaled $58,332,053 as compared to cash used in continued operating activities of $100,854,966 in the comparative nine month period ended September 30, 2021. In the nine months ended September 30, 2022, the cash used in operating activities represents an average operating cash burn rate of $6,481,339 per month compared to $11,206,107 per month in the comparative period. The Company is evaluating a number of options to improve operating results including: subleasing excess real estate, combining operations for lower performing locations, closing or disposing of non-core assets, and general and administrative cost reductions.
Cash used in discontinued operating activities in the nine months ended September 30, 2022 totaled $2,565,934 compared with cash used in discontinued operating activities of $5,528,420 in the comparative nine month period ended September 30, 2021.
Financing Activities
Cash used in financing activities totaled $7,413,443 in the nine months ended September 30, 2022 compared with cash used of $222,427,152 in the comparative nine month period ended September 30, 2021. In the nine months ended September 30, 2022, the Company settled $3,342,761 lease liabilities associated with its real estate, $1,150,000 of consideration payable primarily related to its 2021 acquisition of Coastal, $4,680,000 for repayment of notes payable offset associated with Coastal and received $1,759,318 primarily from a legal settlement and the remainder from the sale of non-core assets. The nine months end September 30, 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 totaled $3,169,939 in the nine months ended September 30, 2022 compared with cash used of $33,665,592 in the comparative nine month period ended September 30, 2021. In the nine months ended September 30, 2022, the Company invested $150,000 in its social equity venture investment in Digistrains and $200,000 in Josephine & Billies, received $6,253,157 of proceeds from the sale of property, plant and equipment primarily associated with the sale and leaseback transaction at its Pullman property invested $2,733,218 of property plant and equipment to support its operations. The comparative nine month period ended September 30, 2021 includes $29,546,223 of cash paid for acquisitions as the major use of cash.
Commitments and Contingencies
California Operating Licenses
The Company’s primary activity is the cultivation, manufacturing 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 the Company or its clients will be able to do so and any failure to do so may have a negative effect on the Company’s business and results of operations.
Social Equity Fund
The Company formed a wholly owned subsidiary to serve as its social equity fund during the during 2021 with a planned $10,000,000 investment and a planned annual contribution of at least 2% of net income from the Company. Through September 30, 2022, the Company has invested approximately $1,300,000 in three investments being Stanton Brands (dba Josephine & Billie’s), Peakz LLC and Digistrains.
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Share Capital and Capital Management
As of September 30, 2022, the Company had 104,914,328 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 September 30, 2022, a total of 3,694,392 RSUs and 2,448,750 PSUs 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. There are currently 510,363 options to purchase up to 510,363 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. There are currently 9,206 options to purchase up to 9,206 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 nine months ended September 30, 2022 and year ended December 31, 2021. The Company is not subject to any external capital requirements.
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.
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Specialized Knowledge, Skills, Resources & Equipment
Knowledge with respect to cultivating and growing cannabis is important in the cannabis industry and particularly 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.
UNITED STATES REGULATORY ENVIRONMENT
Cannabis Industry Regulation
On February 8, 2018, the Canadian Securities Administrators revised their previously released Staff Notice 51-352 -Issuers with U.S. Marijuana-Related Activities (“Staff Notice 51-352”), 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.
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) (“Adult-Use Cannabis”) 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) (“Medical-Use Cannabis”) ((i) and (ii) collectively “Regulated Cannabis”). 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 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. §§ 801-971) (the “CSA”) and through the Food, Drug & Cosmetic Act (21 U.S.C. §§ 301-392) (the “FDCA”). The CSA schedules controlled substances, including “marihuana” (defined as all parts of the plant cannabis sativa L. 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 (“DEA”), an agency of the U.S. Department of Justice (the “DOJ”) 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 “FDA”), 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 cease-and-desist 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 cannabis sativa L., for a narrow segment of medical conditions.
State laws that permit and regulate the cultivation, production, distribution, sale 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 cultivation, 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.
However, in October 2022, President Biden directed the Department of Justice and Department of Health & Human Services to conduct a review of the scheduling status of cannabis. It is anticipated that cannabis may be rescheduled or descheduled entirely within the next 12-24 months.
As of September 30, 2022, 38 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 19 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 13 states, with the remainder of the currently-legal states to commence sales activities in 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 2023.
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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 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, and New Jersey and Montana commencing Adult-Use sales in 2022 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 “2013 Cole Memorandum”) 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 non-exhaustive list of which was enumerated therein.
On January 4, 2018, U.S. Attorney General Jeff Sessions formally issued a new memorandum (the “Sessions Memorandum”), 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.
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 cultivation, 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 (“FinCEN”) issued a memorandum on February 14, 2014 (the “FinCEN Memorandum”) 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 (“SAR”) 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 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 “2014 Cole Memorandum”) 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.
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 “Farm Bill”) removed hemp as a Schedule I controlled substance and authorized the United States Department of Agriculture (“USDA”) 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.
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Although the 2013 Cole Memorandum has been rescinded, one legislative safeguard for the 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”) to prevent the federal government from using congressionally appropriated funds to enforce federal cannabis laws against regulated 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 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”) 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 “Rohrbacher-Blumenauer” Amendment, and now known colloquially as the “Joyce-Amendment” after its most recent sponsors. The rider was renewed on March 15, 2022 through the signing of the FY 2022 omnibus spending bill, which extended the protections of the Amendment through September 30, 2022.
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.
However, as noted previously, in October 2022 President Biden directed the Department of Justice and Department of Health & Human Services to conduct a review of the scheduling status of cannabis. It is anticipated that cannabis may be rescheduled or descheduled entirely within the next 12-24 months.
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.
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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 not-for-profit medical cannabis collectives and dispensaries, and an optional identification card system for Medical-Use Cannabis patients.
In September 2015, the California legislature passed three bills collectively known as the Medical Cannabis Regulation and Safety Act (“ MCRSA”). The MCRSA established a licensing and regulatory framework for 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”), creating an 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”), which amalgamated MCRSA and AUMA and provided for a set of regulations to govern a medical and 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 at the California Department of Food and Agriculture (“CalCannabis”), and the Manufactured Cannabis Safety Branch California Department of Public Health (“MCSB”), 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 agencies-BCC, CalCannabis and MCSB-into a single licensing authority known as the Department of Cannabis Control (“DCC”). 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.
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 age 18 years of age or older 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, storage, required regulatory and compliance testing, sale to certain licensed entities within the State of California, 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, post-processing refinement, infusion, packaging or repackaging, labeling or relabeling, remediation 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.
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California Reporting Requirements
The State of California uses METRC as the state’s track-and-trace 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.
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 storefront retail premises to medical cannabis patients at least 18 years and older, and adults 21 and over maintain a fully operational security alarm system; |
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| · | contract for professionally-certified security guard services; |
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| · | maintain a video surveillance system that records continuously 24 hours a day; |
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| · | ensure that the facility’s outdoor premises have sufficient lighting; |
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| · | not dispense from its premises outside of permissible hours of operation; |
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| · | limit the daily amount of cannabis goods dispensed to individual customers to prevent diversion; |
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| · | store cannabis and cannabis product only in areas per the premises diagram submitted to and approved by the State of California during the licensing process; |
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| · | store all cannabis and cannabis products in a secured, locked room or a vault; report to local law enforcement and the DCC within 24 hours after discovering the theft, diversion, or loss of cannabis; and |
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| · | ensure the safe transport of cannabis and cannabis products between licensed facilities, maintain a delivery manifest and QR-code scannable State license in any vehicle transporting cannabis and cannabis products. Only vehicles registered with the DCC that meet DCC 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. |
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| · | All deliveries of cannabis goods must be made in person to a physical address that is not on publicly-owned land or to a building leased by a public agency. |
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| · | 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 retail store) and ensure that all cannabis goods sold comply with the regulatory requirements. |
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| · | 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 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. |
In March 2022, the state of California issued notable new regulations pertaining to cannabis delivery. First, the state increased the total value of cannabis goods delivery employees can carry in their vehicle from $5,000 to $10,000. Second, for purposes of this limit, the state removed any distinction between “ordered” and “unordered” product. These changes will afford cannabis delivery operators considerably more flexibility, allowing them to carry a broader array of products and serve a larger geographic area. These regulations are proposed to take effect in November 2022.
California Cannabis Cultivation Tax
As of July 1st, 2022, California has eliminated its cannabis cultivation tax. Prior to this, cannabis cultivated in California was subject to a $161/pound tax. In practice, this tax amounted to 30% or more of the wholesale price of cannabis. The elimination of the cannabis cultivation tax may make legal cannabis more competitive with California’s robust illicit cannabis market.
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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 Currency and Foreign Transactions Reporting Act of 1970 (31 U.S.C. § 5311 et seq) (commonly known as the “Bank Secrecy Act”). 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.
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 “United States Regulatory Environment - California”. 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 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 the 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.
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 “Track-and-Trace” system, METRC, and the Company’s integrated enterprise resource planning system (“ERP”). The Company conducts regular continuous cycle counts in addition to both quarterly and annual manual inventory reconciliations, in accordance with regulations and best practices.
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.
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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 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 September 30, 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 then 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. During the second quarter of 2022, we restructured the responsibilities of several members our senior finance team to help improve our financial reporting. During the third quarter of 2022, we added additional resources. We believe the internal finance department responsibility re-allocation, additional resources and recent divestment of the bulk wholesale business will over time improve our internal control over financial reporting.
Management expects to 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.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the quarter ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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.
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Item 6. Exhibits.
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| Incorporated by Reference From | ||||||
Exhibit No. |
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| 10-12G |
| 9/30/2021 |
| 2.1 |
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| 9/30/2021 |
| 2.2 |
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| 10-12G |
| 9/30/2021 |
| 2.3 |
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| 10-12G |
| 9/30/2021 |
| 2.4 |
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| 10-12G/A |
| 10/27/2021 |
| 2.5 |
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| 2.6 |
| First Amendment to Unit Purchase Agreement, dated as of March 4, 2022, by and among Coastal Holding Company LLC, TPCO Holding Corp and Julian Michalowski, as Equityholders’ Representative and Coastal Holding Company, LLC. |
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| Notice of Articles of Subversive Capital Acquisition Corp.. dated July 15, 2019 |
| 10-12G |
| 9/30/2021 |
| 3.1 |
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| Articles of Subversive Capital Acquisition Corp., dated July 15, 2019 |
| 10-12G/A |
| 10/01/2021 |
| 3.2 |
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| Certificate of Change of Name. dated January 15, 2021 by Subversive Capital Acquisition Corp. |
| 10-12G |
| 9/30/2021 |
| 3.3 |
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| 9/30/2021 |
| 4.1 |
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| Warrant Agency Agreement between the Company and Odyssey Trust Company dated July 16, 2019 |
| 10-12G |
| 9/30/2021 |
| 4.2 |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
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Exhibit No. |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
| Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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* 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.
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.
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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. |
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Date: November 14, 2022 | By: | s/ Troy Datcher |
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| Troy Datcher |
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| Chief Executive Officer |
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Date: November 14, 2022 | By: | /s/ Mike Batesole |
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| Mike Batesole Chief |
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| Financial Officer (Principal Financial Officer) |
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EXHIBIT 31.1
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Troy Datcher, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of TPCO Holding Corp.; |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 14, 2022 | By: | /s/ Troy Datcher | |
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| (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Mike Batesole, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of TPCO Holding Corp.; |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 14, 2022 | By: | /s/ Mike Batesole | |
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| Mike Batesole | |
| Chief Financial Officer | |||
| (Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of TPCO Holding Corp. (the “Company”) on Form 10-Q for the period ended S 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Troy Datcher, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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| (2) | The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| November 14, 2022 | By: | /s/ Troy Datcher | |
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| Troy Datcher | |
| Chief Executive Officer | |||
| (Principal Executive Officer) |
A signed original of this written statement required by Section 906 has been provided to TPCO Holding Corp. and will be retained by TPCO Holding Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. §1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of TPCO Holding Corp. (the “Company”) on Form 10-Q for the period ended June 30, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mike Batesole, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
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| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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| (2) | The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| November 14, 2022 | /s/ Mike Batesole | ||
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| Mike Batesole |
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| Chief Financial Officer | |
| (Principal Financial Officer) |
A signed original of this written statement required by Section 906 has been provided to TPCO Holding Corp. and will be retained by TPCO Holding Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 2.6
Execution Copy
AMENDMENT AGREEMENT
This Amendment Agreement (this “Amendment”) is made and entered into as of March 4, 2022 (the “Amendment Effective Date”), by and among Coast L Acquisition Corp., a Delaware corporation (the “Buyer”), TPCO Holding Corp., a British Columbia corporation (“Parent”), Coastal Holding Company, LLC, a California limited liability company (“Coastal”), the certain members of Coastal identified on the signature pages hereto (the “Signing Members”) and Julian Michalowski, as Equityholders’ Representative (“Representative”). Capitalized terms used in this Amendment and not otherwise defined herein have the meanings given in the Purchase Agreement (as defined below).
RECITALS
WHEREAS, Buyer, Parent, Coastal, the Signing Members, Representative and certain other Persons are parties to that certain Unit Purchase Agreement, dated as of October 1, 2021 (the “Purchase Agreement”), and in connection therewith, Buyer, Parent and Representative are parties to that certain Holdback and Lockup Agreement, dated as of October 1, 2021 (the “Holdback Agreement” and, together with the Purchase Agreement, the “Transaction Agreements”).
WHEREAS, the parties now desire to amend and supplement certain terms of the Purchase Agreement and the Holdback Agreement, all as set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises, notwithstanding anything to the contrary in the Agreement, the parties hereto hereby agree as follows:
1. Amendments.
(a) The parties agree that for all purposes of the Transaction Agreements, including without limitation, Section 2.05 of the Purchase Agreement, that the respective amounts of Coastal Inventory, Prepaid Assets and Unsatisfied Management Date Accounts Payable, in each case as of the Management Transfer Date, are as set forth on Exhibit A attached hereto.
(b) The parties agree that, notwithstanding anything in the Transaction Agreements to the contrary, for all purposes of the Transaction Agreements, including without limitation, Section 2.05 of the Purchase Agreement, and for purposes of measuring “Sale Consideration” (i) except with respect to the Coastal Inventory and the Prepaid Expenses (as well as an interim calculation of Unsatisfied Management Date Accounts Payables, which will be updated as of the Closing Date), the parties have elected to defer delivery of the Buyer Statement until thirty (30) days after Closing, (ii) determination of the final calculations of the Coastal Indebtedness, the Coastal Transaction Expenses, the Coastal Cash, the Unsatisfied Management Date Accounts Payables, and the Sale Consideration shall be deferred until after the Closing and in each instance will be measured as of the Closing Date rather than the Management Transfer Date, (iii) the Prepaid Assets and Coastal Inventory shall be equal to the respective amounts set forth on Exhibit A hereto, (iv) the interim calculation of Unsatisfied Management Date Accounts Payable as of the Management Transfer Date shall be equal to the amount set forth on Exhibit A hereto but will be updated as of the Closing Date and will be measured as of the Closing Date, and (v) Buyer shall deliver the Buyer Statement giving effect to the foregoing within thirty (30) days after the Closing.
[Signature Page to Amendment Agreement]
(c) Section 2.02(b) of the Purchase Agreement is hereby amended by deleting the first sentence thereof in its entirety and replacing it with the following:
“The consideration payable at Closing by Buyer to the Members in consideration for the Unit Purchase is the Sale Consideration, less an amount of Buyer Shares equal to the sum of the obligations set forth on Schedule 2.02(b), without duplication, to the extent such obligations are not satisfied (from the proceeds of the Loan Amount, cancelled or otherwise paid) on or prior to the Closing, with each Buyer Share being valued for this purpose at a price of $3.2607 per share.”
(d) Section 2.05(g)(i) of the Purchase Agreement is hereby amended in its entirety to read as follows:
“(i) If the Sale Consideration is greater than the Share Consideration (the amount by which the Sale Consideration is greater than the Share Consideration, the “Shortfall”), then within five Business Days following the Determination Date, Buyer shall increase the number of Tranche A Shares being held in accordance with the Holdback Agreement by the number of Buyer Shares equal to (A) the Shortfall, divided by (B) $3.2607.”
(e) Section 2.05(g)(ii) of the Purchase Agreement is hereby amended in its entirety to read as follows:
“(ii) If the Share Consideration is greater than the Sale Consideration (the amount by which the Share Consideration is greater than the Sale Consideration, the “Excess”), then within five Business Days following the Determination Date, Buyer shall reduce and cancel from the Share Consideration being held in accordance with the Holdback Agreement a number of Tranche A Shares (or if there at such time no Tranche A Shares then being held, a number of Tranche B Shares) equal to (A) the Excess, divided by (B) $3.2607.”
(f) Section 6(a) of the Holdback Agreement is hereby amended in its entirety to read as follows:
“(a) Tranche A Shares (and any TPCO Shares into which they are exchanged) shall be Released on the later of (i) the date such Tranche A Shares have been Earned, (ii) the Closing, (iii) completion of the Tax Filings and Payments; provided that Parent or its Affiliates provide Coastal with the requisite information to complete the Tax Filings and Payments by May 15, 2022, and (iv) 180 days after the Management Transfer Date. Notwithstanding the foregoing, on any such date, Tranche A Shares shall not be Released to the extent that the Unsatisfied Loan Amount would exceed the number of Earned but not yet Released Tranche A Shares and Tranche B Shares, but shall thereafter be released to the extent the Earned but not yet released Tranche A and Tranche B Shares exceed the then Unsatisfied Loan Amount.”
(g) Section 6(b) of the Holdback Agreement is hereby amended in its entirety to read as follows:
“(b) Tranche B Shares (and any TPCO Shares into which they are exchanged) shall be Released on the later of (i) the date such Tranche B Shares have been Earned (ii) the Closing, (iii) ten (10) days after the final calculation of Sale Consideration pursuant to Section 2.05 of the Purchase Agreement and any adjustments to the Company Shares in accordance therewith, (iv) completion of the Tax Filings and Payments; provided that Parent or its Affiliates provide Coastal with the requisite information to complete the Tax Filings and Payments by May 15, 2022, and (v) 180 days after the applicable Pricing Date for such Tranche B Shares. Notwithstanding the foregoing, on any such date, Tranche B Shares shall not be Released to the extent that the Unsatisfied Loan Amount would exceed the number of Earned but not yet Released Tranche A Shares and Tranche B Shares, but shall thereafter be released to the extent the Earned but not yet released Tranche A and Tranche B Shares exceed the then Unsatisfied Loan Amount.”
(h) The last sentence of Section 8.03 of the Purchase Agreement is hereby amended in its entirety to read as follows:
“Without limiting the generality of the foregoing, upon termination of this Agreement, (i) all Share Consideration shall be released, paid over and/or surrendered to Buyer and cancelled, as and to the extent provided under the Holdback Agreement, (ii) the Coastal Note shall continue in accordance with its terms, (iii) the Service Agreements shall terminate, (iv) the assignment to Buyer or its Affiliates of the right to exercise the option under the Pasadena Agreement Amendment shall terminate and revert to and be vested solely with Coastal, (v) Buyer shall pay Coastal the amount, if any, by which the sum of Coastal Inventory and Prepaid Expenses (as specified in Exhibit A of the Amendment Agreement among the parties hereto) exceeds the total amount of all Unsatisfied Management Date Accounts Payable (measured as of the Management Transfer Date) paid by Buyer prior to termination, and (vi) all payments made by Buyer or its Affiliates (A) to the Seller (as defined in the Pasadena Agreement Amendment) of Pasadena pursuant to the Pasadena Agreement Amendment, and (B) for the build out of Concord, shall in each case be added to the outstanding balance under the Coastal Note and be subject to repayment in accordance with the terms thereunder.”
2. Miscellaneous.
(a) The Purchase Agreement and Holdback Agreement, as amended hereby, are and shall remain unmodified and in full force and effect until their termination in accordance with their respective terms and are hereby reaffirmed. The provisions of Article X of the Purchase Agreement are hereby incorporated herein, mutatis mutandis.
(b) This Amendment Agreement may be executed in one or more counterparts each of which shall be deemed to constitute an original and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. This Amendment, to the extent signed and delivered by means of a facsimile machine, e-mail, DocuSign or other means of electronic transmission, shall be treated in all manner and respects and for all purposes as an original signature, agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person.
(c) This Amendment and the rights and duties of the parties hereunder shall be governed by, and construed in accordance with, the Laws of the State of California, without regard to the conflict of laws principles.
(d) This Amendment will be binding on and inure to the benefit of the parties and their respective successors and assigns.
[Signature Page Immediately Follows.]
Execution Copy
IN WITNESS WHEREOF, the parties have caused this Amendment Agreement to be signed by their respective duly authorized representatives as of the date first written above.
| COAST L ACQUISITION CORP. | |||
| By: | /s/ Troy Datcher | ||
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| Name: | Troy Datcher | |
| Title: | CEO | ||
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| COASTAL HOLDING COMPANY, LLC |
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| By: | /s/ Julian Michalowski |
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| Name: | Julian Michalowski |
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| Title: | CEO |
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| TPCO HOLDING CORP. |
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| By: | /s/ Troy Datcher |
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| Name: | Troy Datcher |
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| Title: | CEO |
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| Julian Michalowski, as Equityholders’ Representative |
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| THE JULIAN MICHALOWSKI 2020 REVOCABLE TRUST DATED DECEMBER 1, 2020 |
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| By: | /s/ Julian Michalowski |
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| Name: | Julian Michalowski |
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| Title: | Trustee |
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| /s/ Kevin McGrath |
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| Kevin McGrath |
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| /s/ Malante Hayworth | |||
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| Malante Hayworth |
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| /s/ Josh Ginsberg |
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| Josh Ginsberg |
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| TREASURE DRAGON HOLDING LTD. | |||
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| By: | /s/ Steven Loeb | ||
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| Name: | Steven Loeb |
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| Title: | Authorized Signatory |
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| BIG HORSE, LLC |
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| By: | /s/ Jason Loeb |
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| Name: | Jason Loeb |
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| Title: | Authorized Signatory |
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EXHIBIT A
Coastal Inventory, Prepaid Assets and Unsatisfied Management Date Accounts Payable
| Coastal Inventory |
| $1,311,039 |
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| Prepaid Assets |
| $49,365 |
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| Unsatisfied Management Date Accounts Payable |
| $4,303,834 |
EXHIBIT 2.7
SECOND AMENDMENT
This SECOND Amendment (this “Amendment”) is made and entered into as of September 29, 2022 (the “Amendment Effective Date”), by and among Coast L Acquisition Corp., a Delaware corporation (the “Buyer”), TPCO Holding Corp., a British Columbia corporation (“Parent”), Coastal Holding Company, LLC, a California limited liability company (“Coastal”), and Julian, Michalowski, as Equityholders’ Representative (“Representative”) on behalf of the certain members of Coastal identified on the signature pages hereto (the “Signing Members”). Capitalized terms used in this Amendment and not otherwise defined herein have the meanings given in the Purchase Agreement (as defined below).
RECITALS
WHEREAS, Buyer, Parent, Coastal, the Signing Members, Representative and certain other Persons are parties to that certain Unit Purchase Agreement, dated as of October 1, 2021, as amended by that certain Amendment Agreement dated as of March 14, 2022 (the “Purchase Agreement”).
WHEREAS, the parties now desire to amend and supplement certain terms of the Purchase Agreement as set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises, notwithstanding anything to the contrary in the Agreement, the parties hereto hereby agree as follows:
1. Amendments.
(a)Section 8.02(b)(i) of the Purchase Agreement is hereby amended by deleting the reference to “September 30, 2022” and substituting in its place a reference to “October 14, 2022”.
(b)The following shall be added to the Purchase Agreement as a new Section 6.05(g):
“(g) Parent and the Equityholders’ Representative shall meet in person on or prior to October 7, 2022 to discuss matters concerning the Purchase Agreement, unless personal attendance is prevented by circumstances beyond reasonable control, in which case the absent party will participate by video conference.”
2. Disclosure. The parties acknowledge and agree that this Amendment and the transactions contemplated hereby are subject to Section 6.06 of the Purchase Agreement. In furtherance thereof, the Parties agree not to make or issue any statements, comments or communications regarding this Amendment, the Purchase Agreement, the documents and transactions contemplated thereby, or matters and discussions among the parties with respect thereto, other than the information to be filed by Parent in its Form 8K, as set forth on Exhibit A hereto, or as otherwise permitted or required under Section 6.06 of the Purchase Agreement.
3. Miscellaneous.
(a) Except as modified by this Amendment, the Purchase Agreement is and shall remain unmodified and in full force and effect in accordance with its terms and is hereby reaffirmed. The provisions of Article X of the Purchase Agreement are hereby incorporated herein, mutatis mutandis.
(b) This Amendment may be executed in one or more counterparts each of which shall be deemed to constitute an original and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other parties. This Amendment, to the extent signed and delivered by means of a facsimile machine, e-mail, DocuSign or other means of electronic transmission, shall be treated in all manner and respects and for all purposes as an original signature, agreement or instrument and shall be considered to have the same binding legal effect as if it were the original signed version thereof delivered in person.
(c) This Amendment and the rights and duties of the parties hereunder shall be governed by, and construed in accordance with, the Laws of the State of California, without regard to the conflict of laws principles.
(d) This Amendment will be binding on and inure to the benefit of the parties and their respective successors and assigns.
[Signature Page Immediately Follows]
| 2 |
IN WITNESS WHEREOF, the parties have caused this Second Amendment to be signed by their respective duly authorized representatives as of the date first written above.
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| COASTAL HOLDING COMPANY, LLC |
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| By: | /s/ Julian Michalowski |
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| Name: | Julian Michalowski |
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| Title: | Chief Executive Officer |
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| COAST L ACQUISITION CORP. |
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| By: | /s/ Mike Batesole |
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| Name: | Mike Batesole |
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| Title: | Chief Financial Officer |
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| TPCO HOLDING CORP. |
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| By: | /s/ Mike Batesole |
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| Name: | Mike Batesole |
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| Title: | Chief Financial Officer |
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| /s/ Julian Michalowski |
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| Julian Michalowski, as Equityholders’ Representative on behalf of the following Signing Members: |
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| THE JULIAN MICHALOWSKI 2020 REVOCABLE TRUST DATED DECEMBER 1, 2020 |
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| Kevin McGrath |
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| Malante Hayworth |
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| Josh Ginsberg |
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| TREASURE DRAGON HOLDING LTD. BIG HORSE, LLC |
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| 3 |
Exhibit A
8K Disclosure
As previously disclosed, on October 1, 2021, TPCO Holding Corp. (the “Company”) executed a Unit Purchase Agreement (as amended, 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.
On September 29, 2022, the Company, Coastal Holding and Julian Michalowski, as Equityholders’ Representative, entered into an amendment to the Purchase Agreement to, among other things, extend the “Outside Date” in Section 8.01(b)(i) from September 30, 2022 to October 14, 2022 to provide additional time to address all outstanding matters and completion of the closing conditions. The parties are engaged in discussions in an effort to consummate the transaction.
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