Vireo Growth Inc 10-K for FY2022
Vireo Growth Inc. (VREOF)
About this 10-K
Vireo Growth Inc filed this 10-K on March 31, 2023, covering the fiscal year ended December 31, 2022 (FY2022).
Headline figures
Fiscal year ended December 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $74.63M
- up 37.1% from $54.45M a year earlier
- Net loss
- $42.46M
- compared with a net loss of $33.69M a year earlier
- Diluted EPS
- -$0.33
- compared with -$0.27 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period from to .
Commission file number
(Exact name of registrant as specified in its charter)
British Columbia, |
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:
Securities registered pursuant to Section 12(g) of the Securities Exchange Act of 1934:
Subordinate Voting Shares
Multiple Voting Shares
Super Voting Shares
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ◻
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.
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).
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 | ◻ |
⌧ | Smaller reporting company | ||
Emerging growth company |
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If an emerging growth company, indicate by checkmark 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ¨
Indicate by check mark whether any of those error corrections are restatements that require a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to Section 240.10 D-1(b). ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The aggregate market value of the shares of Subordinate Voting Shares, Multiple Voting Shares and Super Voting Shares (based on as converted basis, based on the closing price of these shares on the OTCQX) on June 30, 2022, held by non-affiliates of the registrant was approximately $
As of March 27, 2023, the registrant had the following number of shares of each of its classes of registered outstanding: Subordinate Voting Shares –
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the definitive proxy statement to be filed by the registrant in connection with the 2022 Annual and Special Meeting of Shareholders (the “2022 Management Information Circular and Proxy Statement”).
GOODNESS GROWTH HOLDINGS, INC.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 64 | |
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Report of Independent Registered Public Accounting Firm (PCAOB ID | 76 | |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 109 | |
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspection | 111 | |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 111 | |
Certain Relationships and Related Transactions, and Director Independence | 111 | |
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EXPLANATORY NOTE
Unless the context provides otherwise, references herein to “we,” “us,” “our,” “Company” or “Goodness Growth” refer to Goodness Growth Holdings, Inc. together with our wholly owned subsidiaries. References to “Darien Business Development Corp.” or “Darien” refer to the Company prior to completion of the RTO (as hereinafter defined).
Unless otherwise indicated, all references to “$” or “US$” in this report refer to United States dollars, and all references to “C$” refer to Canadian dollars.
Emerging Growth Company Status
As a company with less than $1.235 billion in revenue during our most recently completed fiscal year, we qualify as 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”). As an emerging growth company, we may take advantage of specified reduced disclosure and other exemptions from requirements that are otherwise applicable to public companies that are not emerging growth companies. These provisions include:
| ● | Reduced disclosure about our executive compensation arrangements; |
| ● | Exemptions from non-binding shareholder advisory votes on executive compensation or golden parachute arrangements; |
| ● | Our election under Section 107(b) of the JOBS Act to delay adoption of new or revised accounting standards with different effective dates for public and private companies until those standards would otherwise apply to private companies; and |
| ● | Exemption from the auditor attestation requirement in the assessment of our internal control over financial reporting. |
We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.235 billion in annual revenues as of the end of a fiscal year, if we are deemed to be a large-accelerated filer under the rules of the Securities and Exchange Commission (the “SEC”) or if we issue more than $1.0 billion of non-convertible debt over a three-year period.
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CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Form 10-K contains statements that we believe are, or may be considered to be, “forward-looking statements” under U.S. or Canadian securities laws. Forward-looking statements are neither historical facts nor assurances of future performance. Instead, they are based on current beliefs, expectations, or assumptions regarding the future of the business, future plans and strategies, operational results, and other future conditions of the Company. All statements other than statements of historical fact included in this report regarding the prospects of our industry or our prospects, plans, financial position, or business strategy may constitute forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking words such as “expect,” “plan,” “expected,” “scheduled,” “estimates,” “estimated,” “forecasts,” “continue,” “continued,” “anticipate,” “will,” “expectations,” “cannot,” “could,” “believe,” “focused,” “intention,” “strategic,” “future,” “approach,” “strategy,” “efforts,” “potential,” “potentially,” “possible,” “may,” “intend,” “intended,” “intent,” “should,” “might,” “would,” “achieve,” “allowed to,” “over time,” “likely,” “remain,” “opportunities,” “seeking,” or the negative or plural of these words or similar expressions or variations. Furthermore, forward-looking statements may be included in various filings that we make with the SEC or press releases or oral statements made by or with the approval of one of our authorized executive officers. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that these expectations will prove to be correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements.
By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that predictions, forecasts, projections, and other forward-looking statements will not be achieved. We caution readers not to place undue reliance on these statements as many important factors could cause the actual results to differ materially from the beliefs, plans, objectives, expectations, anticipations, estimates, and intentions expressed in such forward-looking statements. Risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company, as applicable, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking information and statements include, but are not limited to, the risks described in “Risk Factors” in this report.
Readers are cautioned not to place undue reliance on any forward-looking statements contained in this report, which reflect management’s opinions only as of the date hereof. Except as required by law, we undertake no obligation to revise or publicly release the results of any revision to any forward-looking statements. You are advised, however, to consult any additional disclosures we make in our reports to the SEC. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained in this report.
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PART I
Item 1.Business
Background
Goodness Growth Holdings, Inc. is a reporting issuer in Canada, with its securities listed for trading on the Canadian Securities Exchange (the “CSE”) under the symbol “GDNS” and on the OTCQX under the symbol “GDNSF”. Goodness Growth is a cannabis company whose mission is to provide safe access, quality products and value to its customers while supporting its local communities through active participation and restorative justice programs. The Company is evolving with the industry and is in the midst of a transformation to being significantly more customer-centric across its operations, which include cultivation, manufacturing, wholesale and retail business lines. With our core operations strategically located in four limited-license medical and adult-use markets, Goodness Growth cultivates and manufactures cannabis products in environmentally friendly greenhouses and other facilities and distributes these products through our growing network of Green Goods™ and other Goodness Growth branded retail dispensaries, as well as third-party dispensaries in the markets in which our subsidiaries hold operating licenses.
As of March 27, 2023, Goodness Growth is licensed in seven states and territories, consisting of Maryland, Massachusetts, Minnesota, Nevada, New Mexico, New York, and Puerto Rico. As of March 27, 2023, we retail cannabis products in 18 dispensaries located in Maryland (2), Minnesota (8), New Mexico (4), and New York (4) and wholesales cannabis products, through third-party companies, in Maryland, Minnesota, and New York.
Our registered office is located at 1500 Royal Centre, 1055 West Georgia Street, P.O. Box 11117, Vancouver, British Columbia V6E 4N7. Our head office is located at 207 South Ninth Street, Minneapolis, Minnesota 55402.
History of the Company
Our business was established in 2014 as Minnesota Medical Solutions, LLC, and we received our first license in December 2014. The Company was incorporated under the Business Corporations Act (Alberta) on November 23, 2004 under the name “Initial Capital Inc.” On May 8, 2007, the Company changed its name to “Digifonica International Inc.” following the completion of a qualifying transaction. On December 9, 2013, the Company continued into British Columbia under the name of “Dominion Energy Inc.” The Company had several name changes before ultimately changing its name to “Darien Business Development Corp.” on March 13, 2017. Vireo Health, Inc. (“Vireo U.S.”) was organized as a limited liability company under Minnesota law on February 4, 2015 and converted to a Delaware corporation on January 1, 2018. Vireo U.S. acquired all the equity of Minnesota Medical Solutions, LLC, and Empire State Health Solutions, LLC, in an equity interest swap transaction on January 1, 2018. On March 18, 2019, Vireo U.S. completed the reverse takeover transaction of Goodness Growth (formerly Vireo Health International Inc., which was formerly Darien Business Development Corp. or “Darien”) (the “RTO”) whereby Darien acquired all the issued and outstanding shares of Vireo U.S. Following the completion of the reverse takeover, the former shareholders of Vireo U.S. acquired control of the Company as they owned a majority of the outstanding shares of the Company upon completion of the RTO. Concurrently with the completion of the RTO, the Company changed our name to “Vireo Health International, Inc.” In June 2021, we changed our name to “Goodness Growth Holdings, Inc.”
Arrangement Agreement
On January 31, 2022, we entered into an Arrangement Agreement (the “Arrangement Agreement”) with Verano Holdings Inc. (“Verano”), pursuant to which Verano was to acquire all of the issued and outstanding common shares of Goodness Growth pursuant to a plan of arrangement (the “Plan of Arrangement”) under the Business Corporations Act (British Columbia) (the “Arrangement”). Subject to the terms and conditions set forth in the Arrangement Agreement and the Plan of Arrangement, holders of Goodness Growth Shares were to receive 0.22652 of a subordinate voting share of Verano (each a “Verano Subordinate Voting Share”), subject to adjustment as described below (the “Exchange Ratio”), for each Subordinate Voting Share held, and 22.652 Verano Subordinate Voting Shares for each Multiple Voting Share and Super Voting Share held, immediately prior to the effective time of the Arrangement (the “Effective Time”). At the Effective Time, in accordance with the terms of Goodness Growth’s 2019 Company Equity Incentive Plan, the terms of each
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Goodness Growth option and RSU were to be adjusted to entitle the holder to receive, upon exercise, in substitution for the number of Goodness Growth Shares subject to such option or RSU, that number of Verano Shares based on the Exchange Ratio. In accordance with the terms of Goodness Growth’s outstanding warrants, the terms of each Goodness Growth warrant were to be adjusted to entitle the holder to receive, upon exercise, in substitution for the number of Goodness Growth Shares subject to such warrant, that number of Verano Shares based on the Exchange Ratio.
On October 13, 2022, Goodness Growth received a notice of purported termination of the Arrangement Agreement (the “Notice”) from Verano. The Notice asserted certain breaches of the Arrangement Agreement, including claims the Company’s public filings and communications with respect to its business and ongoing operations were misleading and that the Company breached its representations to Verano under the Arrangement Agreement. Verano also claimed, as a result of such breaches, it is entitled to payment of the $14,875,000 termination fee and its transaction expenses. Goodness Growth denies all of Verano’s allegations and affirmatively asserts that it has complied with its obligations under the Arrangement Agreement, and with its disclosure obligations under US and Canadian law, in all material respects at all times. Goodness Growth believes that Verano has no factual or legal basis to justify or support its purported grounds for termination of the Arrangement Agreement.
On October 21, 2022, Goodness Growth commenced an action in the Supreme Court of British Columbia against Verano arising out of Verano’s repudiation of the Arrangement Agreement, which Goodness Growth believes was wrongful. Goodness Growth is seeking damages, costs and interest, based on Verano's breach of contract and of its duty of good faith and honest performance. On November 14, 2022, Verano filed counterclaims against the Company for the termination fee and transaction expenses described above. Due to uncertainties inherent in litigation, it is not possible for Goodness Growth to predict the timing or final outcome of the legal proceedings against Verano or to determine the amount of damages, if any, that may be awarded.
Description of the Business
Overview of the Company
Goodness Growth is a United States-based multi-state cannabis company with significant operations in four core markets of Maryland, Minnesota, New Mexico, and New York. We are science-focused and dedicated to providing patients and adult-use customers with high quality cannabis-based products. We cultivate cannabis in environmentally friendly greenhouses, manufacture pharmaceutical-grade cannabis extracts, and sell our products at both Company-owned and third-party dispensaries to qualifying patients and adult-use customers. We currently serve thousands of customers each month.
New Mexico sales of adult-use products began on April 1, 2022. In 2021, New York adopted legislation allowing adult-use cannabis and sales began in January, 2023. Maryland voters approved recreational marijuana legalization in the fourth quarter of 2022, and recreational sales are expected to begin in the next eighteen months. Minnesota has the potential to enact adult-use legalization in the next 18 months; as of March 27, 2023, bills are pending in both houses of the Minnesota legislature that, if reconciled to a common text, passed by both houses and signed into law by the Minnesota Governor, would establish an adult-use program in Minnesota. As of March 27, 2023, four of our markets are operational, with 18 of our total retail dispensary licenses open for business.
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Our principal locations and type of operation are listed below:
Location | Nature and Status of Operations | Opened or Acquired |
Hurlock, Maryland | Fully operational processing facility | Opened in 2018 |
Baltimore, Maryland | Fully operational dispensary facility | Acquired in 2021 |
Frederick, Maryland | Fully operational dispensary facility | Opened in 2021 |
Massey, Maryland | Fully operational cultivation facility | Opened in 2021 |
Holland, Massachusetts | Cultivation land purchased; pre-development | Acquired in 2019 |
Otsego, Minnesota | Fully operational cultivation and processing facility | Opened in 2015 |
Minneapolis, Minnesota | Fully operational dispensary facility | Opened in 2015 |
Bloomington, Minnesota | Fully operational dispensary facility | Opened in 2016 |
Moorhead, Minnesota | Fully operational dispensary facility | Opened in 2015 |
Rochester, Minnesota | Fully operational dispensary facility | Opened in 2015 |
Hermantown, Minnesota | Fully operational dispensary facility | Opened in 2020 |
Blaine, Minnesota | Fully operational dispensary facility | Opened in 2020 |
Burnsville, Minnesota | Fully operational dispensary facility | Opened in 2020 |
Woodbury, Minnesota | Fully operational dispensary facility | Opened in 2020 |
Caliente, Nevada | Initial cultivation and processing facility complete; awaiting interior build out | Acquired in 2021 |
Gallup, New Mexico | Fully operational dispensary facility | Acquired in 2019 |
Gallup, New Mexico | Fully operational cultivation facility | Acquired in 2019 |
Gallup, New Mexico | Fully operational cultivation facility | Opened in 2021 |
Santa Fe, New Mexico | Fully operational dispensary facility | Acquired in 2019 |
Las Cruces, New Mexico | Fully operational dispensary facility | Opened in 2021 |
Albuquerque, New Mexico | Fully operational dispensary facility | Opened in 2021 |
Johnstown, New York | Fully operational cultivation and processing facility | Opened in 2016 |
Colonie, New York | Fully operational dispensary facility | Opened in 2016 |
Elmhurst, New York | Fully operational dispensary facility | Opened in 2016 |
Johnson City, New York | Fully operational dispensary facility | Opened in 2016 |
White Plains, New York | Fully operational dispensary facility | Opened in 2016 |
Our mission is to provide patients and consumers with best-in-class cannabis products and expert advice, informed by medicine and science. We also are seeking to develop intellectual property that is complementary to our mission, including novel product formulations, novel delivery systems and harm-mitigation processes.
We have developed proprietary cannabis strains, cultivation methods, carbon dioxide extraction, ethanol extraction, and other processes related to the production, refinement, and packaging of cannabis products. We have documented the relevant processes in the form of standard operating procedures and work instructions, which are only shared with third parties when absolutely required and then only upon receipt of written non-disclosure agreements.
We have sought and continue to seek to protect our trademark and service mark rights. Because the cultivation, processing, possession, transport and sale of cannabis and cannabis-related products remain illegal under the Controlled Substances Act (as defined below) we are not able to fully protect our intellectual property at the federal level. As a result, we have
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sought and continue to seek federal registrations in limited classes of goods and services and have obtained several state registrations.
The Cannabis Industry and Business Lines of the Company
According to market research projections by cannabis researcher Brightfield Group, U.S. sales of legal cannabis are expected to reach over $31.8 billion in 2023 and $50.7 billion in 2028.
As described further below, United States federal law now bifurcates the legality of “hemp” from “marihuana” (also commonly known as “marijuana”). For purposes of this filing, the term “cannabis” means “marihuana” as set forth in the Controlled Substances Act (21 U.S.C. § 811) (the “Controlled Substances Act”) and is used interchangeably with the term “marijuana.”
To date, in the United States, medical cannabis has been legalized in 39 states and the District of Columbia, while 21 states and the District of Columbia have approved cannabis for recreational use by adults (adult-use).
We strive to meet best-in-class health, safety and quality standards relating to the growth, production and sale of cannabis medicines, and products for consumers. Our offerings include cannabis flower, cannabis oil, cannabis topicals, orally ingestible tablets, capsules featuring cannabinoids, and vaporizer pens and cartridges.
We are a vertically integrated cannabis company that operates from “seed-to-sale.” We have three business lines:
| i. | Cultivation: We grow cannabis in outdoor, indoor and greenhouse facilities. Our expertise in growing enables us to produce award-winning and proprietary strains in a cost-effective manner. We sell our products in company-owned or -managed dispensaries and to third parties where lawful. |
| ii. | Production: We convert cannabis biomass into formulated oil, using a variety of extraction techniques. We use some of this oil to produce consumer products such as vaporizer cartridges and edibles, and we sell some oil to third parties in jurisdictions where this practice is lawful. |
| iii. | Retail Dispensaries: We operate retail dispensaries that sell proprietary and, where lawful, third-party cannabis products to retail customers and patients. |
Cultivation
We have rights to operate cultivation facilities in six states and Puerto Rico. Although pricing pressure for dried flower in several mature cannabis markets has led some operators to eschew cultivation, in certain markets the transition from medical-only to adult-use cannabis has increased wholesale market prices significantly. We believe that our cultivation operations provide certain other benefits, including:
| i. | Low Cost: We continually seeks ways to optimize our growing processes and minimize expenses. By having control over our own cultivation, we can reduce input costs and maximize margins. We believe that production at scale is critical to drive down unit cost. |
| ii. | Product Availability: Control over our cultivation facilities allows us to monitor and update the product mix in our dispensaries to meet evolving demand, especially in the form of strain selection and diversity. |
| iii. | Quality Assurance: Quality and safety of cannabis products are critically important to our customers. Control over growing processes greatly reduces the risk of plant contamination or infestation. We believe that products with consistent quality can demand higher retail prices. |
Our focuses on quality, potency, strain diversity and production at scale are important because we believe that the wholesale market for cannabis plant material will become increasingly price competitive over time. More companies are
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entering, and will likely continue to enter, this segment of the industry. We believe that manufacturers and retailers that source high-quality, low-cost plant material will have a significant advantage in the medium and long term.
Cultivation and Production Facilities
Except for our bifurcated cultivation-only and production-only facilities in Maryland, we operate combined cultivation and production facilities. Each cultivation and production facility focuses primarily on the development of cannabis products and dried cannabis plant material for medical and other consumer use, as well as the research and development of new strains of cannabis. At all our facilities, we focus on consumer safety and maintaining strict quality control. The methods used in our facilities result in several key benefits, including consistent production of high-quality product and the minimization of product recalls and complaints from patients and adult-use customers.
We operate the following cultivation and production facilities as of the close of business on March 27, 2023:
Maryland: | · · · · | We operate one cultivation facility of approximately 110,000 square feet and one production facility of approximately 30,000 square feet. In March 2021, we transferred the cultivation license from our formerly co-located cultivation and processing facility to another facility consisting of approximately 110,000 square feet of greenhouse space and associated land and buildings. The production operation remains at the original combined cultivation and processing facility. Our wholesale business is continuing to experience growth in this medical market. Investments in proprietary edible formulations and the introduction of new brands have the potential for improved financial results. We have a number of customers; our results of operations and financial results in Maryland are not dependent upon sales to one or a few major customers. |
Minnesota | · | Currently operate one cultivation and production facility of approximately 90,000 square feet. |
| · | We have a large number of customers; our results of operations and financial results in Minnesota are not dependent upon sales to one or a few major customers. |
New Mexico | · | Currently operate approximately 15,600 square feet of cultivation and production and have four operational retail dispensaries. |
| · | We have a large number of customers; our results of operations and financial results in New Mexico are not dependent upon sales to one or a few major customers. |
| · | Current cultivation capacity in New Mexico is insufficient to supply our dispensaries adequately and, therefore, we must purchase a portion of our flower inventory, as well as most manufactured cannabis products, from licensed, third-party suppliers. The availability of cannabis products from these suppliers is consistent. |
New York | · | Currently operate one cultivation and production facility of approximately 60,000 square feet. Additional 120,000 square feet of cultivation and productions space is under construction and intended primarily to support the adult-use market, when and if we are licensed to sell into that market. |
| · | We purchase a modest portion of our manufactured products inventory from several of the nine other registered organizations. |
| · | While we believe the long-term opportunity in New York is substantial, recent performance has been impacted by neighboring states transitioning to recreational-use jurisdictions, by substantial investments in retail dispensaries and cultivation by certain of New York’s nine competitive registered organizations (vertically-integrated medical cannabis companies), and by the delayed rollout of the state’s adult-use cannabis program and resultant proliferation of illicit retail cannabis distribution operations in the state. We believe that new product introductions, the expansion of wholesale revenue streams, our potential participation in the adult-use market, and the potential relocation of some of our retail dispensaries to superior sites will contribute to improving profit margins in the future. We also anticipate additional growth of our home delivery service. |
| · | We have a large number of customers; our results of operations and financial results in New York are not dependent upon sales to one or a few major customers. |
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Manufacturing
We manufacture, assemble, and package cannabis finished goods across a variety of product segments:
| i. | Inhalable: flower and trim, dabbable concentrates (e.g., Hash, Rosin, Temple Balls), distillate pre-filled vaporizer pens and cartridges, pre-rolls, distillate syringes. |
| ii. | Ingestible: edibles, tablets, softgels, oral solutions, oral spray, tinctures, lozenges. |
| iii. | Topicals: balms and topical bars. |
We have wholesale operations in Maryland, Minnesota, and New York. Manufactured products are sold to third parties, where allowed, and are also distributed to Company-owned and operated retail dispensaries.
Principal Products or Services
Our brands include:
| ● | Vireo Spectrum™ brand pre-filled distillate vaporizer pens and cartridges, syringes, bulk oil, softgels, tablets, oral solutions, oral spray, topical bars, and topical balms; |
| ● | Vireo Selects™ brand distillate vaporizer pens |
| ● | 1937™ brand distillate vaporizer pens and cartridges, flower and trim, and dabbable concentrates (e.g., Hash, Rosin, Temple Balls); |
| ● | LiteBud™ pre-roll and flower products; |
| ● | Boundary Waters™ pre-roll products; |
| ● | Hi-Color™ edibles; |
| ● | Kings and Queens™ concentrates, including live and cured resin badder, budder, sugar, and sauce; and |
| ● | Various other flower and trim brands. |
The following table shows which principal manufactured products we currently sell at our dispensaries in our various markets:
Market | Principal Products |
Maryland | 1937 Vape Cartridges; Vireo Selects Vape Cartridges; 1937 Concentrates; 1937 Pre-Rolls; Litebud Pre-Rolls; 1937 Pre-Pack Flower; 1937 Bulk Flower; 1937 Bulk Trim; Hi-Color™ edibles; Kings and Queens™ concentrates; Small A$$ Buds bulk flower |
Minnesota | Vireo Selects Vape Cartidges, Hi-Color™ edibles, Vireo Spectrum Flower and Pre-Rolls, Boundary Waters Pre-Rolls, Vireo Spectrum Capsules; Vireo Spectrum Tincture; Vireo Spectrum Oral Solution; Vireo Spectrum Oral Spray; Vireo Spectrum Syringe/Bulk Oil; Vireo Spectrum Tablet; Vireo Spectrum Topical Balm; Vireo Spectrum Topical Bar |
New Mexico | Red Barn Growers Flower |
New York | Vireo Selects Vape Cartridges, Vireo Spectrum Vape Cartridges; Hi-Color™ edibles, Vireo Spectrum Syringes/Bulk Oil; Vireo Spectrum Softgel; Moonlight Softgel; Vireo Spectrum Oral Solution; Vireo Spectrum Oral Spray; Vireo Spectrum Balm; Vireo Spectrum Flower; Vireo Spectrum Pre-Rolls |
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Retail Strategy
We have invested substantial resources in developing customer-friendly store designs and floorplans. In 2020, we began constructing new dispensaries using a new layout and color scheme tied to the Green Goods™ trademark and began converting existing dispensaries to this new theme.
Members of our management team have experience in real estate development, which has enabled us to secure premium locations for some of our dispensaries. Typically, we seek locations with high foot traffic and good visibility, close to densely populated residential areas. We also consider location, vehicular traffic, demographics, and competitor locations when selecting retail locations.
Principal Business Objectives
Our principal business objectives over the next 12-month period include achieving positive operating cash flow; continuing growth and expansion in the Minnesota market through flower offerings and edibles; planning and execution in New York for impending adult use program through expanding our facilities and product offerings, subject to regulatory approval; improving margins in the adult-use New Mexico market, principally through reducing costs; and increasing wholesale sales in our core markets.
Employees and Human Capital Resources
As of March 1, 2023, we had 519 employees, 409 of whom were full time employees. Certain of our employees in Maryland, Minnesota and New York are represented by local offices of the United Food and Commercial Workers International Union (“UFCW”). The collective bargaining agreements with the employees in these states expire as follows:
State |
| Agreement Expiration |
Maryland | | October 31, 2024 |
Minnesota | | November 21, 2024 |
New York (non-drivers) | | October 31, 2023 |
In addition, our home delivery drivers in New York are represented by the Warehouse Production Sales & Allied Service Employees Union, AFL-CIO Local 811 (“Local 811”). Our collective bargaining agreement with Local 811 expires July 31, 2023. We consider our relations with our employees, with UFCW and with Local 811 to be good overall.
Our human capital resources objectives include identifying, recruiting, retaining, incenting and integrating our existing and additional employees into our collaborative, results-focused culture. Our compensation program is designed to attract, motivate and retain highly qualified executives and employees. We are committed to a culture that values diversity, mutual respect, equity and collaboration that helps achieve our enterprise goals.
Research and Development
Our former research and development activities primarily focused on developing new, innovative, and patent-protectable products for the cannabis market. These efforts have focused on novel cannabinoid formulations as well as accessory products designed to improve the cannabis consumption experience. We also experimented with plant spacing and nutrient blends, cannabis variety trialing and improved pest management techniques. We also engaged in research and development activities focused on developing new extracted or infused products.
Patents and Trademarks
We hold two patents for “Tobacco Products with Cannabinoid Additives and Methods for Reducing the Harm Associated with Tobacco Use” (US Patents 10,369,178 and 10,702,565) and have a number of other patents pending with the United States Patent and Trademark Office (“USPTO”).
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We have successfully registered the trademarks Vireo Health® and Green Goods® with the USPTO and have applied to register a number of other trademarks with the USPTO, including:
| ● | 1937™ |
| ● | Lite Bud™ |
| ● | Terp Safe™ |
| ● | Amplifi™ |
Competitive Conditions and Position
Historically, Vireo U.S. won licenses in competitive, merit-based selection processes. We pursued opportunities in limited license markets with higher barriers to entry presenting an opportunity for higher returns or the development of strategic opportunities.
The industry is highly competitive with many operators, including large multi-state operators and smaller regional and local enterprises. We face competition from other companies that have greater resources, enhanced access to public equity and debt markets, superior cultivation and manufacturing capabilities, lower operating costs, better-located retail facilities, more experienced management, or that may be more mature as businesses. There are several multi-state operators that we compete directly with in some of our operating markets. Aside from current direct competition, other operators that are sufficiently capitalized to enter the Company’s markets through new licensure or acquisitive growth are also considered potential competitors. Similarly, if and to the extent we continue to enter new markets, we will encounter new direct competitors.
See “Risk Factors – We face intense competition in a new and rapidly growing industry from licensed companies with more experience and financial resources than we have and from unlicensed and unregulated participants.”
Regulation of Cannabis in the United States
Below is a discussion of the federal and state-level U.S. regulatory regimes in those jurisdictions where we operate through our subsidiaries. We currently operate facilities in Maryland, Minnesota, New Mexico, and New York.
Regulation of Cannabis in the United States Federally
We currently directly derives a substantial portion of our revenues from the cannabis industry in certain U.S. states, which industry is illegal under U.S. Federal Law. As of December 31, 2022, the Company is directly involved (through licensed subsidiaries) in both the medical and adult-use cannabis industry in the states of New York, Minnesota, Maryland, and New Mexico, as permitted within such states under applicable state law. The U.S. Supreme Court has ruled that Congress has the constitutional authority to enact the existing federal prohibition on cannabis. As described further below, U.S. federal law now bifurcates the legality of “hemp” from “marihuana” (also commonly known as marijuana). For purposes of this filing, the term “cannabis” means “marihuana” as set forth in the Controlled Substances Act (21 U.S.C. § 811) (the “Controlled Substances Act”) and is used interchangeably with the term “marijuana.” The U.S. federal government regulates drugs through the Controlled Substances Act, which places controlled substances, including marijuana, on a schedule. Marijuana is classified as a Schedule I drug. The Department of Justice defines Schedule I drugs, substances or chemicals as “drugs with no currently accepted medical use and a high potential for abuse.” With the limited exceptions of Epidiolex, a pharmaceutical derived from the cannabis extract cannabidiol (“CBD”), and certain drugs that incorporate synthetically derived cannabinoids (i.e., Marinol, Syndros, and Cesamet), the U.S. Food and Drug Administration has not approved marijuana as a safe and effective drug for any indication. Moreover, under the Agriculture Improvement Act of 2018 (commonly referred to as the 2018 Farm Bill), marijuana remains a Schedule I controlled substance under the Controlled Substances Act, with the exception of hemp and extracts derived from hemp (such as CBD) with a tetrahydrocannabinol (“THC”) concentration of less than 0.3%.
State laws regulating cannabis are in direct conflict with the Controlled Substances Act. Although certain states and territories of the U.S. authorize medical or recreational cannabis production and distribution by licensed or registered
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entities, under U.S. federal law, the possession, use, cultivation, and transfer of cannabis and any related drug paraphernalia is illegal; any such acts are criminal acts under federal law under the Controlled Substances Act. Although our activities are compliant with applicable state and local laws, strict compliance with state and local laws with respect to cannabis may neither absolve the Company of liability under U.S. federal law, nor may it provide a defense to any federal proceeding which may be brought against the Company.
There is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the U.S. Congress amends the Controlled Substances Act with respect to cannabis (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. We will continue to monitor compliance on an ongoing basis in accordance with our compliance program and standard operating agreement procedures. While our operations are in material compliance with all applicable state laws, regulations and licensing requirements, such activities remain illegal under United States federal law. If the Department of Justice policy were to aggressively pursue debt or equity owners of cannabis-related business and U.S. Attorneys followed such Department of Justice policies by pursuing prosecutions, then the Company could face, (i) seizure of its cash and other assets used to support or derived from its cannabis subsidiaries and (ii) the arrest of its employees, directors, officers, managers and investors, who could face charges of ancillary criminal violations of the CSA for aiding and abetting and conspiring to violate the Controlled Substances Act by virtue of providing financial support to state-licensed or permitted cultivators, processors, distributors and/or retailers of cannabis. Additionally, as has been affirmed by U.S. Customs and Border Protection, employees, directors, officers, managers and investors of the Company who are not U.S. citizens face the risk of being barred from entry into the U.S., for life.
In August 2013, then-Deputy Attorney General, James Cole, authored a memorandum (the “Cole Memorandum”) addressed to all United States district attorneys acknowledging that, notwithstanding the designation of cannabis as a controlled substance at the federal level in the United States, several states had enacted laws relating to cannabis for medical purposes.
The Cole Memorandum outlined the priorities for the Department of Justice (the “DOJ”) relating to the prosecution of cannabis offenses. In particular, the Cole Memorandum noted that in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of cannabis, conduct in compliance with those laws and regulations is less likely to be a priority at the federal level. Notably, however, the DOJ never provided specific guidelines for what regulatory and enforcement systems it deemed sufficient under the Cole Memorandum standard. In light of limited investigative and prosecutorial resources, the Cole Memorandum concluded that the DOG should be focused on addressing only the most significant threats related to cannabis. States where medical cannabis had been legalized were not characterized as a high priority.
In March 2017, then-Attorney General Jeff Sessions again noted limited federal resources and acknowledged that much of the Cole Memorandum had merit. However, on January 4, 2018, Mr. Sessions issued a memorandum that rescinded and superseded the Cole Memorandum effective immediately (the “Sessions 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 and to follow well-established principles when pursuing prosecutions related to marijuana activities. The inconsistency between federal and state laws and regulations is a major risk factor.
As a result of the Sessions Memorandum, federal prosecutors were 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 federal prosecutors will be in relation to such activities. Furthermore, the Sessions Memorandum did not discuss the treatment of medical cannabis by federal
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prosecutors. As an industry best practice, despite the rescission of the Cole Memorandum, we continue to do the following to ensure compliance with the guidance provided by the Cole Memorandum:
| ● | Ensure the operations of our subsidiaries and business partners are compliant with all licensing requirements that are set forth with regards to cannabis operation by the applicable state, county, municipality, town, township, borough, and other political/administrative divisions. To this end, we retain appropriately experienced legal counsel to conduct the necessary due diligence to ensure compliance of our operations with all applicable regulations. |
| ● | The activities relating to cannabis business adhere to the scope of the licensing obtained for example, in the states where only medical cannabis is permitted, the products are only sold to patients who hold the necessary documentation to permit the possession of the cannabis. |
| ● | We only work through licensed operators, which must pass a range of requirements, adhere to strict business practice standards, and be subjected to strict regulatory oversight whereby sufficient checks and balances ensure that no revenue is distributed to criminal enterprises, gangs, and cartels. |
| ● | We conduct reviews of products and product packaging to ensure that the products comply with applicable regulations and contain necessary disclaimers about the contents of the products to prevent adverse public health consequences from cannabis use and prevent impaired driving. |
| ● | Our subsidiaries have implemented inventory-tracking systems and necessary procedures to ensure that inventory is effectively tracked, and the diversion of cannabis and cannabis products is prevented. |
Former Attorney General William Barr, who succeeded Attorney General Sessions, did not provide a clear policy directive for the United States related to state-legal cannabis-related activities. However, in a written response to questions from U.S. Senator Cory Booker made as a nominee, Attorney General Barr stated, “I do not intend to go after parties who have complied with state law in reliance on the Cole Memorandum.” Attorney General Barr’s statements were not an official declaration of the DOJ policy and were not binding on the DOJ, on any U.S. Attorney or on the Federal courts. On March 11, 2021, Merrick Garland was confirmed as the new Attorney General. Attorney General Garland has not yet made a formal statement or written response on the matter; however, during his confirmation hearings he stated that federal prosecution of state-licensed cannabis operators is not a “useful use” of limited prosecutorial resources. Moreover, there is no guarantee that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. Unless and until the U.S. Congress amends the Controlled Substances Act with respect to cannabis (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. We will continue to monitor compliance on an ongoing basis in accordance with our compliance program and standard operating agreement procedures. While our operations are in material compliance with all applicable state laws, regulations and licensing requirements, such activities remain illegal under United States federal law. For the reasons described above and the risks further described in the Risk Factors section below, there are significant risks associated with our business.
Although the Cole Memorandum has been rescinded, Congress has passed a so-called “rider” provision in the FY 2015, 2016, 2017, 2018, and 2019 Consolidated Appropriations Acts to prevent the DOJ from using congressionally appropriated funds to prevent any state or jurisdiction from implementing a law that authorizes the use, distribution, possession, or cultivation of medical marijuana. The rider is known as the “Rohrabacher-Farr” Amendment after its original lead sponsors (it is also sometimes referred to as the “Rohrabacher-Blumenauer” or, in its Senate Form, the “Leahy” Amendment, but it is referred to in this report as “Rohrabacher-Farr”).
Rohrabacher-Farr is typically included in short-term funding bills or continuing resolutions by the House of Representatives, whereas the Leahy Amendment was included in the fiscal year 2020 budget by the Senate, which was signed on December 20, 2019. Rohrabacher-Farr prevents the DOJ from using congressionally appropriated funds to enforce federal cannabis laws against regulated medical cannabis actors operating in compliance with state and local law. Rohrabacher-Farr has been renewed effective through September 30, 2023.
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The risk of federal enforcement and other risks associated with the Company’s business are described in Item 1A.—"Risk Factors.”
Regulation of the Cannabis Market at State and Local Levels
Below is a summary overview of the licensing and regulatory framework in the states where Goodness Growth or our subsidiaries are currently operating under licenses or rights to operate.
Maryland
Maryland Regulatory Landscape
In 2012, a state law was enacted in Maryland to establish a state-regulated medical cannabis program. Legislation was signed in May 2013 and the program became operational on December 1, 2017. The Natalie M. LaPrade Maryland Medical Cannabis Commission (the “MMCC”) regulates the state program and awarded operational licenses in a highly competitive application process. The market is divided into three primary classes of licenses: dispensary, cultivation, and processing. Medical cannabis dispensary license pre-approvals were issued to 102 dispensaries out of a pool of over 800 applicants, 15 processing licenses were awarded out of a pool of 124 applicants and 15 cultivation licenses were awarded out of a pool of 145 applicants.
The medical cannabis program was written to allow access to medical cannabis for patients with qualifying medical conditions, including chronic pain, nausea, seizures, glaucoma, and post-traumatic stress disorder or “PTSD.”
In April 2018, Maryland lawmakers agreed to expand the state’s medical cannabis industry by adding another 20 licenses: 7 for cultivation and 13 for processing. Permitted products for sale and consumption include oil-based formulations, dry flower and edibles and other concentrates.
In November 2022, Maryland voters approved recreational marijuana legalization via ballot initiative. Under the initiative, listed as Question 4 on the ballot, adults 21 and older in Maryland will be allowed to possess up to 1.5 ounces of marijuana and grow two plants out of the public view beginning July 1, 2023.
Licenses in Maryland
We operate one dispensary in Frederick, Maryland, which opened in March 2021 and one dispensary in Baltimore, Maryland, which we acquired in November 2021. We also operate a production facility of 30,000 square feet and a 110,000 square-foot cultivation facility. We hold phase 2 licenses for cultivation, processing, and dispensing. Wholesale revenues have grown, driven in part by new product offerings and increased market penetration. Our cultivation and production licenses, as well as the license for our Frederick, Maryland dispensary, were awarded to our affiliate MaryMed, LLC through merit-based license application processes. Merit-based license awards require limited investment and thus present high-return opportunities. Our dispensary license for our Baltimore, Maryland location was acquired from Charm City Medicus, LLC on November 19, 2021. We believe that our medical and scientific background helped Goodness Growth develop a competitive advantage in the marketplace.
Maryland Licenses and Regulations
Maryland licenses are valid for six years and are subject to four-year renewals after required fees are paid and provided that the business remains in good standing. Renewal requests are typically communicated through email from the MMCC and include a renewal form.
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Maryland Reporting Requirements
The State of Maryland uses Marijuana Enforcement Tracking Regulation and Compliance system (METRC) as the state’s computerized track and trace (“T&T”) system for seed-to-sale. Individual licensees whether directly or through third-party integration systems are required to push data to the state to meet all reporting requirements. We use a third-party application for our computerized seed to sale software, which integrates with the state’s METRC program and captures the required data points for cultivation, manufacturing and retail a as required in the Maryland Medical Cannabis law.
Minnesota
Minnesota Regulatory Landscape
Legislation passed during the 2014 Minnesota legislative session created a new process allowing seriously ill individuals from Minnesota to use medical cannabis to treat a set of nine qualifying medical conditions. The qualifying medical conditions have been expanded to now include 15 qualifying conditions. The Medical Cannabis Program is regulated and administered by the Minnesota Department of Health which oversees all cultivation, production, and distribution facilities. In the initial program the Minnesota Department of Health had registered two manufacturers, with each manufacturer having licenses for four distribution facilities across the state. Minnesota now allows a manufacturer to operate eight distribution facilities, which may include the manufacturer’s single location for cultivation, harvesting, manufacturing, packaging, and processing but is not required to include that location.
Medical cannabis is provided to patients as a dried raw cannabis, liquid, pill, topical (lotions, balms, and patches), vaporized delivery method that does not require the use of dried leaves or plant form, water-soluble cannabinoid multi-particulates (for example, granules, powders, and sprinkles) and orally dissolvable products such as lozenges, gums, mints, buccal tablets, and sublingual tablets.
In terms of safety and security, there are several precautions built into the program. For example, registered manufacturers must contract with a laboratory for testing the quality and consistency of the medical cannabis products. Manufacturers’ facilities are also subject to state inspections.
Minnesota has also implemented a process for monitoring and evaluating the health impacts of medical cannabis on patients which will be used to help patients and health professionals grow their understanding of the benefits, risks, and side effects of medical cannabis.
In 2022, edibles and dried cannabis flower for smoking were added to the medical program in Minnesota.
On July 1, 2022, Minnesota Statutes s. 151.72 went into effect, which permits the sale, to anyone age 21 or older in the state, of edible products derived from hemp and containing no more than 5mg of THC per serving and 50mg per package.
On January 5, 2023, H.F. No. 100 (“H.F. 100”) was introduced into the Minnesota House of Representatives. H.F. 100, if passed, reconciled with a companion bill in the Minnesota senate, and signed by the Governor, would create an adult-use cannabis program in the State of Minnesota. The probability and timing of the enactment of an adult-use cannabis program, as well as the Company’s ability to participate in any such program, remain uncertain as of the date of filing of this Annual Report on Form 10-K.
Licenses and Permits in Minnesota
Our license in Minnesota was awarded in 2015 through merit-based license application processes. Merit-based license awards require limited investment and thus present high-return opportunities. We believe that our medical and scientific expertise helped us develop a competitive advantage in the marketplace.
Vireo Health of Minnesota, LLC (“Vireo Minnesota”), which is a subsidiary of Goodness Growth, holds one vertically-integrated medical cannabis license to operate one cultivation and production facility in Otsego, MN and eight retail
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medical cannabis dispensaries in the state of Minnesota, located in Blaine, Bloomington, Burnsville, Hermantown, Rochester, Minneapolis, Moorhead, and Woodbury.
Minnesota Licenses and Regulations
We currently operate eight retail dispensaries and one cultivation and production facility of approximately 90,000 square feet. Recent changes to the state’s qualifying conditions for medical cannabis patients have contributed to increases in patient enrollment. The March 2022 addition of dried raw cannabis to the list of allowed delivery methods, give our management team optimism that the Minnesota market remains a growth opportunity for the Company.
Minnesota state licenses are renewed every two years. Every two years, licensees are required to submit a renewal application with the commissioner at least six months before its registration term expires. The most recent manufacturer annual fee paid in 2021 was $189,220 and is non-refundable. Additionally, provided that the requisite renewal fees are paid, the renewal application is submitted in a timely manner, and there are no material violations noted against the applicable licenses, and subject to the possible effect of the enactment of H.F. 100 or any other adult-use cannabis legislation in the state, The Company expects to receive the applicable renewed license in the ordinary course of business. While the Company’s compliance controls have been developed to mitigate the risk of any material violations of a license arising, there is no assurance that the Company’s license will be renewed in the future in a timely manner. Any unexpected delays or costs associated with the licensing renewal process could impede the ongoing or planned operations of the Company and have a material, adverse effect on the Company’s business and financial results.
Minnesota Reporting Requirements
The State of Minnesota uses Marijuana Enforcement Tracking Regulation and Compliance system (METRC) as the state’s computerized T&T system for seed-to-sale. Individual licensees whether directly or through third-party integration systems are required to push data to the state to meet all reporting requirements. We use a third-party application for our computerized seed to sale software, which integrates with the state’s Metrc program and captures the required data points for cultivation, manufacturing and retail as required.
New Mexico
New Mexico Regulatory Landscape
The Lynn and Erin Compassionate Use Act (“Compassionate Use Act”) was signed into law in 2007 and became effective July 1, 2007. The Compassionate Use Act established the regulatory framework for use of medical cannabis by New Mexico residents and created the New Mexico Medical Cannabis Program (“NMMCP”). It allows practitioners to prescribe medical cannabis to patients with a debilitating medical condition (as defined in the Compassionate Use Act). Currently, there are 23 qualifying conditions under the Compassionate Use Act. When a practitioner determines that the patient has a debilitating medical condition and provides written certification so stating and that the potential health benefits of the cannabis use would likely outweigh the health risks for the patient, the patient can apply with the New Mexico Department of Health (“NMDOH”) for a registry identification card. A qualified patient is allowed to possess cannabis in an amount that is reasonably necessary to ensure uninterrupted availability of cannabis for a period of three months. In 2019, New Mexico announced it would begin permitting non-residents of the state to obtain cannabis under the Compassionate Use Act and as of July 1, 2020, the state now extends reciprocity to residents of all other medical cannabis states, allowing visiting medical marijuana patients to use their home-state credentials to purchase at licensed New Mexico medical marijuana dispensaries.
The Cannabis Regulation Act (“Cannabis Regulation Act”) was signed into law on April 12, 2021. The Cannabis Regulation Act established the regulatory framework for use of recreational cannabis within the State of New Mexico to allow for the sale, possession, and consumption of recreational marijuana in the state for adults 21 and older. The Cannabis Regulation Act also created the Cannabis Control Division (“NMCCD”) under the New Mexico Regulation and Licensing Department, which now oversees the NMMCP. The NMMCP was previously subject to the regulatory authority of NMDOH. The first dispensaries providing adult-use cannabis began sales in April 2022.
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Licenses in New Mexico
Pursuant to a management agreement with our affiliate Red Barn Growers, Inc. (“Red Barn”), a New Mexico non-profit corporation and NMCCD licensee, Vireo Health of New Mexico, LLC (“VHNM”), a wholly-owned subsidiary of Goodness Growth, currently operates four dispensaries located in Albuquerque, Las Cruces, Santa Fe and Gallup and a cultivation and processing facility located in Gallup.
New Mexico Licenses and Regulations
In New Mexico, we currently operate an approximately 15,600 square feet of cultivation and production and have four operational retail dispensaries.
The NMCCD has established the following types of cannabis licenses: couriers; producers; manufacturers; retailers; microbusinesses; cannabis consumption lounges; vertically integrated establishments; and integrated microbusinesses. Red Barn operates pursuant to a vertically integrated establishment license issued by NMCCD. Red Barn’s vertically integrated establishment licenses allows it to cultivate, process, and distribute cannabis.. Each vertically integrated licensee can operate an unlimited number of dispensaries.
New Mexico Reporting Requirements
The state of New Mexico uses BIOTRACKTHC© as the state’s computerized T&T system used to track commercial cannabis activity and seed-to-sale. Individual licensees are required to push data to the state to meet all reporting requirements.
New York
New York Regulatory Landscape
The Compassionate Care Act was signed into law on July 5, 2014. The law was expanded in January 2022 to remove a previous list of qualifying conditions. The law now allows patients to use medical cannabis for any condition that could be treated by medical cannabis as recommended by their doctor.
Physicians must complete a New York State Department of Health-approved course and register with the New York Department of Health Medical Marijuana Program to certify patients. Practitioners must consult the New York State Prescription Monitoring Program Registry prior to issuing a certification to a patient for medical cannabis.
Patients who are certified by their practitioners are required to apply to obtain a registry identification card in order to obtain medical cannabis certified patients may designate up to two caregivers, who must also register with the Department of Health, to obtain and administer medical cannabis products on behalf of the patients.
There are ten registered organizations, which each hold a vertically integrated license allowing the cultivation, manufacture, transport, distribution, and dispensation of medical cannabis. Registered organizations may only manufacture medical cannabis products in forms approved by the Commissioner of the Department of Health. Approved forms currently include whole flower, metered liquid or oil preparations, solid and semisolid preparations (e.g., capsules, chewable and effervescent tablets, lozenges), metered ground plant preparations, and topical forms and transdermal patches. The Compassionate Care Act expressly provides that a certified medical use of cannabis does not include smoking and that all prices must be approved by the New York Department of Health.
Each registered organization may have up to four dispensing facilities, owned and operated by the registered organization, where approved medical cannabis products will be dispensed to certified patients or their designated caregivers, who have registered with the Department. Dispensing facilities must report dispensing data to the New York State Prescription Monitoring Program Registry and consult the registry prior to dispensing approved medical cannabis products to certified patients or their designated caregivers.
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The Marihuana Regulation & Taxation Act was signed into law on March 31, 2022, legalizing adult-use cannabis in New York State. MRTA established a new Office of Cannabis Management governed by a Cannabis Control Board to comprehensively regulate adult-use, medical, and hemp cannabis. The OCM has begun to issue licenses and is currently promulgating rules and regulations outlining how and when our business can participate in the adult-use cannabis market.
Licenses and Permits in New York
Our licenses in New York were each awarded to us through merit-based license application processes.
Through our subsidiary Vireo Health of New York, LLC, we hold one of ten vertically integrated medical cannabis licenses. We currently have a cultivation and processing facility in Johnstown, NY and four dispensaries throughout the State in New York City (Queens County), Binghamton, White Plains and Albany. We also operate a home-delivery service based out of our Queens dispensary.
Our New York cultivation and processing facility is approximately 21 acres and compromised of 13,650 square foot of indoor cultivation space, 38,304 square feet of greenhouse cultivation space, and 7,350 square feet of laboratory and processing space. The facility has been in continuous production and sale of cannabis since January 2016. In addition, we have under construction, on an adjacent parcel to the existing facility, approximately 110,000 square feet of incremental cultivation and processing facility housed inside a building exceeding 300,000 square feet.
New York Licenses and Regulations
In New York, we were one of the original five registered organizations, placing second in the initial selection process, and are currently one of ten registered organizations (vertically integrated medical cannabis licensees) in the state. While we believe the long-term opportunity in New York is substantial, recent performance has been impacted by neighboring states transitioning to recreational-use jurisdictions, as well as by increasing competition from other developing operators. New product introductions and the beginning of wholesale revenue streams may contribute to improving profit margins in the future. We anticipate additional growth of our home delivery service.
New York registered organization licenses expire 2 years after the date of issuance. An application to renew must be filed with the Department not more than six months nor less than four months prior to the expiration thereof. Registration fees are $200,000 and are refundable if the applicant is not granted a renewal registration.
New York Reporting Requirements
The state of New York uses BIOTRACKTHC© as the state’s cultivation and production computerized T&T system. Leaf Logix is used as state’s point of sale T&T system. Individual licensees are required to push data to the state to meet all reporting requirements.
Our Compliance Program
Expenditures for compliance with federal, state, and local environmental laws and regulations are consistent from year to year and are not material to our financial results. We are compliant with all applicable regulations and properly disposes of the toxic and hazardous substances it uses in our operations.
The Company is classified as having “direct” involvement in the U.S. marijuana industry and are in material compliance with applicable licensing requirements and the regulatory framework enacted by each state in which it operates. We are not subject to any material citations or notices of violation with applicable licensing requirements and the regulatory framework enacted by each applicable state that may have an impact on our licenses, business activities or operations.
With the oversight of our General Counsel and Chief Compliance Officer, our compliance team oversees, maintains, and implements our compliance program. In addition to our internal legal department, we have engaged state regulatory compliance counsel in many jurisdictions.
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The compliance team oversees training for cultivation, production and dispensary managers and employees, along with other department leaders and other designated persons as needed, on compliance with state and local laws and regulations. Our compliance team also monitors all compliance notifications from the regulators and inspectors and lead the effort to timely resolve any issues identified. We keep records of all compliance notifications received from the state regulators or inspectors and how and when the issue was resolved.
We have created comprehensive standard operating procedures that include detailed descriptions and instructions for receiving shipments of inventory, inventory tracking, recordkeeping and record retention practices related to inventory, as well as procedures for performing inventory reconciliation and ensuring the accuracy of inventory tracking and recordkeeping. We maintain accurate records of our inventory at all licensed facilities. We conduct audits of our cannabis and cannabis products inventories at least weekly in order to detect any possible diversion. In addition to weekly inventory audits, security and/or compliance staff conduct unscheduled, unannounced audits to prevent complacency or the perception thereof. Adherence to our standard operating procedures is mandatory and ensures that our operations are compliant with the rules set forth by the applicable state and local laws, regulations, ordinances, licenses and other requirements. We also verify adherence to standard operating procedures by regularly conducting internal inspections and ensure that any issues identified are resolved quickly and thoroughly.
In January 2018, United States Attorney General, Jeff Sessions rescinded the Cole Memorandum and thereby created a vacuum of guidance for enforcement agencies and the DOJ. As an industry best practice, despite the recent rescission of the Cole Memorandum, we continue to do the following to ensure compliance with the guidance provided by the Cole Memorandum:
| ● | Ensure the operations of our subsidiaries and business partners are compliant with all licensing requirements related to cannabis operation by applicable state, county, municipality, town, township, borough, and other political/administrative divisions. To this end, we retain appropriately experienced legal counsel to conduct the necessary due diligence to ensure compliance of such operations with all applicable regulations; |
| ● | The activities relating to cannabis business adhere to the scope of the licensing obtained. For example, in the states where only medical cannabis is permitted, cannabis products are only sold to patients who hold the necessary documentation whereas, in the states where cannabis is permitted for adult recreational use, in the future, we intend to sell our cannabis products only to individuals who meet the requisite age requirements; |
| ● | We adhere to compliant business practices and has implemented strict regulatory oversight to ensure that no revenue is distributed to criminal enterprises, gangs or cartels; and |
| ● | We conduct reviews of products and product packaging to ensure that the products comply with applicable regulations and contain necessary disclaimers about the contents of the products to prevent adverse public health consequences from cannabis use and prevent impaired driving. |
We will continue to monitor compliance on an ongoing basis in accordance with our compliance program and standard operating procedures. While our operations are in compliance with all applicable state laws, regulations and licensing requirements in all material respects, such activities remain illegal under United States federal law. For the reasons described above and the risks further described in Risk Factors below, there are significant risks associated with our business. Readers are strongly encouraged to carefully read all the risk factors contained in Item 1A. Risk Factors, below.
Item 1A. Risk Factors
Investing in our securities involves risks. You should carefully consider the risks described in this section before deciding to invest in our securities. If any of these risks occurs, our business, financial condition, and results of operations could be materially, adversely affected. In such case, the trading price of our securities would likely decline, and you may lose all or part of your investment.
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Set forth below is a summary of the principal risks we face:
| ● | We have a history of operating losses and our management has concluded that factors raise substantial doubt about our ability to continue as a going concern and our auditor has included an explanatory paragraph relating to its ability to continue as a going concern in their audit report for the years ended December 31, 2022. |
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The following are certain factors relating to our business. These risks and uncertainties are not the only ones facing the Company. Additional risks and uncertainties not presently known to us or currently deemed immaterial by us, may also impair our operations. If any such risks occur, our shareholders could lose all or part of their investment and our business, financial condition, liquidity, results of operations, and prospects could be materially, adversely affected and our ability to implement our growth plans could be adversely affected. Our shareholders should carefully evaluate the following risk factors associated with the Subordinate Voting Shares.
Going Concern Risk
We have a history of operating losses and our management has concluded that factors raise substantial doubt about our ability to continue as a going concern and our auditor has included an explanatory paragraph relating to its ability to continue as a going concern in their audit report for the year ended December 31, 2022.
We are focused on cultivating, processing and supplying cannabis and cannabis-derived products in our four core markets. We have negative operating cash flow. In addition, for the year ended December 31, 2022, we had a loss of $42,457,444, and an accumulated deficit of $177,880,963. The costs for cultivating and manufacturing cannabis and cannabis products,
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purchasing cannabis products on the wholesale marketplace, marketing and selling expenses, and general and administrative expenses, are the principal causes of our losses. Our financing costs, which include both debt service and rent payments on the leases of our New York and Minnesota cultivation and processing facilities, are also important contributors to our losses. We may never become profitable and if we do not become profitable your investment could be lost completely.
We anticipate that we will continue to report losses and negative cash flow for the foreseeable future. We have concluded that our historical recurring losses from operations and negative cash flows from operations as well as our dependence on debt and other financings raise substantial doubt about our ability to continue as a going concern and our auditor has included an explanatory paragraph relating to our ability to continue as a going concern in its audit report for the year ended December 31, 2022.
The consolidated financial statements of the Company do not include any adjustments that might result from the outcome of this uncertainty. These adjustments would likely include substantial impairment of the carrying amount of our assets and potential contingent liabilities that may arise if we are unable to fulfill various operational commitments. In addition, the value of our securities, including common stock issued in this offering, would be greatly impaired. Our ability to continue as a going concern is dependent upon generating sufficient cash flow from operations and obtaining additional capital and financing. If our ability to generate cash flow from operations is delayed or reduced and we are unable to raise additional funding from other sources, we may be unable to continue in business. For further discussion about our ability to continue as a going concern and our plan for future liquidity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Going Concern.”
Risks Related to the Regulatory System and Business Environment for Cannabis
Marijuana remains illegal under U.S. federal law, and enforcement of U.S. cannabis laws could change.
United States federal law now bifurcates the legality of “hemp” from “marihuana” (also commonly known as marijuana). For purposes of this Annual Report on Form 10-K, the term “cannabis” means “marihuana” as set forth in the Controlled Substances Act and is used interchangeably with the term “marijuana.”
There are significant legal restrictions and regulations that govern the cannabis industry in the United States. Marijuana remains a Schedule I drug under the Controlled Substances Act, making it illegal under federal law in the United States to, among other things, cultivate, distribute, use or possess cannabis in the United States. In those states in which the cultivation, production, extraction, distribution, transportation, possession or use of marijuana has been legalized, these actions continue to be a violation of federal law pursuant to the Controlled Substances Act. The Controlled Substances Act classifies marijuana as a Schedule I controlled substance and, as such, medical and adult-use cannabis use are illegal under U.S. federal law. Unless and until the U.S. Congress amends the Controlled Substances Act with respect to marijuana (and the President approves such amendment), there is a risk that federal authorities may enforce current federal law. Financial transactions involving proceeds generated by, or intended to promote, cannabis-related business activities in the United States may form the basis for prosecution under applicable U.S. federal money-laundering laws. While the approach to enforcement of such laws by the federal government in the United States has trended toward non-enforcement against individuals and businesses that comply with medical or adult-use cannabis regulatory programs in states where such programs are legal, strict compliance with state laws with respect to cannabis will neither absolve Goodness Growth of liability under U.S. federal law, nor will it provide a defense to any federal proceeding that may be brought against Goodness Growth. Since federal law criminalizing the cultivation, production, extraction, distribution, transportation, possession or use of marijuana pre-empts state laws that legalize such actions, enforcement of federal law regarding marijuana is a significant risk and would greatly harm our business, prospects, revenue, results of operation and financial condition. Any proceedings brought against Goodness Growth under federal law may materially, adversely affect our operations and financial performance.
Our activities are, and will continue to be, subject to evolving regulation by governmental authorities. We are directly and indirectly engaged in the medical and adult-use cannabis industry in the United States, where state law permits such activities. The legality of the production, cultivation, extraction, distribution, transportation and use of cannabis differs
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among states in the United States. Due to the current regulatory environment in the United States, new risks may emerge; management may not be able to predict all such risks.
As of the date of this filing, there are 39 states, plus the District of Columbia (and the territories of Guam, Puerto Rico, the U.S. Virgin Islands and the Northern Mariana Islands), that have laws and/or regulations that recognize, in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. Similarly, 21 states and the District of Columbia have legalized cannabis for adult use.
Because our current and anticipated future activities in the medical and adult-use cannabis industry may be illegal under the applicable federal laws of the United States, there can be no assurance that the U.S. federal government will not seek to enforce the applicable laws against us. The consequences of such enforcement would likely be materially adverse to the Company and our business, including our reputation, profitability and the market price of our publicly traded Subordinate Voting Shares, and could result in the forfeiture or seizure of all or substantially all of our assets.
Due to the conflicting views between state legislatures and the federal government regarding cannabis, cannabis businesses are subject to inconsistent laws and regulations. There can be no assurance that the federal government will not enforce federal laws relating to marijuana and seek to prosecute cases involving marijuana businesses that are otherwise compliant with state laws in the future. In 2013, the DOJ attempted to address the inconsistent treatment of cannabis under state and federal law. Deputy Attorney General James Cole sent all U.S. Attorneys the Cole Memorandum in August 2013, which outlined certain priorities for the DOJ relating to the prosecution of cannabis offenses. The Cole Memorandum noted that, in jurisdictions that have enacted laws legalizing cannabis in some form and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, production, distribution, sale and possession of cannabis, conduct in compliance with such laws and regulations was not a priority for the DOJ. However, the DOJ did not provide (and has not provided since) specific guidelines for what regulatory and enforcement systems would be deemed sufficient under the Cole Memorandum.
On January 4, 2018, former U.S. Attorney General Jeff Sessions formally issued the Sessions Memorandum, which rescinded the Cole Memorandum effective upon its issuance. 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 and to follow well-established principles when pursuing prosecutions related to cannabis activities.
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 thus it is uncertain how active U.S. federal prosecutors will be in the future in relation to such activities.
There can be no assurance that the federal government will not enforce federal laws relating to cannabis and seek to prosecute cases involving cannabis businesses that are otherwise compliant with state laws in the future. On March 11, 2021, Merrick Garland was sworn in as the 86th Attorney General of the United States. Mr. Garland has not yet taken a public position on the appropriate prosecutorial posture regarding cannabis.
Most states that have legalized cannabis continue to craft their regulations pursuant to the Cole Memorandum. Federal enforcement agencies have taken little or no action against state-compliant cannabis businesses. However, the DOJ may change its enforcement policies at any time, with or without advance notice.
There is a substantial risk of regulatory or political change.
The success of our business strategy depends on the legality of the cannabis industry in the U.S. The political environment surrounding the cannabis industry in the U.S. in general can be volatile and the regulatory framework in the U.S. remains in flux. Despite the currently implemented laws and regulations in the U.S. and its territories to legalize and regulate the cultivation, production, processing, sale, possession and use of cannabis, and additional states that have pending legislation regarding the same, the risk remains that a shift in the regulatory or political realm could occur and have a drastic impact
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on the industry as a whole, adversely impacting our ability to successfully invest and/or participate in the selected business opportunities.
Further, there is no guarantee that at some future date, voters and/or the applicable legislative bodies will not repeal, overturn or limit any such legislation legalizing the sale, disbursement and consumption of medical or adult-use cannabis. It is also important to note that local and city ordinances may strictly limit and/or restrict disbursement of cannabis in a manner that will make it extremely difficult or impossible to transact business that is necessary for the continued operation of the cannabis industry.
Cannabis remains illegal under U.S. federal law, and the U.S. federal government could bring criminal and civil charges against us or our subsidiaries or our investments at any time. Federal actions against any individual or entity engaged in the cannabis industry or a substantial repeal of cannabis-related legislation could have a material, adverse effect on our business, financial condition, or results of operations.
We may be subject to action by the U.S. federal government through various government agencies for participation in the cannabis industry.
Because the cultivation, processing, production, distribution, possession and sale of cannabis for any purpose, medical, adult use or otherwise, remain illegal under U.S. federal law, it is possible that we may be forced to cease any such activities. The U.S. federal government, through, among others, the DOJ, its sub-agency the Drug Enforcement Administration (“DEA”) and the U.S. Internal Revenue Service (“IRS”), has the right to actively investigate, audit and shut down cannabis growing facilities, processors, and retailers. The U.S. federal government may also attempt to seize our property. Any action taken by the DOJ, the DEA and/or the IRS to interfere with, seize or shut down our operations will have an adverse effect on our business, prospects, revenue, results of operation and financial condition.
Since federal law criminalizing the use of cannabis pre-empts state laws that legalize its use, the federal government can assert criminal violations of federal law despite state laws permitting the use of cannabis. It does not appear that federal law enforcement and regulatory agencies are focusing resources on licensed marijuana-related businesses that are operating in compliance with state law. As the rescission of the Cole Memorandum and the implementation of the Sessions Memorandum demonstrate, the DOJ may at any time issue additional guidance that directs federal prosecutors to devote more resources to prosecuting marijuana related businesses. In the event that the DOJ aggressively pursues financiers or equity owners of cannabis-related businesses, and U.S. Attorneys follow the DOJ policies through pursuing prosecutions, then we could face:
| (i) | seizure of our cash and other assets used to support or derived from our cannabis subsidiaries; |
| (ii) | the arrest of our employees, directors, officers, managers, and investors; and |
| (iii) | ancillary criminal violations of the Controlled Substances Act for aiding and abetting, and conspiracy to violate the Controlled Substances Act by providing financial support to cannabis companies that service or provide goods to state-licensed or permitted cultivators, processors, distributors and/or retailers of cannabis. |
Because the Cole Memorandum was rescinded, the DOJ or an aggressive federal prosecutor could allege that the Company and our Board and, potentially, our shareholders, “aided and abetted” violations of federal law by providing finances and services to our portfolio cannabis companies. Under these circumstances, federal prosecutors could seek to seize our assets, and to recover the “illicit profits” previously distributed to shareholders resulting from any of our financing or services. In these circumstances, our operations would cease, shareholders may lose their entire investments and directors, officers and/or shareholders may be left to defend any criminal charges against them at their own expense and, if convicted, be sent to federal prison.
Additionally, there can be no assurance as to the position the current or any new federal administration may take on marijuana. Any enforcement of current federal marijuana laws could cause significant financial damage to the Company and our shareholders. Further, future presidential administrations may choose to treat marijuana differently and potentially enforce the federal laws more aggressively.
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Violations of any federal laws and regulations could result in significant fines, penalties, administrative sanctions, convictions, or settlements arising from civil proceedings conducted by either the federal government or private citizens, or criminal charges, including, but not limited to, disgorgement of profits, cessation of business activities or divestiture. These results could have a material, adverse effect on the Company, including our reputation and ability to conduct business, our holding (directly or indirectly) of cannabis licenses in the United States, the listing of our securities on various stock exchanges, our financial position, operating results, profitability or liquidity or the market price of our Subordinate Voting Shares. In addition, it is difficult to estimate the time or resources that would be needed for the investigation or final resolution of any such matters because: (i) the time and resources that may be needed depend on the nature and extent of any information requested by the authorities involved; and (ii) such time or resources could be substantial.
U.S. state and local regulation of cannabis is uncertain and changing.
There is no assurance that state laws legalizing and regulating the sale and use of cannabis will not be repealed or overturned, or that local governmental authorities will not limit the applicability of state laws within their respective jurisdictions. If the U.S. federal government begins to enforce U.S. federal laws relating to cannabis in states where the sale and use of cannabis is currently legal, or if existing state laws are repealed or curtailed, our business or operations in those states or under those laws would be materially and adversely affected. Federal actions against any individual or entity engaged in the cannabis industry or a substantial repeal of cannabis related legislation could materially adversely affect the Company, our business and our assets or investments.
State and local laws permitting the cultivation, production, extraction, distribution, transportation, possession or use of cannabis may also be modified in a manner that is contrary to our interests. For example, states could authorize the issuance of licenses to cultivate, produce, transport or distribute cannabis to additional parties; the maximum number of such licenses could be unlimited, as is the case under the current adult-use legislation in New Mexico. States currently permitting only medical-use cannabis could implement adult-use cannabis laws that give preferences to applicants and/or participants that compete with us, or even prohibit us to participate in portions or the entirety of the adult-use marketplace. Any such change in New York or Minnesota would have a material, adverse effect on our business, financial position or results of operations.
The rulemaking process at the state level that applies to cannabis operators in any state will be ongoing and result in frequent changes. As a result, a compliance program is essential to manage regulatory risk. All operating policies and procedures implemented by the Company are compliance-based and are derived from the state regulatory structure governing cannabis businesses. Notwithstanding our efforts and diligence, regulatory compliance, and the process of obtaining regulatory approvals can be costly and time-consuming. No assurance can be given that we will receive and maintain the necessary licenses, permits or cards to continue operating our business. A state implementing an adult-use cannabis program may prohibit participation by the Company in one or more aspects of that program, or require the Company to pay fees to participate, which fees may be material or prohibitive.
Local laws and ordinances could also restrict our business activity. Although our operations are legal under the laws of the states in which it operates, local governments often have the ability to limit, restrict and ban cannabis businesses from operating within their jurisdiction. Land use, zoning, local ordinances, and similar laws could be adopted or changed and have a material, adverse effect on our business.
Multiple states where medical and/or adult use cannabis is legal have imposed or are considering special taxes or fees on businesses in the marijuana industry. It is uncertain at this time whether other states are in the process of reviewing such additional taxes and fees. The implementation of special taxes or fees could have a material, adverse effect upon our business, prospects, revenue, results of operation and financial condition.
We currently operate cannabis businesses in Maryland, Minnesota, New Mexico, and New York.
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State regulatory agencies may require us to post bonds or significant fees.
There is a risk that a greater number of state regulatory agencies will begin requiring entities engaged in certain aspects of the business or industry of legal marijuana to post a bond or significant fees when applying, for example, for a dispensary license or renewal, as a guarantee of payment of sales and franchise taxes. We are not able to quantify at this time the potential scope of such bonds or fees in the states in which we currently operate or may in the future operate, but they may be materially adverse to our results of operations, financial condition and ultimate business success, individually or in the aggregate.
We may be subject to heightened scrutiny by United States and Canadian authorities, which could ultimately lead to the market for Subordinate Voting Shares becoming highly illiquid and our shareholders having no ability to effect trades in Subordinate Voting Shares in Canada.
Currently, our Subordinate Voting Shares are traded on the Canadian Securities Exchange and on the OTCQX tier of the OTC Markets in the United States. Our business, operations, and investments in the United States, and any such future business, operations, or investments, may become the subject of heightened scrutiny by regulators, stock exchanges and other authorities in Canada and the United States. As a result, we may be subject to significant direct and indirect interaction with public officials. There can be no assurance that this heightened scrutiny will not in turn lead to the imposition of certain restrictions on our ability to operate or invest in the United States or any other jurisdiction, in addition to those described herein.
In 2017, there were concerns that the Canadian Depository for Securities Limited, through its subsidiary CDS Clearing and Depository Services Inc. (“CDS”), Canada’s central securities depository (clearing and settling trades in the Canadian equity, fixed income, and money markets), would refuse to settle trades for cannabis issuers that have investments in the United States. However, CDS has not implemented this policy.
On February 8, 2018, the Canadian Securities Administrators published Staff Notice 51-352 describing the Canadian Securities Administrators’ disclosure expectations for specific risks facing issuers with cannabis-related activities in the U.S. Staff Notice 51-352 confirms that a disclosure-based approach remains appropriate for issuers with U.S. cannabis-related activities. Staff Notice 51-352 includes additional disclosure expectations that apply to all issuers with U.S. cannabis-related activities, including those with direct and indirect involvement in the cultivation and distribution of cannabis, as well as issuers that provide goods and services to third parties involved in the U.S. cannabis industry.
On February 8, 2018, following discussions with the Canadian Securities Administrators and recognized Canadian securities exchanges, the TMX Group, which is the owner and operator of CDS, announced the signing of a Memorandum of Understanding (“MOU”) with Aequitas NEO Exchange Inc., the Canadian Securities Exchange, the Toronto Stock Exchange and the TSX Venture Exchange. The MOU outlines the parties’ understanding of Canada’s regulatory framework applicable to the rules, procedures, and regulatory oversight of the exchanges and CDS as it relates to issuers with cannabis-related activities in the United States. The MOU confirms, with respect to the clearing of listed securities, that CDS relies on the Canadian securities exchanges to review the conduct of listed issuers. The MOU notes that securities regulation requires that the rules of each of the exchanges must not be contrary to the public interest and that the rules of each of the exchanges have been approved by the securities regulators. Pursuant to the MOU, CDS will not ban accepting deposits of or transactions for clearing and settlement of securities of issuers with cannabis-related activities in the United States. Even though the MOU indicated that there are no plans to ban the settlement of securities through CDS, there can be no guarantee that this approach to regulation will continue in the future. If such a ban were implemented at a time when the Subordinate Voting Shares are listed on a Canadian stock exchange, it would have a material, adverse effect on the ability of holders of Subordinate Voting Shares to make and settle trades. In particular, the market for Subordinate Voting Shares would become highly illiquid until an alternative (if available) was implemented, and investors would have no ability to effect a trade of Subordinate Voting Shares through the facilities of the applicable Canadian stock exchange.
We are involved in litigation with Verano, the outcome of which is uncertain.
On October 13, 2022, the Company received a notice of purported termination of the Arrangement Agreement, which asserted certain breaches of the Arrangement Agreement, including claims the Company’s public filings and
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communications with respect to its business and ongoing operations were misleading and that the Company breached its representations to Verano under the Arrangement Agreement. Verano also claimed, as a result of such breaches, it is entitled to payment of the $14,875,000 termination fee and its transaction expenses. The Company denies all of Verano’s allegations and affirmatively asserts that it has complied with its obligations under the Arrangement Agreement, and with its disclosure obligations under US and Canadian law, in all material respects at all times. The Company believes that Verano had no factual or legal basis to justify or support its purported grounds for termination of the Arrangement Agreement.
On October 21, 2022, the Company commenced an action in the Supreme Court of British Columbia against Verano arising out of Verano’s repudiation of the Arrangement Agreement, which Goodness Growth believes was wrongful. The Company is seeking damages, costs and interest, based on Verano's breach of contract and of its duty of good faith and honest performance. On November 14, 2022, Verano filed counterclaims against the Company for the termination fee and transaction expenses described above. Due to uncertainties inherent in litigation, it is not possible for Goodness Growth to predict the timing or final outcome of the legal proceedings against Verano or to determine the amount of damages, if any, that may be awarded to either party. In addition, the costs of prosecuting the Company’s claims and defending against the claims made by Verano could be material.
We may face state limitations on ownership of cannabis licenses.
Certain jurisdictions in which we operate limit the number of cannabis licenses and certain economic or commercial interests in the entity that holds the license that can be held by one entity within that state. As a result of the completion of certain acquisition transactions that we have entered into or may enter into in the future, we may potentially hold more than the prescribed number of licenses or economic or commercial interests in a licensed entity in certain states, and accordingly may be required to divest certain licenses or entities that hold such license in order to comply with applicable regulations. The divestiture of certain licenses or entities that hold such licenses may result in a material, adverse effect on our business, financial condition, or results of operations.
We may become subject to FDA or ATF regulation.
Marijuana remains a Schedule I controlled substance under U.S. federal law. If the federal government reclassifies marijuana to a Schedule II, Schedule III, Schedule IV, or Schedule V controlled substance or declassifies it as a controlled substance, it is possible that the U.S. Food and Drug Administration (the “FDA”) would seek to regulate cannabis under the Food, Drug and Cosmetics Act of 1938, as amended (the “FDCA”). The FDA is responsible for ensuring public health and safety through regulation of food, drugs, supplements, and cosmetics, among other products, through its enforcement authority pursuant to the FDCA. The FDA’s responsibilities include regulating the ingredients as well as the marketing and labeling of drugs sold in interstate commerce. Because marijuana is federally illegal to produce and sell, and because it has few federally recognized medical uses, the FDA has historically deferred enforcement related to cannabis to the DEA; however, the FDA has enforced the FDCA with regard to industrial hemp-derived products, especially CBD derived from industrial hemp sold outside of state-regulated cannabis businesses. The FDA had asserted its authority to regulate CBD derived from both marijuana and industrial hemp, and its intention to develop a framework for regulating the production and sale of CBD derived from industrial hemp. On January 26, 2023, the FDA announced that it would not seek to regulate CBD as a dietary supplement.
Additionally, the FDA may issue rules and regulations, including good manufacturing practices related to the growth, cultivation, harvesting, processing, and production of cannabis. Clinical trials may be needed to verify the efficacy and safety of cannabis and cannabis products. It is also possible that the FDA would require facilities where medical-use cannabis is grown to register with the FDA and comply with certain federally prescribed regulations. If some or all these regulations are imposed, the impact they would have on the cannabis industry is unknown, including the costs, requirements and possible prohibitions that may be enforced. If we are unable to comply with the potential regulations or registration requirements prescribed by the FDA, it may have a material, adverse effect on our business, prospects, revenue, results of operation and financial condition.
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It is also possible that the federal government could seek to regulate cannabis under the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (“ATF”). The ATF may issue rules and regulations related to the use, transport, sale and advertising of cannabis or cannabis products.
Cannabis businesses are subject to applicable anti-money laundering laws and regulations and have restricted access to banking and other financial services. Recent events in the banking industry may further restrict our ability to access financial services.
Banks and other depository institutions are currently hindered by federal law from providing financial services to marijuana businesses, even in states where those businesses are regulated.
The Company and our subsidiaries are subject to a variety of laws and regulations domestically and internationally that involve money laundering, financial record-keeping and proceeds of crime, including the U.S. Currency and Foreign Transactions Reporting Act of 1970 (commonly known as the “Bank Secrecy Act”), as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended, and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S. and Canada. Further, under U.S. federal law, banks or other financial institutions that provide a cannabis business with a checking account, debit or credit card, small business loan, or any other service could be found guilty of money laundering, aiding and abetting, or conspiracy.
The Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury issued the FinCEN Memorandum on February 14, 2014, outlining the pathways for financial institutions to bank cannabis businesses in compliance with federal enforcement priorities. The FinCEN Memorandum states that, in some circumstances, it is permissible for banks to provide services to cannabis-related businesses without risking prosecution for violation of federal money laundering laws. The FinCEN Memorandum refers to the Cole Memorandum’s enforcement priorities.
The revocation of the Cole Memorandum has not yet affected the status of the FinCEN Memorandum, nor has FinCEN given any indication that it intends to rescind the FinCEN Memorandum itself. Shortly after the Sessions Memorandum was issued, FinCEN did state that it would review the FinCEN Memorandum, but FinCEN has not yet issued further guidance.
Although the FinCEN Memorandum remains in effect, it is unclear whether the Biden administration will continue to follow its guidelines. The DOJ continues to have the right and power to prosecute crimes committed by banks and financial institutions, such as money laundering and violations of the Bank Secrecy Act that occur in any state, including states that have in some form legalized the sale of cannabis. Further, the conduct of the DOJ’s enforcement priorities could change for any number of reasons. A change in the DOJ’s priorities could result in the prosecution of banks and financial institutions for crimes that were not previously prosecuted.
If our operations, or proceeds thereof, dividend distributions or profits or revenues derived from our operations were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds from a crime (the sale of a Schedule I drug) under the Bank Secrecy Act’s money laundering provisions. This may restrict our ability to declare or pay dividends or effect other distributions.
The FinCEN Memorandum does not provide any safe harbors or legal defenses from examination or regulatory or criminal enforcement actions by the DOJ, FinCEN or other federal regulators. Thus, most banks and other financial institutions in the United States do not appear willing to provide banking services to cannabis-related businesses or to rely on this guidance. In addition to the foregoing, banks may refuse to process debit card payments and credit card companies generally refuse to process credit card payments for cannabis-related businesses. As a result, we may have limited or no access to banking or other financial services in the United States. In addition, federal money laundering statutes and Bank Secrecy Act regulations discourage financial institutions from working with any organization that sells a controlled substance, regardless of whether the state it operates in permits cannabis sales. The inability or limitation of our ability to open or maintain bank accounts, obtain other banking services and/or accept credit card and debit card payments may make it difficult for us to operate and conduct our business as planned or to operate efficiently and could subject our
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businesses to robbery, embezzlement or other crimes related to our possession or transport of cash, sometimes in substantial quantities.
In March 2023, Federal banking regulators closed Silicon Valley Bank and Signature Bank to prevent the banks from failing. The closures have prompted broader inquiries into the financial health of banks and other financial institutions in the United States and other countries. While none of the banks with which the Company maintains financial relationships has been identified as a target of such an inquiry or as at risk of closure by regulators, there remains the possibility that one or more of the banks could fail, which would further limit the Company’s access to financial services, which could lead to the need to maintain more cash at some or all of the Company’s locations, increasing the risk of theft or other loss. Such events could lead to the smaller number of banks that continue to provide financial services to the Company imposing further restrictions, higher fees, or both on the Company’s accounts.
We operate in a highly regulated sector and may not always succeed in complying fully with applicable regulatory requirements in all jurisdictions where we carry on business.
Our business and activities are heavily regulated in all jurisdictions where we carry on business. Our operations are subject to various laws, regulations and guidelines by state and local governmental authorities relating to the manufacture, marketing, management, transportation, storage, sale, pricing and disposal of cannabis, cannabis oil and consumable cannabis products, and also including laws and regulations relating to health and safety, insurance coverage, the conduct of operations and the protection of the environment. Laws and regulations, applied generally, grant government agencies and self-regulatory bodies broad administrative discretion over our activities, including the power to limit or restrict business activities as well as impose additional disclosure requirements on our products and services. Achievement of our business objectives is contingent, in part, upon compliance with regulatory requirements enacted by these governmental authorities and obtaining all necessary regulatory approvals for the manufacture, production, storage, transportation, sale, import and export, as applicable, of our products. The commercial cannabis industry is still a new industry at the state and local level. The effect of relevant governmental authorities’ administration, application and enforcement of their respective regulatory regimes and delays in obtaining, or failure to obtain, applicable regulatory approvals that may be required may significantly delay or impact the development of markets, products and sales initiatives and could have a material, adverse effect on our business, prospects, revenue, results of operation and financial condition.
While we endeavor to comply with all applicable laws, regulations and guidelines and, to our knowledge, we are in compliance with, or are in the process of being assessed for compliance with all such laws, regulations and guidelines, any failure to comply with the regulatory requirements applicable to our operations may lead to possible sanctions including the revocation or imposition of additional conditions on licenses to operate our business; the suspension or expulsion from a particular market or jurisdiction of our key personnel; the imposition of additional or more stringent inspection, testing and reporting requirements; and the imposition of fines and censures. In addition, changes in regulations, more vigorous enforcement thereof or other unanticipated events could require extensive changes to our operations, increase compliance costs or give rise to material liabilities and/or revocation of our licenses and other permits, which could have a material, adverse effect on our business, results of operations and financial condition. Furthermore, governmental authorities may change their administration, application, or enforcement procedures at any time, which may adversely affect our ongoing costs relating to regulatory compliance.
Because marijuana is illegal under U.S. federal law, we may be unable to access to U.S. bankruptcy protections in the event of our bankruptcy or a bankruptcy in an entity in which we invest.
Many courts have denied cannabis businesses federal bankruptcy protections because the use of cannabis is illegal under federal law. In the event one or more of our businesses were to become unable to pay its liabilities, federal bankruptcy laws sometimes enable businesses to reorganize, reduce debt and continue to operate, or to wind down in an orderly manner so that creditors and sometimes equity holder realize some return of the funds they have provided to the bankrupt business. If federal bankruptcy laws do not apply to cannabis businesses, it would be very difficult for lenders or other creditors and the owners of Subordinate Voting Shares or other equity to recoup their investments in us. If we were to experience a bankruptcy, there is no guarantee that U.S. federal bankruptcy protections would be available to us, which would have a material, adverse effect on the Company, including the potential to disable our ability to conduct our businesses at all.
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Additionally, there is no guarantee that we will be able to effectively enforce any interests we may have in our other subsidiaries and investments. A bankruptcy or other similar event related to an entity in which we hold an interest that precludes such entity from performing its obligations under an agreement may have a material, adverse effect on our business, financial condition, or results of operations. Further, should an entity in which we hold an interest have insufficient assets to pay its liabilities, it is possible that other liabilities will be satisfied prior to the liabilities or equity owed to us. In addition, bankruptcy or other similar proceedings are often a complex and lengthy process, the outcome of which may be uncertain and could result in a material, adverse effect on our business, financial condition or results of operations.
Because our contracts involve marijuana and related activities, which are not legal under U.S. federal law, we may face difficulties in enforcing our contracts.
Because our contracts involve cannabis and other activities that are not legal under federal law and in some state jurisdictions, we may face difficulties in enforcing our contracts in federal courts and certain state courts. Therefore, there is uncertainty as to whether we will be able to legally enforce our agreements, which could have a material, adverse effect on the Company.
We may not be able to secure our payment and other contractual rights with liens on the inventory or licenses of our clients and contracting parties under applicable state laws.
In general, the laws of the various states that have legalized cannabis sale and cultivation do not expressly or impliedly allow for the pledge of inventory containing cannabis as collateral for the benefit of third parties, such as the Company and our subsidiaries, that do not possess the requisite licenses and entitlements to cultivate, process, sell, or possess cannabis pursuant to the applicable state law. Likewise, the laws of those states generally do not allow for transfer of the licenses and entitlements to sell or cultivate cannabis to third parties that have not been granted such licenses and entitlements by the applicable state agency. Our inability to secure our payment and other contractual rights with liens on the inventory and licenses of our clients and contracting parties increases the risk of loss resulting from breaches of the applicable agreements by the contracting parties, which, in turn, could have a material, adverse effect on our business, financial condition or results of operations.
Because marijuana is illegal under U.S. federal law, marijuana businesses may be subject to civil asset forfeiture.
Because the marijuana industry remains illegal under U.S. federal law, any properties owned by participants in the marijuana industry which are either used in the course of conducting such business, or are the proceeds of such business, could be subject to seizure by law enforcement and subsequent civil asset forfeiture. Even if the owner of the property were never charged with a crime, the property in question could still be seized and subject to an administrative proceeding by which, with minimal due process, it could be subject to forfeiture.
We may be subject to constraints on and differences in marketing our products under varying state laws.
There are and may continue to be restrictions on sales and marketing activities imposed by government regulatory bodies that could hinder the development of our business and operating results. Restrictions may include regulations that specify what, where and to whom product information and descriptions may appear and/or be advertised. Marketing, advertising, packaging, and labeling regulations also vary from state to state, potentially limiting the consistency and scale of consumer branding communication and product education efforts. The regulatory environment in the U.S. limits our ability to compete for market share in a manner similar to other industries. If we are unable to effectively market our products and compete for market share, or if the costs of compliance with government legislation and regulation cannot be absorbed through increased selling prices for our products, our sales and operating results could be materially, adversely affected.
The results of future clinical research may be unfavorable to cannabis, which may have a material, adverse effect on the demand for our products.
The cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the cannabis produced. Consumer perception can be significantly influenced by scientific research or findings regarding the
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consumption of cannabis products. There can be no assurance that future scientific research or findings will be favorable to the cannabis market or any particular product, or consistent with earlier research or findings. Research in Canada, the U.S. and internationally regarding the medical benefits, viability, safety, efficacy and dosing of cannabis or isolated cannabinoids (such as CBD and THC) remains in early stages. There have been relatively few clinical trials on the benefits of cannabis or isolated cannabinoids. Although we believe that various articles, reports, and studies support our beliefs regarding the medical benefits, viability, safety, efficacy and dosing of cannabis, future research and clinical trials may prove such statements to be incorrect or could raise concerns regarding cannabis. Future research studies and clinical trials may draw opposing conclusions to those stated in this document or reach negative conclusions regarding the medical benefits, viability, safety, efficacy, dosing, or other facts related to cannabis, which could have a material, adverse effect on the demand for our products, and therefore on our business, prospects, revenue, results of operation and financial condition.
Inconsistent public opinion and perception of the medical and adult-use use cannabis industry hinders market growth and state adoption.
Public opinion and support for medical and adult-use cannabis has traditionally been inconsistent and varies from jurisdiction to jurisdiction. While public opinion and support appears to be rising generally for legalizing medical and adult-use cannabis, it remains a controversial issue subject to differing opinions surrounding the level of legalization (for example, medical cannabis as opposed to legalization in general). Inconsistent public opinion and perception of the medical and adult-use cannabis may hinder growth and state adoption, which could have a material, adverse effect on our business, financial condition, or results of operations.
Our ability to generate revenue and be successful in the implementation of our business plan is dependent on consumer acceptance and demand of our product lines. Our management believes the medical and adult-use cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the cannabis produced. Acceptance of our products depends on several factors, including availability, cost, familiarity of use, perceptions of acceptance by other people, convenience, effectiveness, safety, and reliability. If customers do not accept our products, or if we fail to meet customers’ needs and expectations adequately, our ability to continue generating revenues could be reduced. Consumer perception of our products may be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of medical and adult-use cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the medical and adult-use cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that are perceived as less favorable than, or that question, earlier research reports, findings or publicity could have a material, adverse effect on the demand for our products and our business, results of operations, financial condition, and cash flows. Our dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit, could have a material, adverse effect on the Company, the demand for our products, and our business, results of operations, financial condition and cash flows. Further, adverse publicity reports or other media attention regarding the safety, efficacy, and quality of cannabis in general, or our products specifically, or associating the consumption of cannabis with illness or other negative effects or events, could have such a material, adverse effect or our business, financial position and results of operations. Such adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed.
Investors in the Company who are not U.S. citizens may be denied entry into the United States.
Because cannabis remains illegal under U.S. federal law, those individuals who are not U.S. citizens employed at or investing in legal and licensed U.S. cannabis companies could face detention, denial of entry or lifetime bans from the United States for their business associations with U.S. cannabis businesses. Entry happens at the sole discretion of U.S. Customs and Border Protection (“CBP”) officers on duty, and these officers have wide latitude to ask questions to determine the admissibility of a foreign national. The government of Canada has started warning travelers on its website that previous use of cannabis, or any substance prohibited by U.S. federal laws, could mean denial of entry to the United States. Business or financial involvement in the legal cannabis industry in Canada or in the United States could also be reason enough for U.S. border guards to deny entry. On September 21, 2018, CBP released a statement outlining its current
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position with respect to enforcement of the laws of the United States. It stated that Canada’s legalization of cannabis will not change CBP enforcement of U.S. laws regarding controlled substances and, because cannabis continues to be a controlled substance under U.S. law, working in or facilitating the proliferation of the legal cannabis industry in U.S. states where it is deemed legal or Canada may affect admissibility to the United States. As a result, CBP has affirmed that, employees, directors, officers, managers, and investors of companies involved in business activities related to cannabis in the United States or Canada (such as the Company), who are not U.S. citizens face the risk of being barred from entry into the United States for life. On October 9, 2018, CBP released an additional statement regarding the admissibility of Canadian citizens working in the legal cannabis industry. CBP stated that a Canadian citizen working in or facilitating the proliferation of the legal cannabis industry in Canada coming into the United States for reasons unrelated to the cannabis industry will generally be admissible to the United States; however, if such person is found to be coming into the United States for reasons related to the cannabis industry, such person may be deemed inadmissible.
As a cannabis business, we are subject to unfavorable tax treatment under the Internal Revenue Code.
Under Section 280E of the U.S. Internal Revenue Code of 1986 (together with the Treasury regulations promulgated and the rulings issued thereunder, the “Code”), no deduction or credit is allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if the trade or business (or the activities which comprise the trade or business) consists of trafficking in controlled substances (within the meaning of Schedules I and II of the Controlled Substances Act), which is prohibited by federal law or the law of any state in which that trade or business is conducted. The IRS has applied this provision to cannabis operations, prohibiting them from deducting many expenses associated with cannabis businesses other than certain costs and expenses related to cannabis cultivation and manufacturing operations. Accordingly, Section 280E has a significantly adverse impact on the operations of cannabis companies, including the Company, and an otherwise profitable business may operate at a loss, after taking into account its U.S. income tax expenses.
If our operations are found to be in violation of applicable money laundering legislation and our revenues are viewed as proceeds of crime, we may be unable to effect distributions or repatriate funds to Canada.
We are subject to a variety of laws and regulations in the U.S. and Canada that involve money laundering, financial record-keeping and proceeds of crime, including the Bank Secrecy Act, as amended by Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (Canada), as amended, and the rules and regulations thereunder, and any related or similar rules, regulations or guidelines, issued, administered or enforced by governmental authorities in the U.S. and Canada.
If the operations of the Company or our subsidiaries, or any proceeds thereof, any dividend distributions or any profits or revenues derived from these operations in the United States were found to be in violation of money laundering legislation or otherwise, such transactions may be viewed as proceeds of crime under one or more of the statutes noted above, or any other applicable legislation. This could have a material, adverse effect on the Company and, among other things, could restrict or otherwise jeopardize our ability to declare or pay dividends, effect other distributions, or subsequently repatriate such funds back to Canada.
Risks Related to our Business and Operations
We incurred net losses in fiscal years 2022 and 2021 with net cash used in operating activities and cannot provide assurance as to when or if we will become profitable and generate cash in our operating activities.
We incurred net losses, under U.S. generally accepted accounting principles, of $42,457,444 and $33,690,475 and net cash used in operating activities of $18,073,265 and $30,517,197 for the fiscal years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an aggregate accumulated deficit of $177,880,963. Such losses have historically required us to seek additional funding through the issuance of debt or equity securities. In addition, we have historically experienced and may prospectively experience fluctuations in our quarterly earnings due to the nature of our business. Our long-term success is dependent upon among other things, achieving positive cash flows from operations and
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augmenting such cash flows using external resources to satisfy our cash needs, and there is no assurance that we will be able to achieve such cash flows.
We anticipate requiring additional financing to operate our business and we may face difficulties acquiring additional financing on terms acceptable to us or at all.
We will need additional capital to sustain our operations and will likely seek further financing. If we fail to raise additional capital, as needed, our ability to implement our business model and strategy could be compromised. To date, our operations and expansion of our business have been funded primarily from cash-flow from operations as substantially supplemented by the proceeds of debt and equity financings and the sale of our former Pennsylvania subsidiaries and Arizona dispensary and cannabis licenses. We expect to require substantial additional capital in the future primarily to fund working capital requirements of our business, including operational expenses, planned capital expenditures including the focused development and growth of cultivation and dispensary facilities, debt service and acquisitions.
Even if we obtain financing for our near-term operations and expansion, we expect that we will require additional capital thereafter. Our capital needs will depend on numerous factors including, without limitation: (i) our profitability; (ii) the release of competitive products by our competition; (iii) the level of our investment in research and development; (iv) the amount of our capital expenditures, including acquisitions; (v) debt service; and (vi) the taxes to which our businesses and operations are subject.
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership held by our existing shareholders will be reduced and our shareholders may experience significant dilution. In addition, new securities may contain rights, preferences, or privileges that are senior to those of existing securities. If we raise additional capital by incurring debt, this will result in increased interest expense. If we raise additional funds through the issuance of equity securities, market fluctuations in the price of our securities could limit our ability to obtain additional equity financing.
No assurance can be given that any additional financing will be available to us, or if available, will be on terms favorable to us. If we are unable to raise capital when needed, our business, financial condition, and results of operations would be materially, adversely affected, and we could be forced to reduce or discontinue our operations.
We are a holding company, and our earnings are dependent on the earnings and distributions of our subsidiaries.
We are a holding company and essentially all our assets are the capital stock or membership interests of our subsidiaries or management services agreements with entities in each of the markets in which we operate, including in our core markets of Maryland, Minnesota, New Mexico, and New York. As a result, our shareholders are subject to the risks attributable to our subsidiaries. As a holding company, we conduct substantially all our business through our subsidiaries, which generate substantially all our revenues. Consequently, our cash flows and ability to complete current or desirable future enhancement opportunities are dependent on the earnings of our subsidiaries and the distribution of those earnings to us. The ability of these entities to pay dividends and other distributions will depend on their operating results and will be subject to applicable laws and regulations which require that solvency and capital standards be maintained by such companies and contractual restrictions contained in the instruments governing their debt. In the event of a bankruptcy, liquidation, or reorganization of any of our material subsidiaries, holders of indebtedness and trade creditors may be entitled to payment of their claims from the assets of those subsidiaries before us.
Our subsidiaries may not be able to obtain necessary permits and authorizations.
Our subsidiaries may not be able to obtain or maintain the necessary licenses, permits, certificates, authorizations, or accreditations to operate their respective businesses, or may only be able to do so at great cost. In addition, our subsidiaries may not be able to comply fully with the wide variety of laws and regulations applicable to the cannabis industry. Failure to comply with or to obtain the necessary licenses, permits, certificates, authorizations, or accreditations could result in restrictions on a subsidiary’s ability to operate in the cannabis industry, which could have a material, adverse effect on our business, financial condition, and results of operations.
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Disparate state-by-state regulatory landscapes and the constraints related to holding cannabis licenses in various states results in operational and legal structures for realizing the benefit from cannabis licenses that could result in materially detrimental consequences to us.
We realize, and will continue to realize, the benefits from cannabis licenses pursuant to a number of different structures, depending on the regulatory requirements from state-to-state, including realizing the economic benefit of cannabis licenses through management agreements. Such agreements are often required to comply with applicable laws and regulations or are in response to perceived risks that we determine warrant such arrangements.
The foregoing structures present various risks to the Company and our subsidiaries, including but not limited to the following risks, each of which could have a material, adverse effect on our business, financial condition, and results of operations:
| ● | A governmental body or regulatory entity may determine that any of these structures are in violation of a legal or regulatory requirement or change such legal or regulatory requirements with the result that a management agreement structure violates such requirements (where it had not in the past). |
| ● | There could be a material, adverse impact on the revenue stream we receive from or on account of cannabis licenses (as we will not be the license holder, and therefore any economic benefit is received pursuant to a contractual arrangement). If a management agreement is terminated, the Company will no longer receive any economic benefit from the applicable dispensary and/or cultivation license. |
| ● | These structures could potentially result in the funds invested by the Company being used for unintended purposes, such as to fund litigation. |
| ● | If a management agreement structure is in place, we will not be the license holder of the applicable state-issued cannabis license, and therefore, only have contractual rights in respect of any interest in any such license. If the license holder fails to adhere to its contractual agreement with us, or if the license holder makes, or omits to make, decisions in respect of the license that we disagree with, we will only have contractual recourse and will not have recourse to any regulatory authority. |
| ● | The license holder may renege on its obligation to pay fees and other compensation pursuant to a management agreement or violate other provisions of these agreements. |
| ● | The license holder’s acts or omissions may violate the requirements applicable to it pursuant to the applicable dispensary and/or cultivation license, thus jeopardizing the status and economic value of the license holder (and, by extension, of the Company). |
| ● | The license holder may attempt to terminate the management agreement in violation of its express terms. |
In any or all of the above situations, it may be difficult and expensive for us to protect our rights through litigation, arbitration, or similar proceedings.
The success of our business depends, in part, on our ability to successfully integrate acquired businesses and to retain key employees of acquired businesses.
Since the Company’s inception, we have acquired and integrated complementary businesses, which have contributed to a significant portion of our growth. We continue to evaluate strategic acquisition opportunities that have the potential to support and strengthen our business, including acquisitions in the United States, as part of our ongoing growth strategy. We cannot predict the timing or size of any future acquisitions. To successfully acquire a significant target, we may need to raise additional equity and/or indebtedness, which could increase our debt. There can be no assurance that we will enter into definitive agreements with respect to any contemplated transaction or that any contemplated transaction will be completed. The investigation of acquisition candidates and the negotiation, drafting and execution of relevant agreements,
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disclosure documents and other instruments will require substantial management time and attention and substantial costs for accountants, attorneys, and others. If we fail to complete any acquisition for any reason, including events beyond our control, the costs incurred up to that point for the proposed acquisition would not be recoverable.
Acquisitions typically require integration of the acquired company’s estimation, project management, finance, information technology, risk management, purchasing and fleet management functions. We may be unable to successfully integrate an acquired business into our existing business, and an acquired business may not be as beneficial or profitable as and when expected or at all. Our inability to successfully integrate new businesses in a timely and orderly manner could increase costs, reduce profits, or generate losses. Factors affecting the successful integration of an acquired business include, but are not limited to, the following:
| ● | we may become liable for certain liabilities of an acquired business, whether or not known to us, which could include, among others, tax liabilities, product liabilities, environmental liabilities and liabilities for employment practices, and these liabilities could be significant; |
| ● | we may not be able to retain local managers and key employees who are important to the operations of an acquired business; |
| ● | substantial attention from our senior management and the management of an acquired business may be required, which could decrease the time that they have to service and attract customers; |
| ● | we may not effectively utilize new equipment that we acquire through acquisitions; |
| ● | the complete integration of an acquired company depends, to a certain extent, on the full implementation of our financial and management information systems, business practices and policies; and |
| ● | we may actively pursue a number of opportunities simultaneously and may encounter unforeseen expenses, complications and delays, including difficulties in employing sufficient staff and maintaining operational and management oversight. |
Acquisitions involve risks that the acquired business will not perform as expected and that business judgments concerning the value, strengths and weaknesses of the acquired business will prove incorrect. In addition, potential acquisition targets may be in states in which we do not currently operate, which could result in unforeseen operating difficulties and difficulties in coordinating geographically dispersed operations, personnel, and facilities. In addition, if we enter new geographic markets, we may be subject to additional and unfamiliar legal and regulatory requirements.
We cannot guarantee that we will achieve synergies and cost savings in connection with completed or future acquisitions within the timing anticipated or at all. Many of the businesses that we have acquired and may acquire in the future have unaudited financial statements that have been prepared by management and have not been independently reviewed or audited. We cannot guarantee that such financial statements would not be materially different if such statements were independently reviewed or audited. We cannot guarantee that we will continue to acquire businesses at valuations consistent with prior acquisitions or that we will complete future acquisitions at all. We cannot guarantee that there will be attractive acquisition opportunities at reasonable prices, that financing will be available or that we can successfully integrate acquired businesses into existing operations. In addition, the results of operations from these acquisitions could, in the future, result in impairment charges for any of our intangible assets, including goodwill or other long-lived assets, particularly if economic conditions worsen unexpectedly. Our inability to effectively manage the integration of our completed and future acquisitions could prevent us from realizing expected rates of return on an acquired business and could have a material and adverse effect on our financial condition, results of operations or liquidity.
Our senior secured credit facility contains covenant restrictions that may limit our ability to operate our business.
On March 25, 2021, we entered into the Credit Facility. The Credit Facility contains, and any of our other future debt agreements may contain, covenant restrictions that limit our ability to operate our business, including restrictions on our
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ability to, among other things, incur additional debt or issue guarantees, create additional liens, pay cash dividends, repurchase stock or make other restricted payments, make certain voluntary prepayments of specified debt, engage in sale-leasebacks involving certain assets, and enter into mergers or acquisitions or dispose of certain assets. The Credit Facility also contains, and any of our other future debt agreements may contain, financial covenants regarding our liquidity, minimum consolidated adjusted EBITDA, and consolidated fixed charge coverage ratio. As a result of these covenants, our ability to respond to changes in business and economic conditions and engage in beneficial transactions, including to obtain additional financing as needed, may be restricted. Furthermore, our failure to comply with our debt covenants could result in a default under our debt agreements, which could permit the holders to accelerate our obligation to repay the debt. If any of our debt is accelerated, we may not have sufficient funds available to repay it.
Servicing our debt will require a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt.
As of December 31, 2021, we had $61,250,000 in aggregate principal indebtedness (refer to Note 14) to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K).
Our substantial consolidated indebtedness may increase our vulnerability to any generally adverse economic and industry conditions. We and our subsidiaries may, subject to the limitations in the terms of our existing and future indebtedness, incur additional debt, secure existing or future debt, or recapitalize our debt. Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our current and future indebtedness, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business has not generated positive cash flow from operations. If this continues in the future, we may not have sufficient cash flows to service our debt and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our current and future indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
The nature of the medical and adult-use cannabis industry may result in unconventional due diligence processes and acquisition terms that could have unknown and materially detrimental consequences to us.
The uncertainty inherent in various aspects of the medical and adult-use cannabis industry may result in what otherwise would be considered to be inadequate investment due diligence information and uncertain legal consequences relative to arrangements affecting a target investment. The reluctance of banks and other financial institutions to facilitate financial transactions in the medical and adult-use cannabis industry can result in inadequate and unverifiable financial information about target investments, as well as cash management practices that are vulnerable to theft and fraud. The lack of established, traditional sources of financing for industry participants can result in unusual and uncertain arrangements affecting the ownership and obligations of a target investment. The reluctance of lawyers to represent industry participants in furtherance of financing and other business transactions can result in the lack of appropriate documentation setting forth the terms of the transactions, inadequately documented transactions, and transactions that in whole or in part are illegal under applicable state law, among other detrimental consequences. We may have invested in, and may in the future invest in, businesses and companies that are or may become party to legal proceedings, may have inadequate financial and other due diligence information, may employ vulnerable cash management practices, lack written or adequate legal documents governing significant transactions, and otherwise have known or unknown conditions that could be detrimental to our business and assets.
Our assets may be purchased with limited representations and warranties from the sellers of those assets.
We will generally acquire assets and businesses, after conducting our due diligence, with only limited representations and warranties from the seller regarding the quality of the assets and the likelihood of payment. As a result, if defects in the assets or business are subsequently discovered, we may not be able to pursue a claim for all or any of our damages against the owners of such seller, and may be limited to asserting our claims against the seller. The extent of damages that we may incur as a result of such matters cannot be predicted, but potentially could have a material, adverse effect on the value of our assets and revenue stream and, as a result, on our ability to pay dividends.
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Lending by us to third parties may be unsecured, subordinate in interest or backed by unrealizable license assets.
In connection with certain transactions, we may also act as lender to one or more counterparties. Certain of these loans are unsecured, which places us at a greater risk of not receiving repayment or the equivalent value thereof. Even for loans that are secured, there is a risk that other lenders may have priority interest to us or that the assets of the borrower may be insufficient to satisfy the loan. In addition, we may have difficulty putting liens on the assets of a borrower, as the major asset is generally the cannabis license which is not transferrable pursuant to state law. Any inability of a borrower to repay a loan or of the Company to realize the value of secured assets could have a material, adverse effect on our business, financial condition, or results of operations.
Competition for the acquisition and leasing of properties suitable for the cultivation, production, and sale of medical and adult-use cannabis may impede our ability to make acquisitions or increase the cost of these acquisitions, which could materially, adversely affect our operating results and financial condition.
We compete for the acquisition of properties suitable for the cultivation, production, and sale of medical and adult-use cannabis with entities engaged in agriculture and real estate investment activities, including corporate agriculture companies, cultivators, producers, and sellers of cannabis. These competitors may prevent us from acquiring and leasing desirable properties, may cause an increase in the price we must pay for properties or may result in us having to lease our properties on less favorable terms than we expect. Our competitors may have greater financial and operational resources than we do and may be willing to pay more for certain assets or may be willing to accept more risk than we believe can be prudently managed. In particular, larger companies may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. Our competitors may also adopt transaction structures similar to ours, which would decrease our competitive advantage in offering flexible transaction terms. In addition, due to a number of factors, including but not limited to potential greater clarity of the laws and regulations governing medical use cannabis by state and federal governments, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties. If we pay higher prices for properties or enter into leases for such properties on less favorable terms than we expect, our profitability and ability to generate cash flow and make distributions to our shareholders may decrease. Increased competition for properties may also preclude us from acquiring those properties that would generate attractive returns.
We face security risks related to our physical facilities and cash transfers.
The business premises of our operating locations are targets for theft. While we have implemented security measures at each location and continue to monitor and improve such security measures, our cultivation, production, processing, and dispensary facilities could be subject to break-ins, robberies, and other breaches in security. If there were a breach in security and we fell victim to a robbery or theft, the loss of cannabis plants, cannabis oils, cannabis flowers, cannabis products and cultivation, production, processing, and packaging equipment could have a material, adverse effect on our business, prospects, revenue, results of operation and financial condition.
Our business involves the movement and transfer of cash, which is collected from dispensaries or patients/customers and deposited into our bank. There is a risk of theft or robbery during the transport of cash. We have engaged security firms to provide security in the transport and movement of large amounts of cash. Employees sometimes transport cash and/or products. While we have taken robust steps to prevent theft or robbery of cash and products during transport, there can be no assurance that there will not be a security breach during the transport and the movement of cash or products, involving the theft of product or cash.
We face exposure to fraudulent or illegal activity by employees, contractors, consultants, and agents, which may subject us to investigations and actions.
We are exposed to the risk that any of our employees, independent contractors and consultants may engage in fraudulent or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct or disclosure of unauthorized activities to us that violates one or more of the following: (i) government regulations; (ii) manufacturing standards; (iii) federal or state privacy laws and regulations; (iv) laws that require the true, complete,
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and accurate reporting of financial information or data; or (v) other laws or regulations. It may not always be possible for us to identify and prevent misconduct by our employees and other third parties, and the precautions taken by us to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. We cannot provide assurance that our internal controls and compliance systems will protect us from acts committed by our employees, agents, or business partners in violation of U.S. federal or state or local laws. If any such actions are instituted against us, and we are not successful in defending the Company or asserting our rights, those actions could have a significant impact on our business, including the imposition of civil, criminal and administrative penalties, damages, monetary fines, contractual damages, reputational harm, diminished profits and future earnings, and curtailment of our operations, any of which could have a material, adverse effect on our business, financial condition or results of operations.
We face risks related to the novelty of the cannabis industry, and the resulting lack of information regarding comparable companies, unanticipated expenses, difficulties and delays, and the offering of new products and services in an untested market.
As a relatively new industry, there are not many established players in the cannabis industry whose business model we can follow or emulate. Similarly, there is little information about comparable companies available for potential investors to review in deciding whether to invest in the Company.
Shareholders and investors should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies, like us, that are in their early stages. For example, unanticipated expenses and problems or technical difficulties may occur, which may result in material delays in the operation of our business. We may fail to successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business to the point of having to cease operations and could impair the value of the Subordinate Voting Shares to the point where investors may lose their entire investments.
We have committed and expect to continue committing significant resources and capital to develop and market existing products and services and new products and services. These products and services are relatively untested in the marketplace, and we cannot provide assurance that we will achieve market acceptance for these products and services, or other new products and services that we may offer in the future. Moreover, these and other new products and services may be subject to significant competition from offerings by new and existing competitors in the business. In addition, new products and services may pose a variety of challenges and require us to attract additional qualified employees. The failure to successfully develop and market these new products and services could materially harm our business, prospects, revenue, results of operation and financial condition.
We are dependent on the popularity and acceptance of our brand portfolio.
Our ability to generate revenue and be successful in the implementation of our business plan is dependent on consumer acceptance of and demand for our products. Acceptance of and demand for our products depends on several factors, including availability, cost, ease of use, familiarity of use, convenience, effectiveness, safety, and reliability. If these customers do not accept our products, or if such products fail to adequately meet customers’ needs and expectations, our ability to continue generating revenues could be reduced.
We believe that establishing and maintaining the brand identities of products is a critical aspect of attracting and expanding a large customer base. Promotion and enhancement of brands will depend largely on success in providing high-quality products. If customers and end users do not perceive our products to be of high quality, or if we introduce new products or enter into new business ventures that are not favorably received by customers and consumers, we will risk diluting brand identities and decreasing their attractiveness to existing and potential customers. Moreover, in order to attract and retain customers and to promote and maintain brand equity in response to competitive pressures, we may have to increase substantially financial commitment to creating and maintaining a distinct brand loyalty among customers. If we incur significant expenses in an attempt to promote and maintain brands, this could have a material, adverse effect on our business, financial condition or results of operations.
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Our business is subject to the risks inherent in agricultural operations.
Medical and adult-use cannabis is an agricultural product. There are risks inherent in the cultivation business, such as insects, plant diseases, and similar agricultural risks. Although our cultivation is substantially completed indoors under climate-controlled conditions, some cultivation is completed outdoors and there can be no assurance that extreme weather and other natural events and conditions will not have a material, adverse effect on the production of our products and, consequentially, on our business, financial condition, or results of operations.
We may encounter increasingly strict environmental regulation in connection with our operations and the associated permitting, which may increase the expenses for cannabis production or subject us to enforcement actions by regulatory authorities.
Our operations will be subject to environmental regulation in the various jurisdictions in which they operate. These regulations mandate, among other things, the maintenance of air and water quality standards and land reclamation. They also set forth limitations on the generation, transportation, storage, and disposal of solid and hazardous waste. Environmental legislation is evolving in a manner which will require stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments of proposed projects and a heightened degree of responsibility for companies and their officers, directors, and employees. There is no assurance that future changes in environmental regulation, if any, will not have a material, adverse effect on our business, financial condition, or results of operations of the Company.
Government approvals and permits are currently, and may in the future be, required in connection with our operations. To the extent such approvals are required and not obtained, we may be curtailed or prohibited from our proposed production of cannabis or from proceeding with the development of our operations as currently proposed.
We may face potential enforcement actions if we fail to comply with applicable laws.
Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions thereunder, including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment, or remedial actions. The subsidiaries may be required to compensate those suffering loss or damage by reason of their operations and may have civil or criminal fines or penalties imposed for violations of applicable laws or regulations.
Amendments to current laws, regulations and permits governing the production of cannabis, or more stringent implementation thereof, could cause increases in expenses, capital expenditures or production costs or reduction in levels of production or require abandonment or delays in development, and could have a material, adverse effect on our business, financial condition, or results of operations.
We face risks related to our information technology systems, including potential cyber-attacks and security and privacy breaches.
Our use of technology is critical in our continued operations. We are susceptible to operational, financial and information security risks resulting from cyber-attacks and/or technological malfunctions. Successful cyber-attacks and/or technological malfunctions affecting us or our service providers can result in, among other things, financial losses, the inability to process transactions, the unauthorized release of customer information or other confidential information and reputational risk. We have not experienced any material losses to date relating to cyber-attacks, other information breaches or technological malfunctions. However, there can be no assurance that we will not incur such losses in the future. As cybersecurity threats continue to evolve, we may be required to use additional resources to continue to modify or enhance protective measures or to investigate and redress security vulnerabilities.
We are subject to laws, rules and regulations in the United States and other jurisdictions relating to the collection, production, storage, transfer and use of personal data. We may store and collect personal information about customers and employees. It is our responsibility to protect that information from privacy breaches that may occur through procedural or process failure, information technology malfunction or deliberate, unauthorized intrusions. Any such theft or privacy
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breach could have a material, adverse effect on our business, prospects, revenue, results of operation and financial condition. Additionally, our ability to execute transactions and to possess and use personal information and data in conducting our business subjects us to legislative and regulatory burdens that may require us to notify regulators and customers, employees, and other individuals of a data security breach. Evolving compliance and operational requirements under the privacy laws, rules, and regulations of jurisdictions in which we operate impose significant costs that are likely to increase over time. In addition, non-compliance could result in proceedings against us by governmental entities and/or the imposition of significant fines, could negatively impact our reputation and may otherwise materially, adversely impact our business, financial condition, and operating results.
We may be required to disclose personal information to government or regulatory entities.
We own, manage, or provide services to various U.S. state-licensed cannabis operations. Acquiring even a minimal and/or indirect interest in a U.S. state-licensed cannabis business can trigger requirements to disclose investors’ personal information. While these requirements vary by jurisdiction, some require interest holders to apply for regulatory approval and to provide tax returns, compensation agreements, fingerprints for background checks, criminal history records and other documents and information. Some states require disclosures of directors, officers, and holders of more than a certain percentage of equity of the applicant. While certain states include exceptions for investments in publicly traded entities, not all states do so, and some such exceptions are confined to companies traded on a U.S. securities exchange. If these regulations were to extend to the Company, investors would be required to comply with such regulations, or face the possibility that the relevant cannabis license could be revoked or cancelled by the state licensing authority.
We face risks related to our insurance coverage and uninsurable risks.
Our business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, fires, riots, civil unrest, labor disputes, litigation and changes in the regulatory environment. Such occurrences could result in damage to assets, personal injury or death, environmental damage, delays in operations, monetary losses and possible legal liability.
Although we intend to continue to maintain insurance to protect against certain risks in such amounts as we consider to be reasonable, our insurance will not cover all the potential risks associated with our operations. We may also be unable to maintain insurance to cover these risks at economically feasible premiums. Insurance coverage may not continue to be available or may not be adequate to cover any resulting liability. Moreover, insurance against risks such as environmental pollution or other hazards encountered in our operations is not generally available on acceptable terms. We might also become subject to liability for pollution or other hazards which we may not be insured against or which we may elect not to insure against because of premium costs or other reasons. Losses from these events may cause the Company to incur significant costs that could have a material, adverse effect upon our financial performance and results of operations.
Our reputation and ability to do business may be negatively impacted by our suppliers’ inability to produce and ship products.
We depend on third-party suppliers to produce and timely ship orders to us. Some products purchased from our suppliers are resold to our customers, while others are used in the production or packaging of our products. These suppliers could fail to produce products to our specifications or quality standards and may not deliver units on a timely basis. Any changes in our suppliers’ ability to timely resolve production issues could impact our ability to fulfill orders and could also disrupt our business due to delays in finding new suppliers.
We are dependent on key inputs, suppliers and skilled labor for the cultivation, extraction, and production of cannabis products.
The cultivation, extraction and production of cannabis and derivative products is dependent on a number of key inputs and their related costs, including raw materials and supplies related to growing operations, as well as electricity, water and other local utilities. Any significant interruption or negative change in the availability or economics of the supply chain for key inputs, such as the raw material cost of cannabis, could materially impact our business, financial condition, results of operations or prospects. Some of these inputs may only be available from a single supplier or a limited group of
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suppliers. If a sole source supplier were to go out of business, we might be unable to find a replacement for such source in a timely manner, or at all. If a sole-source supplier were to be acquired by a competitor of ours, that competitor may elect not to sell to the Company in the future. Any inability to secure required supplies and services, or to do so on appropriate terms, could have a material, adverse effect on our business, prospects, revenue, results of operation and financial condition. We purchase key inputs on a purchase order basis from suppliers at market prices based on its production requirements and anticipated demand. We believe that we will have access to a sufficient supply of the key inputs for the foreseeable future.
Our cannabis growing operations consume considerable energy, which makes us vulnerable to rising energy costs. Accordingly, rising or volatile energy costs may adversely affect our business and our ability operate profitably.
The ability to compete and grow our business will be dependent on our continued access, at a reasonable cost and in a timely manner, to skilled labor, equipment, parts, and components. No assurances can be given that we will be successful in maintaining our required supply of skilled labor, equipment, parts, and components. This could have a material, adverse effect on our financial results.
Our inability to attract and retain key personnel could materially, adversely affect our business.
Our success is dependent upon the ability, expertise, judgment, discretion and good faith of our senior management and key personnel. We compete with other companies both within and outside the cannabis industry to recruit and retain competent employees. If we cannot maintain qualified employees to meet the needs of our anticipated growth, our business and financial condition could be materially, adversely affected.
Our sales are difficult to forecast due to limited and unreliable market data.
As a result of recent and ongoing regulatory and policy changes in the medical and adult use cannabis industries and the effects of the COVID-19 pandemic, the market data that is available is limited and unreliable. We must rely largely on our own market research to forecast sales, as detailed forecasts are not generally obtainable from other sources in the states in which our business operates. Additionally, any market research and projections by the Company of estimated total retail sales, demographics, demand, and similar consumer research, are based on assumptions from limited and unreliable market data. A failure in the demand for our products to materialize as a result of inaccurate research and projections may have a material, adverse effect on our business, results of operations and financial condition.
We may be subject to growth-related risks.
We may be subject to growth-related risks, including capacity constraints and pressure on our internal personnel, processes, systems, and controls. Our ability to manage growth effectively will require us, among other things, to continue to implement and improve our operational and financial systems and processes, and to expand, train and manage our employee base. Our inability to manage this growth effectively and efficiently may have a material, adverse effect on our business, prospects, revenue, results of operation and financial condition.
We are currently involved in litigation, and there may be additional litigation in which we will be involved in the future.
We are currently involved in litigation and may become party to litigation from time to time in the future with various counterparties, including, but not limited to, joint venture partners and other affiliates. An adverse decision in any litigation could have a material, adverse effect on our business, financial condition or results of operations and could result in negative publicity and reputational harm. Furthermore, even if we are successful in the litigation, we may incur substantial legal fees, which could have a material, adverse effect on our business, financial condition, or results of operations.
We face an inherent risk of product liability claims as a manufacturer, processor and producer of products that are intended to be ingested by people.
As a cultivator, manufacturer, processor, and distributor of products designed to be ingested by humans, we face an inherent risk of exposure to product liability claims, regulatory action, and litigation if our products are alleged to have
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caused significant loss or injury. In addition, the manufacture and sale of our products involves the risk of injury to consumers due to tampering by unauthorized third parties or product contamination. Previously unknown adverse reactions resulting from human consumption of our products alone or in combination with other medications or substances could occur. Although we will continue to have quality control procedures in place, we may be subject to various product liability claims, including, among others, that the products produced by us, or the products that are purchased by us from third-party licensed producers, caused injury, illness, or death, include inadequate instructions for use or include inadequate warnings concerning possible side effects or interactions with other substances. A product liability claim or regulatory action against us could result in increased costs, could adversely affect our reputation with our customers and consumers generally and could have a material, adverse effect on our business, results of operations and financial condition. There can be no assurances that we will be able to obtain or maintain product liability insurance on acceptable terms or with adequate coverage against potential liabilities. Such insurance is expensive and may not be available in the future on acceptable terms, or at all. The inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims could prevent or inhibit the commercialization of our potential products and have a material, adverse effect on our business, results of operations and financial condition.
Our intellectual property may be difficult to protect.
We rely upon certain proprietary intellectual property, including but not limited to brands, trademarks, trade names, patents and proprietary processes. Our success will depend, in part, on our ability to maintain and enhance protection over our intellectual property, know-how and other proprietary information. We enter into confidentiality or non-disclosure agreements with our corporate partners, employees, consultants, outside scientific collaborators, developers, and other advisors. These agreements generally require that the receiving party keep confidential and not disclose to third-parties confidential information developed by the receiving party or made known to the receiving party by us during the course of the receiving party’s relationship with the Company. These agreements also generally provide that inventions conceived by the receiving party in the course of rendering services to us will be our exclusive property, and we enter into assignment agreements to perfect our rights. These confidentiality, inventions, and assignment confidentiality agreements may be breached and may not effectively assign rights to proprietary information to us. In addition, our proprietary information could be independently discovered by competitors, in which case we may not be able to prevent the use of such proprietary information by our competitors. The enforcement of a claim alleging that a party illegally obtained and was using our proprietary information could be difficult, expensive, and time consuming and the outcome would be unpredictable. In addition, courts outside the United States may be less willing to protect such proprietary information. The failure to obtain or maintain meaningful intellectual property protection could adversely affect our competitive position.
In addition, effective future patent, trademark, copyright, and trade secret protection may be unavailable or limited in certain countries and may be unenforceable under the laws of certain jurisdictions. As long as cannabis remains illegal under U.S. federal law as a Schedule I controlled substance pursuant to the Controlled Substances Act, the benefit of certain federal laws and protections which may be available to most businesses, such as federal trademark and patent protection regarding the intellectual property of a business, may not be available to us. While many states do offer the ability to protect trademarks independent of the federal government, patent protection is wholly unavailable on a state level, and state-registered trademarks provide a lower degree of protection than would federally registered marks. As a result, our intellectual property may never be adequately or sufficiently protected against the use or misappropriation by third parties.
Our failure to adequately maintain and enhance protection over our proprietary information, as well as over unregistered intellectual property of companies that we acquire, could have a material, adverse effect on our business, financial condition, or results of operations.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could subject us to significant liabilities and other costs.
Our success may depend on our ability to use and develop new extraction technologies, recipes, know-how and new strains of cannabis without infringing the intellectual property rights of third parties. We cannot assure that third parties will not assert intellectual property claims against us. We are subject to additional risks if entities licensing intellectual property to us do not have adequate rights to the licensed materials. If third parties assert copyright or patent infringement or violation
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of other intellectual property rights against Goodness Growth, we will be required to defend ourselves in litigation or administrative proceedings, which can be both costly and time consuming and may significantly divert the efforts and resources of management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, require us to pay ongoing royalties or subject us to injunctions that may prohibit the development and operation of our applications, any of which could have a material, adverse effect on our business, results of operations and financial condition.
Our products may be subject to product recalls, which may result in expense, legal proceedings, regulatory action, loss of sales and reputation, and diversion of management attention.
Despite our quality control procedures, cultivators, manufacturers, and distributors of products are sometimes subject to the recall or return of their products for a variety of reasons, including product defects, such as contamination, unintended harmful side effects or interactions with other substances, packaging safety and inadequate or inaccurate labeling disclosure. If any of our products, or any of the products that are purchased by us from a third-party licensed producer, are recalled due to an alleged product defect or for any other reason, we could be required to incur the unexpected expense of the recall and any legal proceedings that might arise in connection with the recall. We may lose a significant amount of sales and may not be able to replace those sales at an acceptable margin, if at all. In addition, a product recall may require significant management attention. Although we have detailed procedures in place for testing our products, there can be no assurance that any quality, potency, or contamination problems will be detected in time to avoid unforeseen product recalls, regulatory action, or lawsuits. Additionally, if one of our significant brands were subject to recall for any reason, the image of that brand and the Company could be harmed. A recall could lead to decreased demand for our products and could have a material, adverse effect on our results of operations and financial condition. Additionally, product recalls may lead to increased scrutiny of our operations by the FDA or other regulatory agencies, requiring further management attention and potential legal fees and other expenses.
We may face unfavorable publicity or consumer perception of the safety, efficacy, and quality of our cannabis products as a result of research, investigations, litigation and publicity.
Management believes the cannabis industry is highly dependent upon consumer perception regarding the safety, efficacy and quality of the cannabis produced. Consumer perception of our products may be significantly influenced by scientific research or findings, regulatory investigations, litigation, media attention and other publicity regarding the consumption of cannabis products. There can be no assurance that future scientific research, findings, regulatory proceedings, litigation, media attention or other research findings or publicity will be favorable to the cannabis market or any particular product, or consistent with earlier publicity. Future research reports, findings, regulatory proceedings, litigation, media attention or other publicity that is perceived as less favorable than, or questions earlier research reports, findings or publicity could have a material, adverse effect on the demand for our products and our business, results of operations, financial condition, and cash flows. Our dependence upon consumer perceptions means that adverse scientific research reports, findings, regulatory proceedings, litigation, media attention or other publicity, whether or not accurate or with merit, could have a material, adverse effect on the Company, the demand for our products and our business, results of operations, financial condition and cash flows. Further, adverse publicity reports or other media attention regarding the safety, efficacy, and quality of cannabis in general, or our products specifically, or associating the consumption of adult use cannabis with illness or other negative effects or events, could have such a material, adverse effect. Adverse publicity reports or other media attention could arise even if the adverse effects associated with such products resulted from consumers’ failure to consume such products appropriately or as directed.
In addition, the use of vape products and vaping may pose health risks. According to the Centers for Disease Control, vape products may contain ingredients that are known to be toxic to humans and may contain other ingredients that may not be safe. Because clinical studies about the safety and efficacy of vape products have not been submitted to the FDA, consumers currently have no way of knowing whether they are safe for their intended uses or what types or concentrations of potentially harmful substances are found in these products.
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We face intense competition in a new and rapidly growing industry by other licensed companies with more experience and financial resources than we have and by unlicensed, unregulated participants.
We face intense competition from other companies, some of which have longer operating histories and more financial resources and manufacturing and marketing experience than we have. Increased competition by larger and better-financed competitors could materially, adversely affect our business, financial condition, and results of operations. Because of the early stage of the industry in which we operate, we face additional competition from new entrants. If the number of consumers of cannabis in the states in which we operate increases, the demand for products will increase and we expect that competition will become more intense as current and future competitors begin to offer an increasing number of diversified products. To remain competitive, we will require a continued high level of investment in research and development, facilities, marketing, and sales support. We may not have sufficient resources to maintain research and development, facilities, marketing, and sales support efforts on a competitive basis, which could materially, adversely affect the business, financial condition, and results of our operations.
We also face competition from illegal dispensaries and black market sources of cannabis and cannabis products, which are unlicensed and unregulated, and which may sell products that are deemed more desirable than ours by certain consumers, including products with higher concentrations of active ingredients, and using delivery methods, including edibles and extract vaporizers, that we are prohibited from offering to individuals in certain of the states in which we operate as they are not currently permitted by the laws of such states. Any inability or unwillingness of law enforcement authorities to enforce existing laws prohibiting the unlicensed cultivation and sale of cannabis and cannabis-based products could result in the perpetuation of the black market for cannabis and/or have a material, adverse effect on the perception of cannabis use. Any or all these events could have a material, adverse effect on our business, financial condition, and results of operations.
There are risks associated with consolidation of the industry by well-capitalized entrants developing large-scale operations.
Currently, the cannabis industry generally is comprised of individuals and small to medium-sized entities, like the Company; however, the risk remains that large conglomerates and companies who also recognize the potential for financial success through investment in this industry could strategically purchase or assume control of larger dispensaries and cultivation facilities. In doing so, these larger competitors could establish price setting and cost controls which would effectively “price out” many of the individuals and small to medium sized entities who currently make up the bulk of the participants in the varied businesses operating within and in support of the medical and adult-use cannabis industry. While the trend in most state laws and regulations seemingly deters this type of takeover, this industry remains quite nascent, so what the landscape will be in the future remains largely unknown.
Synthetic products from the pharmaceutical industry may compete with cannabis use and products.
The pharmaceutical industry may attempt to dominate the cannabis industry, and in particular, legal cannabis, through the development and distribution of synthetic products that emulate the effects and treatment of organic cannabis. If they are successful, the widespread popularity of such synthetic products could change the demand, volume, and profitability of the cannabis industry. This could adversely affect our ability to secure long-term profitability and success through the sustainable and profitable operation of the anticipated businesses and investment targets and could have a material, adverse effect on our anticipated business, financial condition, and results of operations.
Our internal controls over financial reporting may not be effective, and our independent auditors may not be able to certify as to their effectiveness, which could have a significant and adverse effect on our business.
We are subject to various Canadian and U.S. reporting and other regulatory requirements. We incur expenses and, to a lesser extent, diversion of our management’s time in our efforts to comply with the Sarbanes-Oxley Act and applicable Canadian securities laws regarding internal controls over financial reporting. Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could cause us to fail to meet our reporting obligations. In addition, any testing by us
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conducted in connection with Section 404 of the Sarbanes-Oxley Act and applicable Canadian securities laws, or the subsequent testing by our independent registered public accounting firm if required, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retrospective changes to our consolidated financial statements or identify other areas for further attention or improvement. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our Subordinate Voting Shares. The existence of any material weakness or significant deficiency would require management to devote significant time and incur significant expense to remediate any such material weakness or significant deficiency and management may not be able to remediate any such material weakness or significant deficiency in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations, and cause shareholders to lose confidence in our reported financial information, all of which could materially and adversely affect our business and share price.
We identified a material weakness in our internal control over financial reporting as of December 31, 2021, which has been remediated as of December 31, 2022 (see Item 9A to this Form 10-K for more information). 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 the company's annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness was primarily attributable to the misapplication of GAAP accounting guidance surrounding the treatment of warrants issued with a Canadian dollar denominated exercise price. Management updated it’s control procedures over the accounting for infrequent and unusual transactions during the year ended December 31, 2022. More specifically, management added a process step to consult with external GAAP accounting experts when a new significant, infrequent, or unusual transaction occurs. We cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to avoid potential future material weaknesses. Moreover, we cannot be certain that we will not in the future have additional material weaknesses in our internal control over financial reporting, or that we will successfully remediate any that we find. In addition, the processes and systems we have developed to date may not be adequate.
There could continue to be a reasonable possibility that significant deficiencies, other material weaknesses or deficiencies could result in a misstatement of our accounts or disclosures that would result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, or cause us to fail to meet our obligations to file periodic financial reports on a timely basis. Any of these failures could result in adverse consequences that could materially and adversely affect our business, including an adverse impact on the market price of our Subordinate Voting Shares, potential action by the SEC against us, possible defaults under our debt agreements, shareholder lawsuits, delisting of our Shares, general damage to our reputation and the diversion of significant management and financial resources.
The elimination of monetary liability against our directors, officers, and employees under British Columbia law and the existence of indemnification rights for our obligations to our directors, officers, and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers, and employees.
Our Articles contain a provision permitting us to eliminate the personal liability of our directors to us and our shareholders for damages incurred as a director or officer to the extent provided by British Columbia law. We may also have contractual indemnification obligations under any employment agreements with our officers or agreements entered into with our directors. The foregoing indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and the resulting costs may also discourage the Company from bringing a lawsuit against directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our shareholders against our directors and officers even though such actions, if successful, might otherwise benefit the Company and our shareholders.
There is doubt as to the ability to enforce judgments in Canada or under Canadian law against U.S. subsidiaries, assets, and experts.
Our subsidiaries are organized under the laws of various U.S. states. All of the assets of these entities are located outside of Canada and certain of the experts that will be retained by us or our affiliates are residents of countries other than Canada.
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As a result, it may be difficult or impossible for our shareholders to effect service within Canada upon such persons, or to realize against them in Canada upon judgments of courts of Canada predicated upon the civil liability provisions of applicable Canadian provincial securities laws or otherwise. There is some doubt as to the enforceability in the U.S. by a court in original actions, or in actions to enforce judgments of Canadian courts, of civil liabilities predicated upon such applicable Canadian provincial securities laws or otherwise. A court in the U.S. may refuse to hear a claim based on a violation of Canadian provincial securities laws or otherwise on the grounds that such jurisdiction is not the most appropriate forum to bring such a claim. Even if a court in the U.S. agrees to hear a claim, it may determine that the local law in the U.S., and not Canadian law, is applicable to the claim. If Canadian law is found to be applicable, the content of applicable Canadian law must be proven as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by U.S. law in such circumstances.
Our directors and officers reside outside of Canada. Most or all of the assets of such persons are located outside of Canada. Therefore, it may not be possible for Company shareholders to collect or to enforce judgments obtained in Canadian courts predicated upon the civil liability provisions of applicable Canadian securities laws against such persons. Moreover, it may not be possible for Company shareholders to effect service of process within Canada upon such persons. Courts in the United States may refuse to hear a claim based on a violation of Canadian securities laws on the grounds that such jurisdiction is not the most appropriate forum to bring such a claim. Even if a United States court agrees to hear a claim, it may determine that the local law, and not Canadian law, is applicable to the claim. If Canadian law is found to be applicable, the content of applicable Canadian law must be proven as a fact, which can be a time-consuming and costly process.
Our past performance may not be indicative of our future results.
Our prior investment and operational performance may not be indicative of our future operating results. There can be no assurance that the historical operating results achieved by us or our affiliates will be achieved by us, and our performance may be materially different.
Our business, financial condition, results of operations, and cash flow may be negatively impacted by challenging global economic conditions.
Disruptions and volatility in global financial markets and declining consumer and business confidence, including as a result of the COVID-19 pandemic, could lead to decreased levels of consumer spending. Our operations could be affected by the economic context should the unemployment level, interest rates or inflation reach levels that influence consumer spending and, consequently, impact our sales and profitability. These macroeconomic developments could negatively impact our business, which depends on the general economic environment and levels of consumer spending. As a result, we may not be able to maintain our existing customers or attract new customers, or we may be forced to reduce the price of our products. We are unable to predict the likelihood of the occurrence, duration, or severity of such disruptions in the credit and financial markets and adverse global economic conditions. Any general or market-specific economic downturn could have a material, adverse effect on our business, financial condition, results of operations, and cashflow.
Diseases and epidemics (such as COVID-19) may adversely impact our business.
Emerging infectious diseases or the threat of outbreaks of viruses or other contagions or epidemic diseases, including the COVID-19 outbreak, could have a material adverse effect on the Company by causing operational and supply chain delays and disruptions (including as a result of government regulation and prevention measures), labor shortages and shutdowns, social unrest, breach of material contracts and customer agreements, government or regulatory actions or inactions, increased insurance premiums, decreased demand or the inability to sell and deliver the Company’s products, delays in permitting or approvals, governmental disruptions, capital markets volatility, or other unknown but potentially significant impacts. In addition, governments may impose strict emergencies measures in response to the threat or existence of an infectious disease. The full extent and impact of the COVID-19 pandemic is unknown and to date has included extreme volatility in financial markets, a slowdown in economic activity and has raised the prospect of a global recession. The international response to COVID-19 led to significant restrictions on travel, temporary business closures, quarantines, global stock market volatility and a general reduction in global consumer activity. In addition, a significant outbreak of contagious diseases in the human population, such as COVID-19, could result in a widespread health crisis that could
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adversely affect the economies and financial markets of many countries, resulting in an economic downturn that could result in a material adverse effect on input prices, demand for our products, investor confidence, and general financial market liquidity, all of which may materially, adversely affect the Company's business and the market price of the Subordinate Voting Shares. Accordingly, any outbreak or threat of an outbreak of an epidemic disease or similar public health emergency, including COVID-19, could have a material adverse effect on the Company's business, financial condition and results of operations. It is unknown whether and how the Company may be affected if a pandemic, such as the COVID-19 outbreak, continues to persist for an extended period of time.
Risks Related to Our Securities
A return on our securities is not guaranteed.
There is no guarantee that our securities will earn any positive return in the short term or long term. A holding of our securities is speculative and involves a high degree of risk and should be undertaken only by holders whose financial resources are sufficient to enable them to assume such risks and who have no need for immediate liquidity in their investment. A holding of our securities is appropriate only for holders who have the capacity to absorb a loss of some or all of their investment.
Our voting control is concentrated given approximately 35.0% of our voting power is held by our Chief Executive Officer.
As of March 1, 2023, the holder of our Super Voting Shares, Dr. Kyle E. Kingsley, exercises in the aggregate approximately 35.0% of the voting power in respect of our outstanding shares. As a result, Dr. Kingsley has substantial ability to control the outcome of matters submitted to our shareholders for approval, including the election and removal of directors and any arrangement or sale of all or substantially all our assets. Even if Dr. Kingsley does not retain any employment with us, he will continue to have the ability to exercise the same significant voting power.
The concentrated control through the Super Voting Shares could delay, defer, or prevent a change of control of the Company, an arrangement involving us or a sale of all or substantially all our assets that our other shareholders support. Conversely, this concentrated control could allow the holder of the Super Voting Shares to consummate such a transaction that our other shareholders do not support. In addition, the holder of Super Voting Shares may make long-term strategic investment decisions and take risks that may not be successful and may seriously harm our business.
As a director and Executive Chairman of the Company, Dr. Kingsley has significant influence on major strategic decisions of the Company, subject to authorization and oversight by the Board. As a Board member, Dr. Kingsley owes a fiduciary duty to our shareholders and is obligated to act honestly and in good faith with a view to the best interests of the Company. As a shareholder, Dr. Kingsley is entitled to vote his shares, and shares over which he has voting control, in his own interests, which may not always be in the interests of the Company or our other shareholders.
Our capital structure and voting control may cause unpredictability.
Although other Canadian companies have dual class or multiple voting share structures, given the concentration of voting control that is held by Dr. Kingsley, the sole holder of the Super Voting Shares, this structure and control could result in a lower trading price for, or greater fluctuations in, the trading price of the Subordinate Voting Shares, adverse publicity to us or other adverse consequences.
Additional issuances of Subordinate Voting Shares, or securities convertible into Subordinate Voting Shares, may result in dilution.
We may issue additional equity or convertible debt securities in the future, which may dilute an existing shareholder’s holdings in the Company. Our Articles permit the issuance of an unlimited number of Super Voting Shares, Multiple Voting Shares and Subordinate Voting Shares, and existing shareholders will have no pre-emptive rights in connection with such further issuances. Our Board of Directors has discretion to determine the price and the terms of further issuances, and such terms could include rights, preferences, and privileges superior to those existing holders of our securities.
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Moreover, additional Subordinate Voting Shares will be issued by the Company on the conversion of the Multiple Voting Shares and Super Voting Shares in accordance with their terms. To the extent holders of our options or other convertible securities convert or exercise their securities and sell Subordinate Voting Shares they receive, the trading price of the Subordinate Voting Shares may decrease due to the additional amount of Subordinate Voting Shares available in the market. Further, the Company may issue additional securities in connection with strategic acquisitions. The Company cannot predict the size or nature of future issuances or the effect that future issuances and sales of Subordinate Voting Shares (or securities convertible into Subordinate Voting Shares) will have on the market price of the Subordinate Voting Shares. Issuances of a substantial number of additional Subordinate Voting Shares, or the perception that such issuances could occur, may adversely affect prevailing market prices for the Subordinate Voting Shares. With any additional issuance of Subordinate Voting Shares, investors will suffer dilution to their voting power and economic interest in the Company.
Sales of substantial numbers of Subordinate Voting Shares may have an adverse effect on their market price.
Sales of a substantial number of Subordinate Voting Shares in the public market could occur at any time either by existing holders of Subordinate Voting Shares or by holders of the Multiple Voting Shares, which are convertible into Subordinate Voting Shares on the satisfaction of certain conditions. These sales, or the market perception that the holders of a large number of Subordinate Voting Shares or Multiple Voting Shares intend to sell Subordinate Voting Shares, could reduce the market price of the Shares. If this occurs and continues, it could impair our ability to raise additional capital through the sale of securities.
The market price for the Subordinate Voting Shares may continue to be volatile.
The market prices for securities of cannabis companies generally have been volatile. In addition, the market price for the Subordinate Voting Shares has been and may be subject to wide fluctuations in response to numerous factors within and beyond our control including, but not limited to:
| ● | actual or anticipated fluctuations in our results of operations; |
| ● | recommendations by securities research analysts; |
| ● | changes in the economic performance or market valuations of companies in the industry in which we operate; |
| ● | addition or departure of our executive officers and other key personnel; |
| ● | release or expiration of transfer restrictions on outstanding Multiple Voting Shares or Subordinate Voting Shares; |
| ● | sales or expected sales of additional Subordinate Voting Shares; |
| ● | exercise of options or warrants to purchase Subordinate Voting Shares; |
| ● | operating and financial performance that deviates from the expectations of management, securities analysts or investors; |
| ● | regulatory changes affecting our industry generally and/or our business and operations; |
| ● | announcements of developments and other material events by us or our competitors; |
| ● | fluctuations in the costs of vital production materials and services; |
| ● | changes in global financial markets, global economies, and general market conditions, such as interest rates and pharmaceutical product price volatility; |
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| ● | significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors; |
| ● | operating and share price performance of other companies that investors deem comparable to us or from a lack of market comparable companies; and |
| ● | news reports relating to trends, concerns, technological or competitive developments, regulatory changes and other related issues in our industry or markets. |
Financial markets have at times historically experienced significant price and volume fluctuations that: (i) have especially affected the market prices of equity securities of companies and (ii) have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Subordinate Voting Shares from time to time may decline even if our operating results, underlying asset values and prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that may result in impairment losses to us. There can be no assurance that further fluctuations in price and volume of Subordinate Voting Shares traded will not occur. If increased levels of volatility and market turmoil continue, our operations could be adversely impacted, and the trading price of the Subordinate Voting Shares may be materially, adversely affected.
A further decline in the price or trading volume of the Subordinate Voting Shares could affect our ability to raise further capital and adversely impact our ability to continue operations.
The market price for the Subordinate Voting Shares has historically been volatile, with relatively few shares traded on most trading days. Since the termination of the Arrangement Agreement, the Subordinate Voting Shares have been trading at or near the all-time low price and have had generally low trading volume. As a result, our ability to raise equity capital is impaired. The market price and trading volume of the Subordinate Voting Shares could decline further. A further decline in the price or trading volume of the Subordinate Voting Shares could result in a further reduction in the liquidity of the Subordinate Voting Shares and a further reduction in our ability to raise capital. Because a significant portion of our operations have been and may continue to be financed through the sale of equity securities, a further decline in the price or trading volume of our Subordinate Voting Shares could be especially detrimental to our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a material, adverse effect on our business plan and operations, including our ability to operationalize existing licenses and complete planned capital expenditures. If the price or trading volume of our Subordinate Voting Shares declines further, there can be no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not have the resources to continue to operate all of our current businesses, or at all.
If securities or industry analysts do not publish or cease publishing research or reports or publish misleading, inaccurate, or unfavorable research about us, our business or our market, our share price and trading volume could decline.
The trading market for our Subordinate Voting Shares may be influenced by the research and reports that securities or industry analysts publish about us, our business, our market, or our competitors. If no or few securities or industry analysts cover our Company, as is currently the case, the trading price and volume of our Subordinate Voting Shares is likely negatively impacted and will likely continue to be negatively impacted for so long as analyst coverage is minimal or no analysts cover us. If one or more of the analysts who covers us downgrades our Subordinate Voting Shares or publishes unfavorable research about our business, or provides more favorable relative recommendations about our competitors, the price of our Subordinate Voting Shares would likely decline. If any analyst ceases coverage of us or fails to publish reports on us regularly, demand for our Subordinate Voting Shares could decrease, which could cause our share price or trading volume, or both, to decline further.
An investor may face liquidity risks with an investment in our Subordinate Voting Shares.
There is a significant liquidity risk associated with an investment in our Subordinate Voting Shares. The Subordinate Voting Shares currently trade on the Canadian Securities Exchange and are quoted on the OTCQX tier of the OTC Markets
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in the United States. We cannot predict at what prices the Subordinate Voting Shares will continue to trade, and there is no assurance that an active trading market will be sustained. The Subordinate Voting Shares do not currently trade on any U.S. national securities exchange. In the event the Subordinate Voting Shares begin trading on any U.S. national securities exchange, we cannot predict at what prices the Subordinate Voting Shares will trade and there is no assurance that an active trading market will develop or be sustained.
Trading in securities quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to many factors, some of which may have little to do with our operations or business prospects. This volatility could depress the market price of Subordinate Voting Shares for reasons unrelated to operating performance. Moreover, the OTC Markets is not a U.S. national securities exchange, and trading of securities on the OTC Markets is often more sporadic than the trading of securities listed on a U.S. national securities exchange like the Nasdaq or the NYSE. These factors may result in investors having difficulty reselling Subordinate Voting Shares on the OTC Markets.
We are subject to increased costs as a result of being a public company in Canada and the United States.
As a public company both in Canada and the United States, we are subject to the reporting requirements, rules and regulations under the applicable Canadian and United States securities laws and rules of stock exchange(s) on which our securities may be listed. We incur increased costs associated with legal, accounting, and other expenses related to such regulatory compliance. Securities legislation and the rules and policies of the Canadian Securities Exchange require listed companies to, among other things, adopt corporate governance and related practices, and to continuously prepare and disclose material information, all of which add to our legal and financial compliance costs. We may also elect to devote greater resources than we otherwise would have on communication and other activities typically considered important by publicly traded companies.
We do not intend to pay dividends on our Subordinate Voting Shares and, consequently, the ability of investors to achieve a return on their investment will depend entirely on appreciation in the price of our Subordinate Voting Shares.
We have never declared or paid any cash dividend on our Subordinate Voting Shares and do not currently intend to do so in the foreseeable future. We currently anticipate that we will retain future earnings, if any, for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends in the foreseeable future. Therefore, the success of an investment in our Subordinate Voting Shares will depend upon any future appreciation in their value. There is no guarantee that our Subordinate Voting Shares will appreciate in value or even maintain the price at which they were purchased.
We are an “emerging growth company” as defined in the JOBS Act and our election to delay adoption of new or revised accounting standards applicable to public companies may result in our financial statements not being comparable to those of some other public companies. As a result of this and other reduced disclosure requirements applicable to emerging growth companies, the Subordinate Voting Shares may be less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies may take advantage of certain reduced disclosures and may, as hawse have, elect to delay adopting new or revised accounting standards until such time as those standards apply to private companies, which may result in our financial statements not being comparable to those of some other public companies.
For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, (2) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We could be an emerging growth company for up to five years, although circumstances could cause the Company to lose that status earlier, including if we are deemed to be a large accelerated filer under the rules of the SEC of any fiscal year, if we have total annual gross revenue of $1.235 billion as of the end of a fiscal year, or if we issue more than $1.0 billion in non-convertible debt during any three-year period. We cannot predict if investors will find the Subordinate Voting Shares less attractive because we
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may rely on these exemptions. If some investors find the Subordinate Voting Shares less attractive as a result, there may be a less active trading market for the Subordinate Voting Shares, and the share price may be more volatile.
Our shareholders are subject to extensive governmental regulation and, if a shareholder is found unsuitable by one of our licensing authorities, that shareholder would not be able to beneficially own our securities. Our shareholders may also be required to provide information that is requested by licensing authorities and we have the right, under certain circumstances, to redeem a shareholder’s securities; we may be forced to use our cash or incur debt to fund such redemption of our securities.
The Company is, subject to certain conditions, entitled to redeem its securities held by certain shareholders in order to permit the Company to comply with applicable licensing regulations. The purpose of the redemption right is to provide the Company with a means of protecting itself from having a shareholder (an “Unsuitable Person”) with an ownership interest of five percent (5%) or more of the Company’s issued and outstanding shares (calculated on as-converted to Subordinate Voting Shares basis):
| (i) | who a governmental authority granting licenses to the Company (including to any subsidiary) has determined to be unsuitable to own shares, or |
| (ii) | whose ownership of our securities may result in the loss, suspension or revocation (or similar action) with respect to any licenses relating to the conduct of our business relating to the cultivation, processing or dispensing of cannabis or cannabis-derived products in the United States or in the Company being unable to obtain any new licenses in the course of its business, in each case including, but not limited to, as a result of such person’s failure to apply for a suitability review from or to otherwise fail to comply with the requirements of a governmental authority, as determined by the Board of Directors in its sole discretion after consultation with legal counsel and, if a license application has been filed, after consultation with the applicable governmental authority. |
In the event a shareholder’s background or status jeopardizes our current or proposed licensure, we may be required to redeem such shareholder’s securities in order to continue our operations or obtain licenses in the future. This redemption may divert our cash resources from other productive uses and require us to obtain additional financing which, if in the form of equity financing, would be dilutive to our shareholders. Further, any debt financing may involve additional restrictive covenants and further leveraging of our fixed assets. The inability to obtain additional financing to redeem an Unsuitable Person’s securities may result in the loss of a current or potential license.
Certain Tax Risks
THE FOLLOWING IS A DISCUSSION OF CERTAIN MATERIAL TAX RISKS ASSOCIATED WITH THE ACQUISITION AND OWNERSHIP OF SHARES. THIS REPORT DOES NOT DISCUSS RISKS ASSOCIATED WITH ANY APPLICABLE STATE, PROVINCIAL, LOCAL OR FOREIGN TAX LAWS. THE TAX RELATED INFORMATION IN THIS REPORT DOES NOT CONSTITUTE TAX ADVICE AND IS FOR INFORMATIONAL PURPOSES ONLY. FOR ADVICE ON TAX LAWS APPLICABLE TO A SHAREHOLDER’S INDIVIDUAL TAX SITUATIONS, SHAREHOLDERS SHOULD SEEK THE ADVICE OF THEIR TAX ADVISORS. NO REPRESENTATION OR WARRANTY OF ANY KIND IS MADE BY US OR ANY OF THE BOARD OF DIRECTORS, OFFICERS, LEGAL COUNSEL, OTHER AGENTS OR AFFILIATES WITH RESPECT TO THE TAX TREATMENT APPLICABLE TO ANY PERSON WHO ACQUIRES SHARES. EACH INVESTOR IS URGED TO REVIEW THE REPORT IN ITS ENTIRETY AND TO CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, PROVINCIAL, LOCAL AND FOREIGN TAX CONSEQUENCES ARISING IN CONNECTION WITH THE ACQUISITION AND OWNERSHIP OF SHARES.
We are subject to Canadian and United States tax on our worldwide income.
We are deemed to be a resident of Canada for Canadian federal income tax purposes by virtue of being organized under the laws of a Province of Canada. Accordingly, we are subject to Canadian taxation on our worldwide income, in accordance with the rules in the Tax Act generally applicable to corporations resident in Canada.
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Notwithstanding that we are deemed to be a resident of Canada for Canadian federal income tax purposes, we are treated as a United States corporation for United States federal income tax purposes, pursuant to Section 7874(b) of the Code, and will be subject to United States federal income tax on our worldwide income. As a result, we are subject to taxation both in Canada and the United States, which could have a material, adverse effect on our business, financial condition, or results of operations.
Dispositions of Shares are subject to Canadian and/or United States tax.
Dispositions of Shares are subject to Canadian tax. In addition, dispositions of Shares by U.S. Holders are subject to U.S. tax, and certain dispositions of Shares by Non-U.S. Holders (including, if we are treated as a USRPHC, as defined below) are subject to U.S. tax. For purposes of this discussion, a “U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of the shares and is (i) an individual who is a citizen or resident of the United States; (ii) a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust if (1) a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust or (2) the trust has a valid election in effect to be treated as a U.S. person under applicable Treasury regulations. For purposes of this discussion, a “Non-U.S. holder” is a beneficial owner of the shares other than a U.S. Holder or partnership.
Although we do not intend to pay dividends on our Shares, any such dividends would be subject to Canadian and/or United States withholding tax.
It is currently not anticipated that we will pay any dividends on any of our Shares in the foreseeable future.
To the extent dividends are paid on our Shares, dividends received by shareholders who are residents of Canada for purposes of the Tax Act (and Non-U.S. Holders for purposes of the Code) will be subject to U.S. withholding tax. Any such dividends may not qualify for a reduced rate of withholding tax under the Canada-United States tax treaty. In addition, a Canadian foreign tax credit or a deduction in respect of such U.S. withholding taxes paid may not be available.
Dividends received by U.S. Holders will not be subject to U.S. withholding tax but will be subject to Canadian withholding tax. Dividends paid by us will be characterized as U.S. source income for purposes of the foreign tax credit rules under the Code. Accordingly, U.S. Holders may not be able to claim a credit for any Canadian tax withheld unless, depending on the circumstances, they have other foreign source income that is subject to a low or zero rate of foreign tax.
Dividends received by shareholders that are neither Canadian nor U.S. Holders will be subject to U.S. withholding tax and will also be subject to Canadian withholding tax. These dividends may not qualify for a reduced rate of U.S. withholding tax under any income tax treaty otherwise applicable to a shareholder of the Company, subject to examination of the relevant tax treaty. These dividends may, however, qualify for a reduced rate of Canadian withholding tax under any income tax treaty otherwise applicable to a shareholder of the Company, subject to examination of the relevant tax treaty.
Transfers of Shares may be subject to United States estate and generation-skipping transfer taxes.
Because the Shares are treated as shares of a U.S. domestic corporation, the U.S. estate and generation-skipping transfer tax rules generally may apply to a Non-U.S. Holder of Shares.
Taxation of Non-U.S. Holders upon a disposition of Shares depends on whether we are classified as a United States real property holding corporation.
We are treated as a U.S. domestic corporation for U.S. federal income tax purposes under Section 7874 of the Code. As a U.S. domestic corporation for U.S. federal income tax purposes, the taxation of our Non-U.S. Holders upon a disposition of Shares generally depends on whether we are classified as a “United States real property holding corporation” for U.S. federal income tax purposes (a “USRPHC”). We have not performed any analysis to determine whether we are currently, or have ever been, a USRPHC. In addition, we have not sought and do not intend to seek formal confirmation of our status
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as a Non-USRPHC from the IRS. If we ultimately are determined by the IRS to constitute a USRPHC, our non-U.S. Holders may be subject to U.S. federal income tax on any gain associated with the disposition of the Shares.
Changes in tax laws may affect the Company and holders of Shares.
There can be no assurance that the Canadian and U.S. federal income tax treatment of the Company or an investment in the Company will not be modified, prospectively or retroactively, by legislative, judicial, or administrative action, in a manner adverse to us or holders of our Shares.
ERISA imposes additional obligations on certain investors.
In considering an investment in the Shares, trustees, custodians, investment managers, and fiduciaries of retirement and other plans subject to the fiduciary responsibility provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”) and/or Section 4975 of the Code, should consider, among other things: (i) whether an investment in the Company shares is in accordance with plan documents and satisfies the diversification requirements of Sections 404(a)(1)(C) and 404(a)(1)(D) of ERISA, if applicable; (ii) whether an investment in our Shares will result in unrelated business taxable income to the plan; (iii) whether an investment in the Shares is prudent under Section 404(a)(1)(B) of ERISA, if applicable, given the nature of an investment in, and the compensation structure of, the Company and the potential lack of liquidity of Shares during the lock-up period following the RTO; (iv) whether the Company or any of our affiliates is a fiduciary or party in interest to the plan; and (v) whether an investment in the Shares complies with the “indicia of ownership” requirement set forth in ERISA Section 404(b). Fiduciaries and other persons responsible for the investment of certain governmental and church plans that are subject to any provision of federal, state, or local law that is substantially similar to the fiduciary responsibility provisions of Title I of ERISA or Section 4975 of the Code that are considering the investment in the Shares should consider the applicability of the provisions of such similar law and whether the Shares would be an appropriate investment under such similar law. The responsible fiduciary must take into account all of the facts and circumstances of the plan and of the investment when determining if a particular investment is prudent.
Item 1B.Unresolved Staff Comments
None.
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Item 2.Properties
The following tables set forth our principal physical properties.
Material Properties | ||||
Type |
| Location |
| Leased / Owned |
Processing |
| MaryMed, LLC |
| Leased |
| | | | |
Cultivation |
| MaryMed, LLC |
| Owned |
| | | | |
Cultivation and Processing |
| Vireo Health of Minnesota, LLC |
| Leased |
| | | | |
Cultivation |
| Red Barn Growers, Inc. |
| Leased |
| | | | |
Cultivation and Processing |
| Vireo Health of New York, LLC |
| Leased |
Through our subsidiaries, we have entered into material lease agreements related to our Maryland, Minnesota, and New York operations. Those agreements are discussed below.
Maryland Lease
100 Enterprise Drive, LLC (“Maryland Lessor”) entered into a lease agreement with MaryMed, LLC on April 21, 2017 and continuing for a period of ten years (“MaryMed Lease Agreement”). Pursuant to the MaryMed Lease Agreement, MaryMed LLC agreed to lease from Maryland Lessor the premises located at 10 Enterprise Drive, in the Town of Hurlock County, of Dorchester, Maryland. The monthly base rent for the first 12 months of the term of the lease was $20,000 per month and $300,000 as security deposit. The foregoing description is qualified in its entirety by reference to the MaryMed Lease Agreement, which is included as Exhibit 10.17 hereto and incorporated by reference herein.
Maryland Lessor entered into a lease amendment with MaryMed, LLC on May 8, 2020 (“MaryMed Lease Amendment”) with respect to the MaryMed Lease Agreement. Pursuant to the MaryMed Lease Amendment, the base rent was reduced to an amount of $10,506.25 per month from June 1, 2020 through August 1, 2020. The foregoing description is qualified in its entirety by reference to the MaryMed Lease Amendment, which is included as Exhibit 10.13 hereto and incorporated by reference herein.
Minnesota Lease
IIP-MN 1 LLC (“Minnesota Landlord”) and Minnesota Medical Solutions, LLC (predecessor to Vireo Health of Minnesota, LLC) entered into a lease agreement on November 8, 2017 that was set to expire on November 8, 2032 (“MN Lease Agreement”). Concurrent with the execution of the lease, Minnesota Landlord closed on a purchase of real property and improvements on the property located at 8740 77th Street Northeast, Ostego, Minnesota on October 6, 2017. The monthly base rent for the first 12 months of the term of the MN Lease Agreement was $50,000, with $300,000 to be paid in security deposit. The foregoing description is qualified in its entirety by reference to the MN Lease Agreement, which is included as Exhibit 10.19 hereto and incorporated by reference herein.
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Pursuant to the First Amendment to the MN Lease Agreement (“1st Amendment to the MN Lease Agreement”), dated December 7, 2018, the term of the MN Lease Agreement was extended to December 7, 2033 and Minnesota Medical Solutions, LLC was permitted to make improvements at a cost to Minnesota Landlord not to exceed $2,988,000 rather than $988,000 as initially detailed in the MN Lease Agreement. In addition, the monthly base rest was increased to $77,625 and the security deposit was increased to $450,000. The foregoing description is qualified in its entirety by reference to the 1st Amendment to the MN Lease Agreement, which is included as Exhibit 10.15 hereto and incorporated by reference herein.
Pursuant to the Second Amendment to the MN Lease Agreement (“2nd Amendment to the MN Lease Agreement”), dated September 25, 2019, the term of the MN Lease Agreement was extended to December 7, 2038 and Minnesota Medical Solutions, LLC was permitted to make improvements at a cost to Minnesota Landlord not to exceed $5,588,000 rather than $2,988,000 as detailed in the 1st Amendment to the MN Lease Agreement, and the monthly base rest was increased to $111,262.50. The foregoing description is qualified in its entirety by reference to the 2nd Amendment to the MN Lease Agreement, which is included as Exhibit 10.16 hereto and incorporated by reference herein.
Pursuant to the Third Amendment to the MN Lease Agreement (“3rd Amendment to the MN Lease Agreement”), dated February 18, 2020, Minnesota Medical Solutions, LLC was permitted to make improvements at a cost to Minnesota Landlord not to exceed $5,638,183 rather than $2,988,000 as detailed in the 2nd Amendment to the MN Lease Agreement. The foregoing description is qualified in its entirety by reference to the 3rd Amendment to the MN Lease Agreement, which is included as Exhibit 10.17 hereto and incorporated by reference herein.
Pursuant to the Fourth Amendment to the MN Lease Agreement (“4th Amendment to the MN Lease Agreement”), dated April 10, 2020, Minnesota Medical Solutions, LLC was permitted to make improvements at a cost to Minnesota Landlord not to exceed $6,698,183 rather than $5,638,183 as detailed in the 3rd Amendment to the MN Lease Agreement, and the term of the MN Lease Agreement was extended to April 9, 2040. In addition, the monthly base rent was increased to $129,350.42. The security deposit will be reduced to $225,000 on November 8, 2023 and the security deposit will be further reduced to $112,500 on November 8, 2026. The foregoing description is qualified in its entirety by reference to the 4th Amendment to the MN Lease Agreement, which is included as Exhibit 10.18 hereto and incorporated by reference herein.
Pursuant to the Fifth Amendment to the MN Lease Agreement (“5th Amendment to the MN Lease Agreement”), dated February 24, 2023, a default by any affiliate of Vireo Health of Minnesota, LLC (f/k/a Minnesota Medical Solutions, LLC), under another lease with the Minnesota Landlord or any affiliate of the Minnesota Landlord, beyond any applicable notice and cure periods, constitutes a default under the MN Lease Agreement, as amended. The forgoing description is qualified in its entirety by reference to the 5th Amendment to the MN Lease Agreement, which is included as Exhibit 10.43 hereto and incorporated by reference.
New York Lease
IIP-NY2 LLC (“New York Landlord”) and Vireo Health of New York, LLC entered into a lease agreement on October 23, 2017 that was set to expire on October 23, 2032 (“NY Lease Agreement”). Concurrent with the execution of the lease, IIP-NY 2 LLC closed on a purchase of real property and improvements on the property located at 256 County Route 117, Perth, New York on September 21, 2017. The monthly base rent for the first 12 months of the term of the NY Lease Agreement was $55,000, with $330,000 to be paid in security deposit. The foregoing description is qualified in its entirety by reference to the NY Lease Agreement, which is included as Exhibit 10.19 hereto and incorporated by reference herein.
Pursuant to the First Amendment to the NY Lease Agreement (“1st Amendment to the NY Lease Agreement”), dated December 7, 2018, the term of the NY Lease Agreement was extended to December 7, 2033 and Vireo Health of New York, LLC was permitted to make improvements at a cost to New York Landlord not to exceed $3,000,000, instead of $1,000,000 as initially outlined in the NY Lease Agreement. The foregoing description is qualified in its entirety by reference to the 1st Amendment to the NY Lease Agreement, which is included as Exhibit 10.10 hereto and incorporated by reference herein.
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Pursuant to the Second Amendment to the NY Lease Agreement (“2nd Amendment to the NY Lease Agreement”), dated April 10, 2020, the term of the NY Lease Agreement was extended to April 9, 2035 and Vireo Health of New York, LLC was permitted to make improvements at a cost to New York Landlord not to exceed $3,360,000 rather than $3,000,000 as detailed in the 1st Amendment to the NY Lease Agreement. In addition, the monthly base rent was increased to $90,518.51 and the Company provided a new guaranty on behalf of New York Landlord. The foregoing description is qualified in its entirety by reference to the 2nd Amendment to the NY Lease Agreement, which is included as Exhibit 10.11 hereto and incorporated by reference herein.
Pursuant to the Third Amendment to the NY Lease Agreement (“3rd Amendment to the NY Lease Agreement”), dated September 24, 2022, the term of the NY Lease Agreement was extended to September 23, 2041. Concurrent with the execution of the 3rd Amendment to the NY Lease Agreement, Vireo Health of New York and the New York Landlord closed on a purchase of 92.3 acres of real property adjacent to 256 County Route 117, Perth, New York. Vireo Health of New York, LLC was permitted to make improvements at a cost to New York Landlord not to exceed $49,435,000, instead of $3,360,000 as initially outlined in the 2nd Amendment to the NY Lease Agreement. In addition, the monthly base rent was increased to $615,629.65 and the Company provided a new guaranty on behalf of the New York Landlord. The forgoing description is qualified in its entirety by reference to the 3rd Amendment to the NY Lease Agreement, which is included as Exhibit 10.12 hereto and incorporated by reference.
Pursuant to the Fourth Amendment to the NY Lease Agreement (“4th Amendment to NY Lease Agreement”), dated February 24, 2023, (1) the tenant improvement allowance was increased to a cost not to exceed $53,435,000, instead of $49,435,000 as initially outlined in the 3rd Amendment to the NY Lease Agreement. In addition, the monthly base rent was increased by an additional $50,000, (2) the security deposit was increased by an additional $150,000, and (3) a default by any affiliate of Vireo Health of New York, LLC, under another lease with the New York Landlord or any affiliate of the New York Landlord, beyond any applicable notice and cure periods, constitutes a default under the NY Lease Agreement, as amended. The forgoing description is qualified in its entirety by reference to the 4th Amendment to the NY Lease Agreement, which is included as Exhibit 10.44 hereto and incorporated by reference.
Item 3.Legal Proceedings
We are involved in various regulatory issues, claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material, adverse effect on our results of operations or financial condition.
Schneyer Litigation
On February 25, 2019, Dr. Mark Schneyer (“Schneyer”) filed a lawsuit in Minnesota District Court, Fourth District (the “Court”), on his own behalf and, derivatively, on behalf of Dorchester Capital, LLC, naming Vireo Health, Inc. (“Vireo U.S.”), Dorchester Management, LLC (“Dorchester Management”), and Dorchester Capital, LLC (“Capital”), as defendants. The essence of the claims made by Schneyer is Vireo U.S. paid an inadequate price for MaryMed, LLC (“MaryMed”), which it purchased it from Capital in 2018, and that the consideration given – shares of preferred stock in Vireo U.S. – was distributed inappropriately by Capital at the direction of Dorchester Management (the managing member of Capital). Schneyer, who is a Class B member of Capital, is seeking unspecified damages in excess of $50,000 and other relief. Dorchester Management, LLC is an affiliated entity to Vireo U.S. and was previously used as a management company over Dorchester Capital, LLC. It no longer has active operations following Vireo Health, Inc.’s acquisition of MaryMed, LLC in 2018. It is owned and controlled by Kyle E. Kingsley, who is a director and Executive Chairman of the Company, and Amber H. Shimpa, who is a director and President of Vireo U.S. and the Company.
Simultaneously with the complaint, Schneyer filed a motion seeking a temporary restraining order (“TRO”) to prevent the “further transfer” of MaryMed which would, Schneyer claimed, occur if Vireo U.S.’s RTO transactions were allowed to occur. The Court held a hearing on the motion for TRO on March 5, 2019 and denied the motion on the same day.
Weeks prior to commencement of the litigation, Dorchester Management had appointed a special litigation committee (“SLC”) on behalf of Capital to investigate the consideration provided by Vireo U.S. for the purchase of MaryMed and
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assess any potential claims Capital may have as a result of the transaction. The SLC, a retired judge who engaged another retired judge as legal counsel to the SLC, was appointed in accordance with Minnesota law, issued a report on May 1, 2021, recommending, among other things, that certain claims be permitted to proceed (the “Remaining Derivative Claims”) and other claims not be permitted to proceed by the Court (the “Rejected Derivative Claims”).
On July 7, 2021, Schneyer filed a Second Amended Complaint asserting direct claims on behalf of himself and the Remaining Derivative Claims on behalf of Capital and some Rejected Derivative Claims on behalf of Capital. Under Delaware law, Capital has a right to control the litigation of the Remaining Derivative Claims, the Rejected Derivative Claims, and any other derivative allegations that may be asserted on behalf of Capital. On August 17, 2021, Management exercised this right for Capital and appointed a second independent special litigation committee (the “Second SLC”), a partner at an international law firm, to manage the litigation of the claims raised in Schneyer’s Second Amended Complaint. On August 31, 2021, Capital filed a complaint at the Second SLC’s direction alleging the Remaining Derivative Claims and the Rejected Derivative Claims. Schneyer opposed the appointment of the Second SLC.
On December 9, 2021, the Court dismissed Schneyer’s claim for rescissory damages and the Remaining Derivative Claim alleging fraud. The Court also ruled that the Remaining Derivative Claims should be pursued by the Second SLC. Finally, the Court also denied Schneyer’s request to seek punitive damages.
On February 22, 2022, the Minnesota Court of Appeals denied the immediate review of the December 9, 2021 order.
On June 20,2022 the Court issued an order amending and realigning the complaint brought by Capital for the Remaining Derivative Claims. The order also denied Vireo U.S.’ and Dorchester Management’s motion to dismiss the Remaining Derivative Claims brought by Capital.
Verano
On January 31, 2022, the Company entered into the Arrangement Agreement with Verano, pursuant to which Verano was to acquire all of the issued and outstanding shares of Goodness Growth pursuant to a Plan of Arrangement. Subject to the terms and conditions set forth in the Arrangement Agreement and the Plan of Arrangement, holders of Goodness Growth Shares would receive 0.22652 of a Verano Subordinate Voting Share, subject to adjustment as described below, for each Subordinate Voting Share held, and 22.652 Verano Subordinate Voting Shares for each Multiple Voting Share and Super Voting Share held, immediately prior to the effective time of the Arrangement.
On October 13, 2022, Goodness Growth received a notice of purported termination of the Arrangement Agreement (the “Notice”) from Verano. The Notice asserted certain breaches of the Arrangement Agreement, including claims the Company’s public filings and communications with respect to its business and ongoing operations were misleading and that the Company breached its representations to Verano under the Arrangement Agreement. Verano also claimed, as a result of such breaches, it is entitled to payment of the $14,875,000 termination fee and its transaction expenses of up to $3,000,000. Goodness Growth denies all of Verano’s allegations and affirmatively states that it has complied with its obligations under the Arrangement Agreement, and will continue to comply with its disclosure obligations under US and Canadian law, in all material respects at all times. We believe that Verano has no factual or legal basis to justify or support its purported grounds for termination of the Arrangement Agreement.
On October 21, 2022, Goodness Growth commenced an action in the Supreme Court of British Columbia against Verano after Verano wrongfully repudiated the Arrangement Agreement. The Company is seeking as-yet-unspecified damages, costs and interest, based on Verano's breach of contract and of its duty of good faith and honest performance.
On November 14, 2022, Verano filed counterclaims against the Company for the termination fee and transaction expenses described above. Due to uncertainties inherent in litigation, it is not possible for Goodness Growth to predict the timing or final outcome of the legal proceedings against Verano or to determine the amount of damages, if any, that may be awarded.
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Item 4.Mine Safety Disclosures
Not applicable.
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Trading Price and Volume
Our Subordinate Voting Shares are traded on the CSE under the symbol “GDNS.” The following table sets forth trading information for the Subordinate Voting Shares for the periods indicated, as quoted on the CSE.
|
| Low Trading Price |
| High Trading Price | ||
Period | | (C$) | | (C$) | ||
Year Ending December 31, 2023 |
| |
|
| |
|
First Quarter (through March 1, 2023) | | $ | 0.1950 | | $ | 0.2750 |
Year Ended December 31, 2022 | |
|
| |
|
|
Fourth Quarter (December 31, 2022) | | $ | 0.2150 | | $ | 1.6300 |
Third Quarter (September 30, 2022) | | $ | 1.2900 | | $ | 1.9000 |
Second Quarter (June 30, 2022) | | $ | 1.5400 | | $ | 2.6400 |
First Quarter (March 31, 2022) | | $ | 2.0100 | | $ | 3.3100 |
Year Ended December 31, 2021 | |
|
| |
|
|
Fourth Quarter (December 31, 2021) | | $ | 1.5600 | | $ | 2.1600 |
Third Quarter (September 30, 2021) | | $ | 1.7400 | | $ | 2.3200 |
Second Quarter (June 30, 2021) | | $ | 2.2800 | | $ | 3.1200 |
First Quarter (March 31, 2020) | | $ | 1.8200 | | $ | 4.6800 |
Our Subordinate Voting Shares also are traded on the OTCQX under the symbol “GDNSF.” The following table sets forth trading information for the Subordinate Voting Shares for the periods indicated, as quoted on the OTCQX.
|
| Low Trading Price |
| High Trading Price | ||
Period | | (US$) | | (US$) | ||
Year Ending December 31, 2023 |
| |
|
| |
|
First Quarter (through March 1, 2023) | | $ | 0.1490 | | $ | 0.2070 |
Year Ended December 31, 2022 | |
|
| |
|
|
Fourth Quarter (December 31, 2022) | | $ | 0.1500 | | $ | 1.2100 |
Third Quarter (September 30, 2022) | | $ | 0.9340 | | $ | 1.4570 |
Second Quarter (June 30, 2022) | | $ | 1.2000 | | $ | 2.1010 |
First Quarter (March 31, 2022) | | $ | 1.5700 | | $ | 2.5950 |
Year Ended December 31, 2021 | |
|
| |
|
|
Fourth Quarter (December 31, 2021) | | $ | 1.2400 | | $ | 1.7100 |
Third Quarter (September 30, 2021) | | $ | 1.3900 | | $ | 1.8600 |
Second Quarter (June 30, 2021) | | $ | 1.8300 | | $ | 2.5400 |
First Quarter (March 31, 2021) | | $ | 1.4700 | | $ | 3.7700 |
Shareholders
As of March 1, 2023, there were 127 holders of record of our Subordinate Voting Shares, 173 holders of record of our Multiple Voting Shares, and 1 holder of record of our Super Voting Shares.
61
Dividends
We have not paid, and do not in the foreseeable future intend to pay, any dividends on the Subordinate Voting Shares or any other equity. The declaration and payment of future dividends to holders of our Shares will be at the discretion of the Board of Directors and will depend upon many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements and other factors deemed relevant by the Board of Directors. In addition, as a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their respective jurisdictions of organization, agreements of our subsidiaries or covenants under future indebtedness that the Company or our subsidiaries may incur. See “Risk Factors - Risks Related to the Company’s Securities – We do not intend to pay dividends on our Shares and, consequently, the ability of investors to achieve a return on their investment will depend entirely on appreciation in the price of the Subordinate Voting Shares.”
Equity Compensation Plans
The following table sets forth, as of December 31, 2022, securities authorized for issuance under each of the 2018 Equity Incentive Plan (the “2018 Plan”), the 2019 Equity Incentive Plan (the “2019 Plan”), and any equity issued under an employment agreement. All outstanding options under the 2018 Equity Incentive Plan, as well as all outstanding compensation warrants, settle in Subordinate Voting Shares. Outstanding options and under the 2019 Equity Incentive Plan settle in either Subordinate Voting Shares of Vireo or Multiple Voting Shares, at the Company’s option. All restricted stock units issued under the 2019 Equity Incentive Plan or an employment agreement settle in Subordinate Voting Shares. Figures below are presented on an as-converted basis.
|
| Number of | | | |
| |
| | securities | | | | | Number of securities |
| | to be issued upon | | Weighted-average | | remaining available | |
| | exercise of | | exercise price of | | for future issuance | |
| | outstanding options, | | outstanding options, | | under equity | |
Plan Category | | warrants and RSUs | | warrants and RSUs | | compensation plans | |
Equity compensation plans approved by security holders |
| 10,465,892 | | $ | 1.10 |
| 2,346,741 |
Equity compensation plans not approved by security holders |
| 16,303,343 | | $ | 0.25 |
| — |
Total |
| 26,769,235 | | $ | 0.47 |
| 2,346,741 |
In January 2019, the Company adopted the 2019 Plan, which was approved by shareholders. Subject to adjustment provisions as provided in the 2019 Plan, the maximum number of Subordinate Voting Shares that may be issued under the 2019 Equity Incentive Plan is equal to 10% of the number of issued and outstanding Subordinate Voting Shares from time to time, on an as converted to Subordinate Voting Shares basis. No future awards will be made under the 2018 Plan. Awards under the 2019 Plan may be made in any form permitted under the 2019 Plan, in any combinations approved by the Board of Directors. For the purposes of this report, the term “as converted to Subordinate Voting Shares basis” includes the conversion of the Multiple Voting Shares and Super Voting Shares into Subordinate Voting Shares.
In January 2018, Vireo U.S. adopted the 2018 Plan, which permitted the Company to grant incentive stock options, restricted shares, restricted share units, or other awards. The 2018 Plan was not approved by shareholders. Under the terms of the 2018 Plan, a total of 1,000,000 common shares were reserved for issue. The exercise price for incentive stock options issued under the 2018 Plan were to be set by the committee (as defined under the 2018 Plan) but were not to be less 100% of the fair market value of Vireo U.S.’s shares on the date of grant. Incentive stock options to be issued were to have a maximum term of 10 years from the date of grant. The incentive stock options vested at the discretion of the Board.
Recent Sales of Unregistered Securities
We did not issue any unregistered securities during the quarter ended December 31, 2022.
62
Item 6.Reserved
The following are selected financial data derived from our Consolidated Financial Statements for the years ended December 31, 2022 and 2021. The data set forth below should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Our Consolidated Financial Statements have been prepared in accordance with GAAP on a going-concern basis that contemplates continuity of operations and realization of assets and liquidation of liabilities in the ordinary course of business.
The selected consolidated financial information set forth below may not be indicative of our future performance.
| | Twelve Months Ended | |||||||
| | December 31, | |||||||
|
| 2022 |
| 2021 |
| 2020 | |||
Retail Revenue | | $ | 62,123,357 | | $ | 44,692,385 | | $ | 37,236,301 |
Wholesale Revenue | |
| 12,502,510 | |
| 9,753,783 | |
| 11,972,314 |
Other Revenue | | | — | | | — | | | 2,714 |
Total Revenues, net of discounts | | $ | 74,625,867 | | $ | 54,446,168 | | $ | 49,211,329 |
Cost of Goods Sold | |
| 43,717,706 | |
| 34,647,483 | |
| 32,083,608 |
Gross Profit | | $ | 30,908,161 | | $ | 19,798,685 | | $ | 17,127,721 |
Total Expenses | |
| 37,847,526 | |
| 40,280,249 | |
| 40,170,843 |
Other Income (Expense) | |
| (29,625,079) | |
| (9,086,911) | |
| 8,890,928 |
Operating Loss | |
|
| |
|
| |
|
|
Before Provision for Income Taxes | | $ | (36,564,444) | | $ | (29,568,475) | | $ | (14,152,194) |
63
Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the financial information and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or “forward-looking information” within the meaning of Canadian securities laws. These statements are often identified by the use of words such as “expect,” “plan,” “expected,” “scheduled,” “estimates,” “estimated,” “forecasts,” “continue,” “continued,” “anticipate,” “will,” “expectations,” “cannot,” “could,” “believe,” “focused,” “intention,” “strategic,” “future,” “approach,” “strategy,” “efforts,” “potential,” “potentially,” “possible,” “may,” “intend,” “intended,” “intent,” “should,” “might,” “would,” “achieve,” “allowed to,” “over time,” “likely,” “remain,” “opportunities,” “seeking,” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements and forward-looking information are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements or forward-looking information. Factors that could cause or contribute to such differences include, but are not limited to, those identified in this Annual Report on Form 10-K and those discussed in the section titled “Risk Factors” set forth in Part I, Item 1A of this Annual Report on Form 10-K and in our other SEC and Canadian public filings. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this Annual Report on Form 10-K and while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements. You should not rely upon forward-looking statements or forward-looking information as predictions of future events. Furthermore, such forward-looking statements or forward-looking information speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements or forward-looking information to reflect events or circumstances after the date of such statements.
Amounts are presented in United States dollars, except as otherwise indicated.
Overview of the Company
Goodness Growth is a cannabis company whose mission is to provide safe access, quality products and value to its customers while supporting its local communities through active participation and restorative justice programs. The Company is evolving with the industry and is in the midst of a transformation to being significantly more customer-centric across its operations, which include cultivation, manufacturing, wholesale and retail business lines. With our core operations strategically located in four limited-license markets through our state-licensed subsidiaries, we cultivate and manufacture cannabis products and distribute these products through our growing network of Green Goods® and other retail dispensaries we own or operate as well as to third-party dispensaries in the markets in which our subsidiaries hold operating licenses.
On January 31, 2022, we entered into an Arrangement Agreement (the “Arrangement Agreement”) with Verano Holdings Corp. (“Verano”), pursuant to which Verano was to acquire all of the issued and outstanding shares of Goodness Growth pursuant to a plan of arrangement (the “Plan of Arrangement”) under the Business Corporations Act (British Columbia) (the “Arrangement”). Subject to the terms and conditions set forth in the Arrangement Agreement and the Plan of Arrangement, holders of Goodness Growth Shares was to receive 0.22652 of a subordinate voting share of Verano (each a “Verano Subordinate Voting Share”), subject to adjustment as described below, for each Subordinate Voting Share held, and 22.652 Verano Subordinate Voting Shares for each Multiple Voting Share and Super Voting Share held, immediately prior to the effective time of the Arrangement.
On October 13, 2022, we received a notice of purported termination of the Arrangement Agreement (the “Notice”) from Verano. The Notice asserted certain breaches of the Arrangement Agreement, including claims our public filings and
64
communications with respect to our business and ongoing operations were misleading and that we breached our representations to Verano under the Arrangement Agreement. Verano also claimed, as a result of such breaches, it is entitled to payment of the $14,875,000 termination fee and its transaction expenses of up to $3,000,000. We deny all of Verano’s allegations and have complied with our obligations under the Arrangement Agreement in all material respects at all times. Verano has no factual or legal basis to justify or support its purported grounds for termination of the Arrangement Agreement.
On October 21, 2022, we commenced an action in the Supreme Court of British Columbia against Verano seeking damages after Verano wrongfully terminated the Arrangement Agreement. We are seeking damages, costs and interest, based on Verano's breach of contract and of its duty of good faith and honest performance. On November 14, 2022, Verano filed counterclaims against the Company for the termination fee and transaction expenses described above. Due to uncertainties inherent in litigation, it is not possible to predict the timing or final outcome of the legal proceedings against Verano or to determine the amount of damages, if any, that may be awarded.
The termination of the Arrangement Agreement gives rise to substantial doubt about the Company’s ability to meet its obligations over the next twelve months. Company management is working with the Company’s lenders, counsel, and other applicable parties to implement a plan to effectively mitigate the conditions giving rise to substantial doubt. Elements of this plan may include, but are not limited to, asset sales, debt restructuring, and capital raises. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, the Company’s continuance as going concern is dependent on its future profitability and implementation of the aforementioned plan. The Company may not be successful in these efforts.
Operating Segments
We report our operating results in one business segment: the cultivation, production, and sale of cannabis. We cultivate, manufacture, and distribute cannabis products to third parties in wholesale markets and cultivate, manufacture, and sell cannabis products directly to approved patients and adult-use-customers in our owned or operated retail stores.
During the year ended December 31, 2022, the Company had operating revenue in five states: Arizona, Maryland, Minnesota, New Mexico, and New York. Retail revenues were derived from sales in eighteen dispensaries throughout four states. We had eight operational dispensaries in Minnesota, four in New Mexico, four in New York, and two in Maryland. Wholesale revenues were derived from sales of products to third parties in the states of Arizona, Maryland, Minnesota, and New York. During the year ended December 31, 2022, we ceased all operations in Arizona. During the year ended December 31, 2021, we divested our retail operation in Arizona, and the Ohio business.
Year ended December 31, 2022 Compared to the Year Ended December 31, 2021
Revenue
We derived our revenue from cultivating, processing, and distributing cannabis products through our nineteen dispensaries in five states and our wholesale sales to third parties in four states. For the year ended December 31, 2022, 83% of the revenue was generated from retail dispensaries and 17% from wholesale business. For the year ended December 31, 2021, 82% of the revenue was generated from retail business and 18% from wholesale business.
For the year ended December 31, 2022, Minnesota operations contributed approximately 51% of revenues, New York contributed 20%, Arizona contributed 3%, New Mexico contributed 8%, and Maryland contributed 18%. For the year ended December 31, 2021, Minnesota operations contributed approximately 40% of revenues, New York contributed 25%, Arizona contributed 16%, New Mexico contributed 6%, and Maryland contributed 13%.
Revenue for the year ended December 31, 2022, was $74,625,867, an increase of $20,179,699 or 37% compared to revenue of $54,446,168 for year ended December 31, 2021. The increase is primarily attributable to revenue contributions from the retail business in Minnesota of $15.7 million, the retail business in Maryland of $4.7 million, and the retail business in New Mexico of $2.9 million, partially offset by the lack of revenues from the Arizona retail business, which was divested
65
in 2021. Key revenue drivers are the increased patient demand in Minnesota driven by the addition of cannabis flower to the Minnesota medical program in March of 2022, the commencement of recreational marijuana sales in New Mexico on April 1, 2022, and the acquisition of Charm City Medicus, LLC in the fourth quarter of 2021.
Retail revenue for the year ended December 31, 2022, was $62,123,357, an increase of $17,430,972 or 39% compared to retail revenue of $44,692,385 for the year ended December 31, 2021, primarily due to increased revenue contributions from Minnesota, Maryland, and New Mexico.
Wholesale revenue for the year ended December 31, 2022, was $12,502,510, an increase of $2,748,727 compared to wholesale revenue of $9,753,783 for year ended December 31, 2021. The increase was primarily due to increased wholesale demand in Maryland and New York.
| | Year Ended | | | | | |
| ||||
| | December 31, | | | | | |
| ||||
|
| 2022 |
| 2021 |
| $ Change |
| % Change |
| |||
Retail: | | |
|
| |
|
| |
|
|
| |
MN | | $ | 37,461,646 | | $ | 21,795,356 | | $ | 15,666,290 |
| 72 | % |
NY | |
| 10,676,424 | |
| 11,473,918 | |
| (797,494) |
| (7) | % |
AZ | |
| — | |
| 5,053,669 | |
| (5,053,669) |
| (100) | % |
NM | |
| 6,040,847 | |
| 3,100,803 | |
| 2,940,044 |
| 95 | % |
MD | | | 7,944,440 | | | 3,268,639 | | | 4,675,801 | | 143 | % |
Total Retail | | $ | 62,123,357 | | $ | 44,692,385 | | $ | 17,430,972 |
| 39 | % |
| | | | | | | | | | | | |
Wholesale: | |
|
| |
|
| |
|
|
|
| |
AZ | | $ | 2,361,233 | | $ | 3,519,835 | | $ | (1,158,602) |
| (33) | % |
MD | |
| 5,474,824 | |
| 3,688,359 | |
| 1,786,465 |
| 48 | % |
NY | |
| 3,994,313 | |
| 2,478,906 | |
| 1,515,407 |
| 61 | % |
MN | | | 672,140 | | | — | | | 672,140 | | 100 | % |
OH | |
| — | |
| 66,683 | |
| (66,683) |
| (100) | % |
| | | | | | | | | | | | |
Total Wholesale | | $ | 12,502,510 | | $ | 9,753,783 | | $ | 2,748,727 |
| 28 | % |
| | | | | | | | | | | | |
Total Revenue | | $ | 74,625,867 | | $ | 54,446,168 | | $ | 20,179,699 |
| 37 | % |
| | | | | | | | | | | | |
AZ and OH Revenue | | $ | (2,361,233) | | $ | (8,640,187) | | $ | 6,278,954 | | (73) | % |
Total Revenue excluding AZ Retail and OH | | $ | 72,264,634 | | $ | 45,805,981 | | $ | 26,458,653 | | 58 | % |
Cost of Goods Sold and Gross Profit
Cost of goods sold are determined from costs related to the cultivation and processing of cannabis and cannabis-derived products as well as the cost of finished goods inventory purchased from third parties.
Cost of goods sold for the year ended December 31, 2022, was $43,717,706, an increase of $9,070,223 compared to the year ended December 31, 2021 of $34,647,483, driven most significantly by the product costs associated with the increase in revenues year over year.
Gross profit for the year ended December 31, 2022, was $30,908,161, representing a gross margin of 41%. This is compared to gross profit for the year ended December 31, 2021, of $19,798,685 or a 36% gross margin. The increase in margin and gross profit was driven primarily by increased retail revenues, specifically increased Minnesota retail contributions as a percentage of overall revenue, which carry higher margins.
66
Total Operating Expenses
Total operating expenses for the year ended December 31, 2022, were $37,847,526, a decrease of $2,432,723 compared to total expenses of $40,280,249 for the year ended December 31, 2021. The decrease in total expenses was attributable to a decrease in share-based compensation of $2,488,444.
Operating Loss before Income Taxes and Other Income (Expense)
Operating loss before other income (expense) and provision for income taxes for the year ended December 31, 2022, was $(6,939,365), a decrease of $13,542,199 compared to an operating loss before other income (expense) and provision for income taxes of $(20,481,564) for the year ended December 31, 2021.
Total Other Income (Expense)
Total other expense for the year ended December 31, 2022, was ($29,625,079), an increase of $20,538,168 compared to other expense of ($9,086,911) or the year ended December 31, 2021. The increase in other expense is primarily attributable to increased interest expense of $12,018,182 in 2022 driven by the issuance of promissory notes, increased impairment charges of $3,426,250 related to long-lived assets, and a decrease of $6,734,680 in asset disposal gains due to a lack of asset divestitures in 2022.
Provision for Income Taxes
Income tax expense is recognized based on the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end. For the year ended December 31, 2022, Federal and State income tax expense totaled $5,893,000 compared to tax expense of $4,122,000 for the year ended December 31, 2021. The increase in tax expense is primarily attributable to the increase in gross profit relative to the prior year.
Year ended December 31, 2021 Compared to the Year Ended December 31, 2020
Revenue
We derived our revenue from cultivating, processing, and distributing cannabis products through our nineteen dispensaries in five states and our wholesale sales to third parties in four states. For the year ended December 31, 2021, 82% of the revenue was generated from retail dispensaries and 18% from wholesale business. For the year ended December 31, 2020, 76% of the revenue was generated from retail business and 24% from wholesale business.
For the year ended December 31, 2021, Minnesota operations contributed approximately 40% of revenues, New York contributed 25%, Arizona contributed 16%, New Mexico contributed 6%, and Maryland contributed 13%. For the year ended December 31, 2020, Minnesota operations contributed approximately 34% of revenues, New York contributed 23%, Arizona contributed 15%, New Mexico contributed 5%, Maryland contributed 8%, Ohio contributed 1%, and Pennsylvania contributed 14%.
Revenue for the year ended December 31, 2021, was $54,446,168, an increase of $5,234,839 or 11% compared to revenue of $49,211,329 for year ended December 31, 2020. The increase is primarily attributable to revenue contributions from the retail business in Minnesota of $5.3 million, the retail business in Maryland of $3.3 million, and the wholesale business in New York of $1.8 million, partially offset by the lack of revenues from the Pennsylvania retail and wholesale businesses, which were divested in 2020. Key revenue drivers were the opening of the Fredrick dispensary in Maryland in the first quarter of 2021, increased patient demand in Minnesota, which is primarily the result of four new dispensary openings that occurred in the fourth quarter of 2020, and a large New York bulk oil sale that occurred during 2021.
Retail revenue for the year ended December 31, 2021, was $44,692,385, an increase of $7,456,084 or 20% compared to retail revenue of $37,236,301 for the year ended December 31, 2020, primarily due to revenue contributions from Minnesota and Maryland.
67
Wholesale revenue for the year ended December 31, 2021, was $9,753,783, a decrease of $2,218,531 compared to wholesale revenue of $11,972,314 for year ended December 31, 2020. The decrease was primarily due to the divestiture of the Pennsylvania wholesale business in 2020.
| | Year Ended | | | | | |
| ||||
| | December 31, | | | | | |
| ||||
|
| 2021 |
| 2020 |
| $ Change |
| % Change |
| |||
Retail: | | |
|
| |
|
| |
|
|
| |
MN | | $ | 21,795,356 | | $ | 16,506,418 | | $ | 5,288,938 |
| 32 | % |
NY | |
| 11,473,918 | |
| 10,890,084 | |
| 583,834 |
| 5 | % |
AZ | |
| 5,053,669 | |
| 4,018,613 | |
| 1,035,056 |
| 26 | % |
NM | |
| 3,100,803 | |
| 2,349,826 | |
| 750,977 |
| 32 | % |
MD | | | 3,268,639 | | | — | | | 3,268,639 |
| N.M. | |
PA | | | — | | | 3,471,360 | | | (3,471,360) | | (100) | % |
Total Retail | | $ | 44,692,385 | | $ | 37,236,301 | | $ | 7,456,084 |
| 20 | % |
| | | | | | | | | | | | |
Wholesale: | |
|
| |
|
| |
|
|
|
| |
AZ | | $ | 3,519,835 | | $ | 3,555,184 | | $ | (35,349) |
| (1) | % |
MD | |
| 3,688,359 | |
| 3,797,655 | |
| (109,296) |
| (3) | % |
NY | |
| 2,478,906 | |
| 630,277 | |
| 1,848,629 |
| 293 | % |
PA | |
| — | |
| 3,521,867 | |
| (3,521,867) |
| 100 | % |
OH | |
| 66,683 | |
| 467,331 | |
| (400,648) |
| (86) | % |
Total Wholesale | | $ | 9,753,783 | | $ | 11,972,314 | | $ | (2,218,531) |
| (19) | % |
| | | | | | | | | | | | |
Other: | |
|
| |
|
| |
|
|
|
| |
RI Royalty | | $ | — | | $ | 2,714 | | $ | (2,714) |
| N.M. | |
| | | | | | | | | | | | |
Total Revenue | | $ | 54,446,168 | | $ | 49,211,329 | | $ | 5,234,839 |
| 11 | % |
PA, OH, and AZ Retail Revenue | | $ | (5,120,352) | | $ | (11,479,171) | | $ | 6,358,819 |
| (55) | % |
Total Revenue excluding AZ and OH | | $ | 49,325,816 | | $ | 37,732,158 | | $ | 11,593,658 |
| 31 | % |
N.M. Not Meaningful | |
|
| |
|
| |
|
|
|
| |
Cost of Goods Sold and Gross Profit
Cost of goods sold are determined from costs related to the cultivation and processing of cannabis and cannabis-derived products as well as the cost of finished goods inventory purchased from third parties.
Cost of goods sold for the year ended December 31, 2021, was $34,647,483, an increase of $2,563,875 compared to the year ended December 31, 2020 of $32,083,608, driven most significantly by the product costs associated with the increase in revenues year over year, and an increase in inventory valuation adjustments driven by a significant and unusual weather period in Arizona.
Gross profit for the year ended December 31, 2021, was $19,798,685, representing a gross margin of 36%. This is compared to gross profit for the year ended December 31, 2020, of $17,127,721 or a 35% gross margin. The increase in margin was driven by increased retail revenue, which carries a higher margin, as a percentage of total revenue in 2021, partially offset by an increase in inventory valuation adjustments of $1,666,696. The increase in inventory valuation adjustments was driven by a significant and unusual weather period in Arizona, which lead to increased obsolete inventory.
Total Operating Expenses
Total operating expenses for the year ended December 31, 2021, were $40,280,249, an increase of $109,406 compared to total expenses of $40,170,843 for the year ended December 31, 2020. The increase in total expenses was attributable to an increase in salaries and wages, professional fees, and general and administrative expenses of $7.3 million, an increase in amortization and depreciation of $0.4 million, offset by a decrease in share-based compensation of $7.6 million. The
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increase in salaries and wages, and general and administrative expenses was driven by significant operational buildout in existing markets, and the decrease in share-based compensation was driven by the lack of share-based compensation expense affiliated with warrant vesting in 2021.
Operating Loss before Income Taxes and Other Income (Expense)
Operating loss before other income (expense) and provision for income taxes for the year ended December 31, 2021, was $(20,481,564), a decrease of $2,561,558 compared to operating income before other income (expense) and provision for income taxes of $(23,043,122) for the year ended December 31, 2020.
Total Other Income (Expense)
Total other expense for the year ended December 31, 2021, was ($9,086,911), an increase of $17,977,839 compared to other income of $8,890,928 for the year ended December 31, 2020. The increase in other expense is primarily attributable to increased interest expense of $5,479,522 in 2021 driven by the issuance of promissory notes, the impairment charge of $5,169,951 related to long-lived assets, as well as the decrease in the gain on disposal of assets of $13,350,138, partially offset by the 2020 derivative loss of $6,260,480.
Provision for Income Taxes
Income tax expense is recognized based on the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end. For the year ended December 31, 2021, Federal and State income tax expense totaled $4,122,000 compared to a tax expense of $8,790,000 for the year ended December 31, 2020. The 2020 expense is significantly impacted by the $20.3 million gain affiliated with the divestiture of various subsidiaries.
Non-GAAP Measures
EBITDA and Adjusted EBITDA are non-GAAP measures and do not have standardized definitions under GAAP. The following information provides reconciliations of the supplemental non-GAAP financial measures presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP. Management occasionally elects to provide supplemental non-GAAP financial measures in circumstances which it believes provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented. During fiscal year 2022, management discussed and provided reconocilations of quarterly EBITDA and Adjusted EBITDA to directly comparable GAAP financial measures. As a result, references and reconciliations to these measures have been provided for the full year. However, management does not undertake any responsibility to provide similar disclosures in future periods.
Our calculation of EBITDA and Adjusted EBITDA excludes “depreciation included in the cost of goods sold.” We believe excluding these additional items better represents EBITDA by excluding all depreciation.Our calculation of EBITDA and
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Adjusted EBITDA now excludes “depreciation included in the cost of goods sold.” We believe excluding these additional items better represents EBITDA by excluding all depreciation.
| | Year Ended | ||||
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
Net income (loss) | | $ | (42,457,444) | | $ | (33,690,475) |
Interest expense, net | |
| 22,593,552 | |
| 10,575,370 |
Income taxes | |
| 5,893,000 | |
| 4,122,000 |
Depreciation & Amortization | |
| 1,329,643 | |
| 1,441,828 |
Depreciation included in cost of goods sold | |
| 2,682,818 | |
| 2,404,711 |
EBITDA (non-GAAP) | | $ | (9,958,431) | | $ | (15,146,566) |
Inventory adjustment | |
| 4,293,788 | |
| 2,641,080 |
Loss on impairment of long-lived assets | | | 8,596,201 | | | 5,169,951 |
Stock-based compensation | |
| 2,694,197 | |
| 5,182,641 |
Other income | |
| (1,190,863) | |
| — |
Gain on disposal of assets | |
| (322,181) | |
| (6,903,039) |
Adjusted EBITDA (non-GAAP) | | $ | 4,112,711 | | $ | (9,055,933) |
Liquidity and Capital Resources
As of December 31, 2022 and 2021, the Company had working capital of $17,019,820 and $25,233,518 respectively, reflecting a decrease in working capital of $8,213,698 for the year ended December 31, 2022.
The Company is an early-stage growth company. It is generating cash from sales and is deploying its capital reserves to acquire and develop assets capable of producing additional revenues and earnings over both the immediate and near term. Capital reserves are being utilized for capital expenditures and improvements in existing facilities, product development and marketing, as well as customer, supplier and investor and industry relations.
Credit Facility
During the year ended December 31, 2017, the Company signed a promissory note payable in the amount of $1,010,000. The note bears interest at a rate of 15% per annum with interest payments required on a monthly basis. Effective November 13, 2019, the Company’s promissory note payable in the amount of $1,010,000 was modified to increase the amount payable to $1,110,000 and extend the maturity date to December 31, 2021. On December 28, 2021, the Company’s promissory note payable in the amount of $1,110,000 was modified to extend the maturity date to December 31, 2023, and the Company paid off $60,000 in principal.
On March 25, 2021, the Company entered into a credit agreement for a senior secured delayed draw term loan with an aggregate principal amount of up to $46,000,000 (the “Credit Facility”), and executed a draw of $26,000,000 in principal. Net of fees and closing costs of $1,971,705, the Company received $24,028,295 of the first tranche on March 25, 2021. Additionally, the Company incurred fees and closing costs of $1,083,422 which were paid in cash. The unpaid principal amounts outstanding under the Credit Facility bear interest at a rate of (a) the U.S. prime rate plus 10.375% per annum payable monthly in cash, and (b) 2.75% per annum paid in kind interest payable monthly. The Credit Facility matures on March 31, 2024.
On March 25, 2021, in connection with closing the Credit Facility, Goodness Growth issued (a) five year warrants to the agent and each lender to purchase an aggregate of 2,803,984 subordinate voting shares at an exercise price of C$3.50 per share, and (b) a five year warrant to the broker to purchase 233,665 subordinate voting shares at an exercise price of C$3.50 per share. Each warrant provides customary anti-dilution provisions. The fair value of these warrants at the time of issuance was $5,395,759 which is treated as a deferred financing cost.
On November 18, 2021, the Company and lenders amended the Credit Facility to provide for an additional loan of $4,200,000 with a cash interest rate of 15% per annum and PIK interest of 2% per annum and no warrants were issued in
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connection with this loan. Cash received net of $156,900 in financing costs was $4,043,100. Obligations under the Credit Facility are secured by substantially all the assets of the Company.
On January 31, 2022, Goodness Growth and certain of its subsidiaries, as borrowers (collectively, “Borrowers”), entered into a Third Amendment to the Credit Facility (the “Third Amendment”) providing for additional delayed draw term loans of up to $55 million (the “Delayed Draw Loans”). Subject to certain conditions to be satisfied prior to the initial funding thereunder, Goodness Growth may borrow a portion of the $55 million for working capital and other general corporate purposes and may borrow the remainder for other specific purposes, including relating to its ongoing expansion in New York. The Delayed Draw Loans have a maturity date of April 30, 2023 with an option to extend another 12 months for an additional fee of $1,375,000. The cash interest rate on the Delayed Draw Loans under the Third Amendment is equal to the U.S. prime rate plus 10.375%, with a minimum required rate of 13.375% per annum, in addition to paid-in-kind interest of 2.75% per annum. Pursuant to the Arrangement Agreement, Verano reimbursed Goodness Growth for all interest expenses related to the Third Amendment in excess of 10% per annum through the purported termination of the Arrangement Agreement on October 13, 2022.
During the year ended December 31, 2022, the Company drew $28,000,000 in principal debt from the Delayed Draw Loans. Proceeds received, net of deferred financing fees of $2,236,919 were $25,763,081. The Company was reimbursed by Verano for $1,190,863 of these deferred financing fees pursuant to the Arrangement Agreement. These fees are included as other income in the unaudited statement of loss and comprehensive loss for the year ended December 31, 2022.
Unless otherwise specified, all deferred financing costs are treated as a contra-liability, to be netted against the outstanding loan balance and amortized over the remaining life of the loan.
On November 19, 2021, the Company signed a promissory note payable in the amount of $2,000,000 in connection with the acquisition of Charm City Medicus, LLC. The note bears an interest rate of 8% per annum with interest payments due on the last day of each calendar quarter. The maturity date of the note is November 19, 2023, and the note is secured by 25% of the membership interests in Vireo Health of Charm City, LLC.
Cash Used in Operating Activities
Net cash used in operating activities was $18.1 million for the year ended December 31, 2022, a decrease of $12.4 million as compared to the year ended December 31, 2021. The decrease is due to more favorable changes in working capital relative to 2021, increased gross profit, and decreased operating expenses.
Cash Flow from Investing Activities
Net cash used in investing activities was $5.6 million for the year ended December 31, 2022, compared to net cash used of $7.2 million for the year ended December 31, 2021. The decrease in cash used is primarily attributable to decreased capital expenditures of $12.5 million, partially offset by the lack of asset disposals in 2022.
Cash Flow from Financing Activities
Net cash provided by financing activities was $23.7 million for the year ended December 31, 2022, an decrease of $2.1 million as compared to the year ended December 31, 2021. The decrease was principally due to fewer net proceeds received from the Credit Facility in 2022.
Lease Transactions
As of December 31, 2022, we have entered into lease agreements for the use of buildings used in cultivation, production and sales of cannabis products in Maryland, Minnesota, Nevada, New Mexico, New York, and Puerto Rico.
The lease agreements for all retail space used for our dispensary operations are with third-party landlords and remaining duration ranges from 1 to 6 years. These agreements are short-term facility leases that require the Company to
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make monthly rent payments as well as to fund common area costs, utilities and maintenance. In some cases, we have received tenant improvement funds to assist in the buildout of the space to meet our operating needs. As of December 31, 2022, the Company had 18 retail locations secured under these agreements.
We have also entered into sale and leaseback arrangements for our cultivation and processing facilities in Minnesota and New York with a special-purpose real estate investment trust. These leases are long-term agreements that provide, among other things, funds to make certain improvements to the property to increase production capacity and operational efficiency of the facility.
Excluding any contracts under one year in duration, the future minimum lease payments (principal and interest) on all our leases are as follows:
| | Operating Leases | | Finance Leases | | | | ||
|
| December 31, 2022 |
| December 31, 2022 |
| Total | |||
2023 | | $ | 2,534,207 | | $ | 10,346,743 | | $ | 12,880,950 |
2024 | |
| 2,243,050 | |
| 10,448,698 | |
| 12,691,748 |
2025 | |
| 2,030,129 | |
| 10,531,127 | |
| 12,561,256 |
2026 | |
| 1,609,276 | |
| 10,844,372 | |
| 12,453,648 |
2027 | |
| 1,384,646 | |
| 11,167,059 | |
| 12,551,705 |
Thereafter | |
| 1,271,640 | |
| 174,401,638 | |
| 175,673,278 |
Total minimum lease payments | | $ | 11,072,948 | | $ | 227,739,637 | | $ | 238,812,585 |
Less discount to net present value | | | (3,447,503) | |
| (152,606,947) | |
| (156,054,450) |
Less liabilities held for sale | | | (1,319,847) | | | — | | | (1,319,847) |
Present value of lease liability | | $ | 6,305,598 | | $ | 75,132,690 | | $ | 81,438,288 |
Outstanding Share Data
As of March 27, 2023, we had 87,135,083 shares issued and outstanding, consisting of the following:
(a) Subordinate Voting Shares
86,721,030 shares issued and outstanding. The holders of Subordinate Voting Shares are entitled to receive dividends which may be declared from time to time and are entitled to one vote per share at all shareholder meetings. All Subordinate Voting Shares are ranked equally with regards to the Company’s residual assets. The Company is authorized to issue an unlimited number of no-par value Subordinate Voting Shares.
(b) Multiple Voting Shares
348,642 shares issued and outstanding. The holders of Multiple Voting Shares are entitled to one hundred votes per share at all shareholder meetings. Each Multiple Voting Share is exchangeable for one hundred Subordinate Voting Shares. The Company is authorized to issue an unlimited number of Multiple Voting Shares.
(c) Super Voting Shares
65,411 shares issued and outstanding. The holders of Super Voting Shares are entitled to one thousand votes per share at all shareholder meetings. Each Super Voting Share is exchangeable for one hundred Subordinate Voting Shares. The Company is authorized to issue an unlimited number of Super Voting Shares.
Options, Warrants, and Convertible Promissory Notes
As of December 31, 2022, we had 23,547,558 employee stock options outstanding, 3,037,649 Subordinate Voting Share compensation warrants denominated in C$ related to financing activities, and 150,000 Subordinate Voting Share compensation warrants outstanding.
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Off-Balance Sheet Arrangements
As of the date of this filing, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.
Summary of Significant Accounting Policies
The critical accounting estimates, assumptions, and judgments that we believe to have the most significant impact on our consolidated financial statements are described below. Note 2, “Summary of Significant Accounting Policies” of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements.
Use of estimates and significant judgments
The preparation of our financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of revenue, expenses, assets, liabilities, accompanying disclosures and the disclosure of contingent liabilities. These estimates and judgments are subject to change based on experience and new information which could result in outcomes that require a material adjustment to the carrying amounts of assets or liabilities affecting future periods. Estimates and judgments are assessed on an ongoing basis. Revisions to estimates are recognized prospectively.
Examples of key estimates in these financial statements include cash flows and discount rates used in accounting for business combinations including contingent consideration, asset impairment including estimated future cash flows and fair values, the allowance for doubtful accounts receivable and trade receivables, inventory valuation adjustments that contemplate the market value of, and demand for inventory, estimated useful lives of property and equipment and intangible assets, valuation allowance on deferred income tax assets, determining the fair value of financial instruments, fair value of stock-based compensation, estimated variable consideration on contracts with customers, sales return estimates, the fair value of the convertible notes and equity component and the classification, incremental borrowing rates and lease terms applicable to lease contracts. We believe that the estimates, judgments, and assumptions used to determine certain amounts that affect the financial statements are reasonable, based on information available at the time they are made. To the extent there are differences between these estimates and actual results, our consolidated financial statements may be materially affected.
Revenue Recognition
The Company’s primary source of revenue is from wholesale of cannabis products to dispensary locations and direct retail sales to eligible customers at the Company-owned dispensaries. Substantially all of the Company’s retail revenue is from the direct sale of cannabis products to medical customers.
Revenue is recognized when control of the promised goods or services, through performance obligations by the Company, is transferred to the customer in an amount that reflects the consideration it expects to be entitled to in exchange for the performance obligations. More specifically, wholesale revenues are recognized upon delivery and acceptance by wholesale customers. Retail revenues are recognized at the point of sale. Discounts are recorded at the time of revenue recognition. Returns were not material during the years ended December 31, 2022 and 2021, but are recognized when the customer is refunded. Revenues are presented net of discounts and returns.
Sales taxes collected from customers are remitted to the appropriate taxing jurisdictions and are excluded from sales revenue as the Company considers itself a pass-through conduit for collecting and remitting sales taxes. Excise duties that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer are included in revenue. Freight revenues on all product sales, when applicable, are also recognized, on a consistent manner, at a point in time. The term between invoicing and when payment is due is not significant and the period between when the entity transfers the promised good or service to the customer and when the customer pays for that good or service is one year or less.
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Cost of sales
Cost of sales represents costs directly related to manufacturing and distribution of our products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and handling and the depreciation of manufacturing equipment and production facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property taxes. Cost of sales also includes inventory valuation adjustments. We recognize the cost of sales as the associated revenues are recognized.
Inventory
Inventory is comprised of cannabis work-in-process, cannabis finished goods and other inventory. Work-in-process inventory includes cannabis plants, bulk harvested material, and various bulk oils and extracts. Finished goods include packaged flower and extracts. Other inventory includes product packaging, hemp derived CBD, apparel, and paraphernalia.
Inventory cost includes pre-harvest, post-harvest and shipment and fulfillment, as well as related accessories. Pre-harvest costs include labor and direct materials to grow cannabis, which includes water, electricity, nutrients, integrated pest management, growing supplies and allocated overhead. Post-harvest costs include costs associated with drying, trimming, blending, extraction, purification, quality testing and allocated overhead. Shipment and fulfillment costs include the costs of packaging, labelling, courier services and allocated overhead.
Inventory is stated at the lower of cost or net realizable value, determined using weighted average cost. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. At the end of each reporting period, we perform an assessment of inventory and records write-downs for excess and obsolete inventories based on our estimated forecast of product demand, production requirements, market conditions, regulatory environment, and spoilage. Factors considered in the determination of obsolescence include slow-moving or non-marketable items. Actual inventory losses may differ from management’s estimates and such differences could be material our consolidated balance sheets, statements of net loss and comprehensive loss and statements of cash flows. In calculating the value of the inventory, management is required to make a number of estimates, including estimating the stage of growth of the cannabis plant up to the point of harvest, harvesting costs, selling costs, sales price, wastage and expected yields of the cannabis plant. In calculating final inventory values, management is required to determine an estimated fail rate and compare the inventory cost to estimated net realizable value. If the assumptions around future demand for our inventory are more optimistic than actual future results, then the excess and obsolete inventory provision may not be sufficient, resulting in our inventory being valued in excess of its net realizable value.
Assessing Recoverability of long-lived assets
We review long-lived assets, including property and equipment and definite life intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Asset impairment tests require the allocation of assets to asset groups, where appropriate, which requires significant judgment and interpretation with respect to the integration between the assets and shared resources. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable independent cash flows are available (“asset group”). Asset impairment tests require the determination of whether there is an indication of impairment. The assessment of whether an indication of impairment exists is performed at the end of each reporting period and requires the application of judgment, historical experience, and external and internal sources of information. An impairment loss is recognized when the sum of projected undiscounted cash flows is less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach or cost approach. The reversal of impairment losses is prohibited. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If impairment indicators exist and are not identified, or judgment and assumptions used in assessing the recoverable amount change, the carrying value of long-lived assets can exceed the recoverable amount.
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Impairment of goodwill and indefinite life intangible assets
Goodwill and indefinite life intangible assets are tested for impairment annually, or more frequently when events or circumstances indicate that impairment may have occurred. As part of the impairment evaluation, the Company may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the indefinite-lived intangible asset or the reporting unit (for goodwill) is less than its carrying value, a quantitative impairment test to compare the fair value to the carrying value. An impairment charge is recorded if the carrying value exceeds the fair value. If the judgments relating to the qualitative or quantitative assessments performed differ from actual results, or if assumptions are different, the values of the indefinite life intangible assets and goodwill can differ from the amounts recorded.
Estimating the fair value of Stock-based compensation
In January 2019, the Company adopted the 2019 Equity Incentive Plan under which the Company may grant incentive stock option, restricted shares, restricted share units, or other awards. The exercise price for incentive stock options issued under the plan will be set by the Administrator (as defined under the plan) but will not be less 100% of the fair market value of the Company’s shares on the date of grant. The Company measures and recognizes compensation expense for stock options to employees and non-employees on a straight-line basis over the vesting period based on their grant date fair values. The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model. Estimates in our stock-based compensation valuations are highly complex and subjective. Determining the estimated fair value of at the grant date requires judgment in determining the appropriate valuation model and assumptions, including the fair value of common shares on the grant date, risk-free rate, volatility rate, annual dividend yield and the expected term. The volatility rate is based on historical volatilities of public companies operating in a similar industry to the Company. Stock options have a maximum term of 10 years from the date of grant. The stock options vest at the discretion of the Board. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.
For stock options granted, the fair value of common stock at the date of grant was determined by the Board of Directors with assistance from third-party valuation specialists. The Company estimates forfeitures at the time of grant and revises these estimates in subsequent periods if actual forfeitures differ from those estimates.
For performance-based stock options and RSUs, the Company records compensation expense over the estimated service period adjusted for a probability factor of achieving the performance-based milestones. At each reporting date, the Company assesses the probability factor and records compensation expense accordingly, net of estimated forfeitures.
Fully vested, non-forfeitable equity instruments issued to parties other than employees are measured on the date they are issued where there is no specific performance required by the grantee to retain those equity instruments. Stock-based payment transactions with non-employees are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Where fully vested, non-forfeitable equity instruments are granted to parties other than employees in exchange for notes or financing receivable, the note or receivable is presented in additional paid-in capital on the balance sheets.
Assessing the realizability of deferred tax assets
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Management assesses the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Changes in recognition or measurement are reflected in the period in which judgment occurs.
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Recently Issued Accounting Standards
For a discussion of recent accounting pronouncements, please see Note 2, Summary of Significant Accounting Policies to our financial statements included elsewhere in this prospectus.
Item 7A.Quantitative and Qualitative Disclosures About Market Risk
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
Item 8.Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Directors of
Goodness Growth Holdings, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Goodness Growth Holdings, Inc. (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of net loss and comprehensive loss, changes in stockholders’ equity, and cash flows for the years ended December 31, 2022 and 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Goodness Growth Holdings, Inc. as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years ended December 31, 2022 and 2021, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has concluded that the historical recurring losses from operations, negative cash flows from operations, dependence on debt and other financings and the termination of the Arrangement Agreement gives rise to substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
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Our audits included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2018.
/s/ | |
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Chartered Professional Accountants | |
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March 31, 2023 |
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GOODNESS GROWTH HOLDINGS, INC.
Consolidated Balance Sheets (In U.S Dollars)
|
| December 31, |
| December 31, | ||
| | 2022 | | 2021 | ||
Assets |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash | | $ | | | $ | |
Accounts receivable, net of allowance for doubtful accounts of $ | |
| | |
| |
Inventory | |
| | |
| |
Prepayments and other current assets | |
| | |
| |
Assets Held for Sale | |
| | |
| — |
Total current assets | |
| | |
| |
Property and equipment, net | |
| | |
| |
Operating lease, right-of-use asset | |
| | |
| |
Notes receivable, long-term | |
| | |
| |
Intangible assets, net | |
| | |
| |
Goodwill | |
| | |
| |
Deposits | |
| | |
| |
Deferred tax assets | |
| | |
| |
Total assets | | $ | | | $ | |
Liabilities | |
|
| |
|
|
Current liabilities | |
|
| |
|
|
Accounts Payable and Accrued liabilities | | $ | | | $ | |
Long-Term debt, current portion | | | | | | — |
Right of use liability | |
| | |
| |
Liabilities held for sale | |
| | |
| — |
Total current liabilities | |
| | |
| |
Right-of-use liability | |
| | |
| |
Long-Term debt, net | |
| | |
| |
Total liabilities | | $ | | | $ | |
| | | | | | |
Commitments and contingencies (refer to Note 16) | |
|
| |
|
|
| | | | | | |
Stockholders’ equity | |
|
| |
|
|
Subordinate Voting Shares ($- par value, unlimited shares authorized; | |
| |
| ||
Multiple Voting Shares ($- par value, unlimited shares authorized; | |
| |
| ||
Super Voting Shares ($- par value; unlimited shares authorized; | |
| |
| ||
Additional Paid in Capital | |
| | |
| |
Accumulated deficit | |
| ( | |
| ( |
Total stockholders' equity | | $ | | | $ | |
Total liabilities and stockholders' equity | | $ | | | $ | |
The accompanying notes are an integral part of these consolidated financial statements
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GOODNESS GROWTH HOLDINGS, INC.
Consolidated Statements of Net Loss and Comprehensive Loss (In U.S. Dollars)
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| 2022 |
| 2021 | ||
Revenue | | $ | | | $ | |
Cost of sales | |
|
| |
|
|
Product costs | |
| | |
| |
Inventory valuation adjustments | |
| | |
| |
Gross profit | |
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Operating expenses: | |
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|
|
Selling, general and administrative | |
| | |
| |
Stock-based compensation expenses | |
| | |
| |
Depreciation | |
| | |
| |
Amortization | |
| | |
| |
Total operating expenses | |
| | |
| |
| | | | | | |
Income (loss) from operations | |
| ( | |
| ( |
| | | | | | |
Other income (expense): | |
|
| |
|
|
Impairment of long-lived assets | |
| ( | |
| ( |
Gain on disposal of assets | |
| | |
| |
Interest expenses, net | |
| ( | |
| ( |
Other income (expenses) | |
| | |
| ( |
Other income (expenses), net | |
| ( | |
| ( |
| | | | | | |
Loss before income taxes | |
| ( | |
| ( |
| | | | | | |
Current income tax expenses | |
| ( | |
| ( |
Deferred income tax recoveries | |
| | |
| |
Net loss and comprehensive loss | |
| ( | |
| ( |
Net loss per share - basic and diluted | | $ | ( | | $ | ( |
Weighted average shares used in computation of net loss per share - basic & diluted | |
| | |
| |
The accompanying notes are an integral part of these consolidated financial statements
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GOODNESS GROWTH HOLDINGS, INC.
Consolidated Statements of Stockholders’ Equity
(In U.S. Dollars)
| | Common Stock | | | | | | | | | | |||||||||||||
| | SVS | | MVS | | Super Voting Shares | | | | | | | | Total | ||||||||||
| | | | | | | | | | | | | | | | | Additional Paid- | | Accumulated | | Stockholders' | |||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Shares |
| Amount |
| in Capital |
| Deficit |
| Equity | ||||||
Balance, January 1, 2021 |
| | | $ | |
| | | $ | |
| | | | | | $ | | | $ | ( | | $ | |
Conversion of MVS shares |
| | |
| — |
| ( | |
| — |
| — | |
| — | |
| — | |
| — | |
| — |
Shares issued in Nevada acquisition |
| | | | — | | — | | | — | | — | | | — | | | | | | — | |
| |
Shares issued in Charm City acquisition |
| | | | — | | — | | | — | | — | | | — | | | | | | — | |
| |
Options exercised |
| | | | — | | — | | | — | | — | | | — | | | | | | — | |
| |
Warrants exercised |
| | | | — | | — | | | — | | — | | | — | | | — | | | — | |
| — |
Warrants issued in financing activities |
| — | | | — | | — | | | — | | — | | | — | | | | | | — | |
| |
Stock-based compensation |
| | | | — | | — | | | — | | — | | | — | | | | | | — | |
| |
Net Loss |
| — | | | — | | — | | | — | | — | | | — | | | — | | | ( | |
| ( |
Balance at December 31, 2021 |
| | | $ | |
| | | $ | |
| | | $ | | | $ | | | $ | ( | | $ | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Balance, January 1, 2022 | | | | $ | |
| | | $ | |
| | | $ | | | $ | | | $ | ( | | $ | |
Conversion of MVS shares | | | | | — | | ( | | | — | | — | | | — | | | — | | | — | | | — |
Options exercised |
| | |
| — |
| — | |
| — |
| — | |
| — | |
| | |
| — | |
| |
Stock-based compensation |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| | |
| — | |
| |
Net Loss |
| — | |
| — |
| — | |
| — |
| — | |
| — | |
| — | |
| ( | |
| ( |
Balance at December 31, 2022 |
| | | $ | |
| | | $ | |
| | | $ | | | $ | | | $ | ( | | $ | |
The accompanying notes are an integral part of these consolidated financial statements
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GOODNESS GROWTH HOLDINGS, INC.
Consolidated Statements of Cash Flows
(In U.S. Dollars, except for per share data)
| | December 31, | ||||
|
| 2022 |
| 2021 | ||
CASH FLOWS FROM OPERATING ACTIVITIES | | |
|
| |
|
Net loss | | $ | ( | | $ | ( |
Adjustments to reconcile net loss to net cash used in operating activities: | |
|
| |
| |
Inventory valuation adjustments | |
| | |
| |
Depreciation | |
| | |
| |
Depreciation capitalized into inventory | |
| | |
| |
Non-cash operating lease expense | |
| | |
| |
Amortization of intangible assets | |
| | |
| |
Stock-based payments | |
| | |
| |
Interest Expense | |
| | |
| |
Impairment of long-lived assets | |
| | |
| |
Deferred income tax | |
| ( | |
| ( |
Accretion | |
| | |
| |
Gain on Sale of Property and Equipment | |
| ( | |
| — |
Gain on disposal of AZ Dispensary | | | — | | | ( |
Gain on disposal of OMS | |
| — | |
| ( |
Gain on disposal of royalty asset | | | ( | | | — |
Change in operating assets and liabilities: | |
| | |
| |
Accounts Receivable | |
| | |
| ( |
Prepaid expenses | |
| ( | |
| |
Inventory | |
| ( | |
| ( |
Accounts payable and accrued liabilities | |
| | |
| |
Change in assets and liabilities held for sale | |
| — | |
| |
Net cash used in operating activities | | $ | ( | | $ | ( |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
|
| |
|
|
PP&E Additions | | $ | ( | | $ | ( |
Proceeds from sale of AZ Dispensary net of cash | |
| — | |
| |
Proceeds from sale of property, plant, and equipment | |
| | |
| — |
Proceeds from sale of royalty asset | |
| | |
| — |
Acquisition of Charm City | |
| — | |
| ( |
Acquisition of MJ Distributing | | | — | | | ( |
Proceeds from sale of OMS net of cash | |
| — | |
| |
Deposits | |
| ( | |
| ( |
Net cash provided by (used in) investing activities | | $ | ( | | $ | ( |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
|
| |
|
|
Proceeds from long-term debt, net of issuance costs | | $ | | | $ | |
Convertible debt payment | |
| — | |
| ( |
Proceeds from option exercises | |
| | |
| |
Proceeds from warrant exercises | | | — | | | — |
Debt principal payments | | | — | | | ( |
Lease principal payments | |
| ( | |
| ( |
Net cash provided by financing activities | | $ | | | $ | |
| | | | | | |
Net change in cash | | $ | ( | | $ | ( |
| | | | | | |
Cash and restricted cash, beginning of year | | $ | | | $ | |
| | | | | | |
Cash and restricted cash, end of year | | $ | | | $ | |
The accompanying notes are an integral part of these consolidated financial statements
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GOODNESS GROWTH HOLDINGS, INC.
Notes to Consolidated Financial Statements
1. Description of Business and Summary
Goodness Growth Holdings, Inc. (“Goodness Growth” or the “Company”) (formerly, Vireo Health International, Inc.) was incorporated under the Alberta Business Corporations Act on November 23, 2004. The Company was previously listed on the Canadian Securities Exchange (the “CSE”) under ticker symbol “VREO”. On June 9, 2021, the Company changed its name to Goodness Growth Holdings, Inc. and its ticker symbol on the CSE to “GDNS.”
Goodness Growth is a cannabis company whose mission is to provide safe access, quality products and value to its customers while supporting its local communities through active participation and restorative justice programs. Goodness Growth operates cannabis cultivation, production, and dispensary facilities in Maryland, Minnesota, New Mexico, and New York, and formerly in Arizona and Ohio.
While marijuana and CBD-infused products are legal under the laws of several U.S. states (with vastly differing restrictions), the United States Federal Controlled Substances Act classifies all “marijuana” as a Schedule I drug. Under U.S. federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States, and a lack of safety for the use of the drug under medical supervision. Recently some federal officials have attempted to distinguish between medical cannabis use as necessary, but recreational use as “still a violation of federal law.” At the present time, the distinction between “medical marijuana” and “recreational marijuana” does not exist under U.S. federal law.
On January 31, 2022, the Company entered into an Arrangement Agreement (the “Arrangement Agreement”) with Verano Holdings Corp. (“Verano”), pursuant to which Verano was to acquire all of the issued and outstanding shares of Goodness Growth pursuant to a plan of arrangement (the “Plan of Arrangement”) under the Business Corporations Act (British Columbia) (the “Arrangement”). Subject to the terms and conditions set forth in the Arrangement Agreement and the Plan of Arrangement, holders of Goodness Growth Shares would receive
On October 13, 2022, Goodness Growth received a notice of purported termination of the Arrangement Agreement (the “Notice”) from Verano. The Notice asserted certain breaches of the Arrangement Agreement, including claims the Company’s public filings and communications with respect to its business and ongoing operations were misleading and that the Company breached its representations to Verano under the Arrangement Agreement. Verano also claimed, as a result of such breaches, it is entitled to payment of the $
On October 21, 2022, Goodness Growth commenced an action in the Supreme Court of British Columbia against Verano after Verano repudiated the Arrangement Agreement. The Company is seeking damages, costs and interest, based on Verano's breach of contract and of its duty of good faith and honest performance. On November 14, 2022, Verano filed counterclaims against the Company for the termination fee and transaction expenses described above. Due to uncertainties inherent in litigation, it is not possible for Goodness Growth to predict the timing or final outcome of the legal proceedings against Verano or to determine the amount of damages, if any, that may be awarded.
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2. Summary of Significant Accounting Policies
Basis of presentation and going concern
The accompanying consolidated financial statements reflect the accounts of the Company. The consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).
These 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. We anticipate that we will continue to report losses and negative cash flow for the foreseeable future. We have concluded that our historical recurring losses from operations and negative cash flows from operations as well as our dependence on debt and other financings and the termination of the Arrangement Agreement gives rise to substantial doubt about the Company’s ability to meet its obligations over the next twelve months. Company management is working with the Company’s lenders, counsel, and other applicable parties to implement a plan to effectively mitigate the conditions giving rise to substantial doubt. Elements of this plan may include, but are not limited to, asset sales, debt restructuring, and capital raises. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. However, the Company’s continuance as going concern is dependent on its future profitability and implementation of the aforementioned plan. The Company may not be successful in these efforts.
These consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary for a fair presentation of the Company’s financial position and results of operations.
Basis of consolidation
These consolidated financial statements include the accounts of the following entities wholly owned, or effectively controlled by the Company for the year ended December 31, 2022:
Name of entity |
| Place of incorporation |
Vireo Health, Inc. |
| Delaware, USA |
Vireo Health of New York, LLC |
| New York, USA |
Minnesota Medical Solutions, LLC |
| Minnesota, USA |
MaryMed, LLC |
| Maryland, USA |
Vireo of Charm City, LLC | | Maryland, USA |
1776 Hemp, LLC |
| Delaware, USA |
Vireo Health of Massachusetts, LLC |
| Delaware, USA |
Mayflower Botanicals, Inc. |
| Massachusetts, USA |
Elephant Head Farm, LLC |
| Arizona, USA |
EHF Cultivation Management, LLC | | Arizona, USA |
Retail Management Associates, LLC |
| Arizona, USA |
Arizona Natural Remedies, Inc. |
| Arizona, USA |
Vireo Health of New Mexico, LLC |
| Delaware, USA |
Red Barn Growers, Inc. |
| New Mexico, USA |
Resurgent Biosciences, Inc. |
| Delaware, USA |
Vireo Health of Puerto Rico, LLC |
| Delaware, USA |
Vireo Health de Puerto Rico, Inc. |
| Puerto Rico |
XAAS Agro, Inc. |
| Puerto Rico |
Vireo Health of Nevada 1, LLC |
| Nevada, USA |
Verdant Grove, Inc. |
| Massachusetts, USA |
The entities listed above are wholly owned, or effectively controlled by the Company and have been formed or acquired to support the intended operations of the Company and all intercompany transactions and balances have been eliminated in the financial statements of the Company.
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During the year ended December 31, 2021, Ohio Medical Solutions, Inc. was removed as a result of a business disposition, and Vireo Health of Nevada 1, LLC, and Vireo of Charm City, LLC, were acquired. Refer to Note 3 for further details on business dispositions.
Recently adopted accounting pronouncements
In November of 2021 FASB issued ASU 2021 -10 - Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance. The update is intended to increase the transparency of government assistance including the disclosure of the types of assistance, an entity’s accounting for the assistance, and the effect of the assistance on an entity’s financial statements. The Company adopted Topic 832 on January 1, 2022. The adoption of the standard did not have a material impact on the Company's results of operations or cash flows.
Use of estimates and significant judgments
The preparation of the Company’s consolidated financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of revenue, expenses, assets, liabilities, accompanying disclosures and the disclosure of contingent liabilities. These estimates and judgments are subject to change based on experience and new information which could result in outcomes that require a material adjustment to the carrying amounts of assets or liabilities affecting future periods. Estimates and judgments are assessed on an ongoing basis. Revisions to estimates are recognized prospectively.
Examples of key estimates in these consolidated financial statements include cash flows and discount rates used in accounting for business combinations including contingent consideration, asset impairment including estimated future cash flows and fair values, the allowance for doubtful accounts receivable and trade receivables, inventory valuation adjustments that contemplate the market value of, and demand for inventory, estimated useful lives of property and equipment and intangible assets, valuation allowance on deferred income tax assets, determining the fair value of financial instruments, fair value of stock-based compensation, estimated variable consideration on contracts with customers, estimated redemption rates on loyalty sales programs, estimated paid time off redemption rates, sales return estimates, the fair value of the convertible notes and equity component and the classification, incremental borrowing rates and lease terms applicable to lease contracts.
Financial statement areas that require significant judgments are as follows:
Assets held for sale and discontinued operations - The Company classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale rather than through continuing use. Such non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and their fair value less cost to sell. Costs to sell are the incremental costs directly attributable to the sale, excluding finance costs and income tax expense.
The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset or the disposal group is available for immediate sale in its present condition. Actions required to complete the sale should indicate that it is unlikely that significant changes to the sale will be made or that the sale will be withdrawn. Management must be committed to the sale expected within one year from the date of the classification.
A discontinued operation is a component of the Company that either has been abandoned, disposed of, or is classified as held for sale, and: (i) disposal group is a component of an entity (or group of components); (ii) component of an entity (or group of components) meets the held for sale criteria, is disposed of by sale, or is disposed of other than by sale; (iii) component of an entity (or group of components) represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. A component of the Company comprises an operation and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the Company. During the years ended December 31, 2022 and 2021, the Company completed various divestitures, further described in Note 3. Management considered the quantitative results of the divested entities as well as qualitative strategic considerations to judge whether the two divestitures constitute a discontinued operation. Management does not believe these divestitures
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represent a strategic shift that has or will have a major effect on an entity’s operations and financial results, and as such, none of these divestitures are considered a discontinued operation.
Definition of a business – Determination of what constitutes a business for purposes of acquisition accounting requires significant judgement. ASC 805 notes that if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business. However, the exact quantitative threshold is not explicitly defined. During the year ended December 31, 2022, no acquisition activity occurred. During the year ended December 31, 2021, the Company completed two acquisitions, further described in Note 3. Management determined that substantially all of the fair value of the assets acquired was concentrated in the licenses acquired, and as such they should be treated as asset acquisitions.
Asset impairment – Asset impairment tests require the allocation of assets to asset groups, where appropriate, which requires significant judgment and interpretation with respect to the integration between the assets and shared resources. Asset impairment tests require the determination of whether there is an indication of impairment. The assessment of whether an indication of impairment exists is performed at the end of each reporting period and requires the application of judgment, historical experience, and external and internal sources of information.
Leases – The Company applies judgment in determining whether a contract contains a lease and if a lease is classified as an operating lease or a finance lease. The Company determines the lease term as the non-cancellable term of the lease, which may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
The Company has several lease contracts that include extension and termination options. The Company applies judgment in evaluating whether it is reasonably certain whether or not to exercise the option to renew or terminate the lease. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., construction of significant leasehold improvements or significant customization to the leased asset).
The Company also applies judgment in allocating the consideration in a contract between lease and non-lease components. It considers whether the Company can benefit from the right-of-use asset either on its own or together with other resources and whether the asset is highly dependent on or highly interrelated with another right-of-use asset.
Foreign currency
These consolidated financial statements are presented in the United States dollar (“USD”), which is the Company’s reporting currency. The functional currency of the Company and its subsidiaries, as determined by management, is the United States (“US”) dollar.
Net loss per share
Basic net loss per share is computed by dividing reported net loss by the weighted average number of common shares outstanding for the reported period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock of the Company during the reporting period. Diluted net loss per share is computed by dividing net loss by the sum of the weighted average number of common shares and the number of potential dilutive common share equivalents outstanding during the period. Potential dilutive common share equivalents consist of the incremental common shares issuable upon the exercise of vested share options and the incremental shares issuable upon conversion of the convertible notes. Potential dilutive common share equivalents consist of stock options, warrants, and convertible notes.
In computing diluted earnings per share, common share equivalents are not considered in periods in which a net loss is reported, as the inclusion of the common share equivalents would be anti-dilutive. Since the Company is in a net loss for all periods presented in these financial statements, there is no difference between the Company’s basic and diluted net loss per share for the periods presented.
85
The anti-dilutive shares outstanding for years ending December 31, 2022 and 2021 were as follows:
| | December 31, | ||
| | 2022 |
| 2021 |
Stock options | | |
| |
Warrants | | |
| |
RSUs | | | | — |
Total | | |
| |
Segment Information
Accounting Standards Codification ("ASC") 280, Segment Reporting, establishes disclosure requirements relating to operating segments in annual and interim financial statements. Operating segments are defined as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision maker in deciding how to allocate resources to the segment and assess its performance. The Company operates in
Cash and cash equivalents
Cash and cash equivalents are comprised of cash and highly liquid investments that are readily convertible into known amounts of cash with original maturities of three months or less.
The Company has
Business combinations and goodwill
The Company accounts for business combinations using the acquisition method in accordance with ASC 805, Business Combinations, which requires recognition of assets acquired and liabilities assumed, including contingent assets and liabilities, at their respective fair values on the date of acquisition. Any excess of the purchase consideration over the net fair value of tangible and identified intangible assets acquired less liabilities assumed is recorded as goodwill. The costs of business acquisitions, including fees for accounting, legal, professional consulting and valuation specialists, are expensed as incurred within acquisition-related (income) expenses, net. Purchase price allocations may be preliminary and, during the measurement period not to exceed one year from the date of acquisition, changes in assumptions and estimates that result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments are determined.
The estimated fair value of acquired assets and assumed liabilities are determined primarily using a discounted cash flow approach, with estimated cash flows discounted at a rate that the Company believes a market participant would determine to be commensurate with the inherent risks associated with the asset and related estimated cash flow streams.
Fair value measurements
The carrying value of the Company’s accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short-term nature, and the carrying value of notes receivable and long-term debt approximates fair value as they bear a market rate of interest.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.
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Inventory
Inventory is comprised of cannabis work-in-process, cannabis finished goods and other inventory. Work-in-process inventory includes cannabis plants, bulk harvested material, and various bulk oils and extracts. Finished goods include packaged flower and extracts. Other inventory includes product packaging, hemp derived CBD, apparel, and paraphernalia.
Inventory cost includes pre-harvest, post-harvest and shipment and fulfillment, as well as related accessories. Pre-harvest costs include labor and direct materials to grow cannabis, which includes water, electricity, nutrients, integrated pest management, growing supplies and allocated overhead. Post-harvest costs include costs associated with drying, trimming, blending, extraction, purification, quality testing and allocated overhead. Shipment and fulfillment costs include the costs of packaging, labelling, courier services and allocated overhead.
Inventory is stated at the lower of cost or net realizable value, determined using weighted average cost. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. At the end of each reporting period, the Company performs an assessment of inventory and record write-downs for excess and obsolete inventories based on the Company’s estimated forecast of product demand, production requirements, market conditions, regulatory environment, and spoilage. Actual inventory losses may differ from management’s estimates and such differences could be material to the Company’s balance sheets, statements of net loss and comprehensive loss and statements of cash flows.
Property and equipment
Property and equipment are recorded at cost net of accumulated depreciation and impairment, if any. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful life of buildings and improvements ranges from to , the estimated useful life of property and equipment, other than buildings, ranges from to . Land is not depreciated. Leasehold improvements, included in buildings and improvements, are depreciated over the lesser of the asset’s estimated useful life or the remaining lease term. The estimated useful life of right of use assets relating to operating and finance leases ranges from to
When assets are retired or disposed of, the cost and accumulated depreciation are removed from the respective accounts and any related gain or loss is recognized. Maintenance and repairs are charged to expenses as incurred. Significant expenditures, which extend the useful lives of assets or increase productivity, are capitalized. When significant parts of an item of property and equipment have different useful lives, they are accounted for as separate items or components of property and equipment.
Construction-in-process includes construction progress payments, deposits, engineering costs, interest expense on long-term construction projects and other costs directly related to the construction of the facilities. Expenditures are capitalized during the construction period and construction in progress is transferred to the relevant class of property and equipment when the assets are available for use, at which point the depreciation of the asset commences.
The estimated useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
Capitalization of interest
Interest incurred relating to the construction or expansion of facilities is capitalized to the construction in progress. The Company ceases the capitalization of interest when construction activities are substantially completed and the facility is available for commercial use.
Intangible assets
Intangible assets include intangible assets acquired as part of business combinations, asset acquisitions and other business transactions. The Company records intangible assets at cost, net of accumulated amortization and accumulated impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value on the acquisition date.
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Amortization of definite life intangible assets is calculated on a straight-line basis over the estimated useful lives of the assets as follows:
Licenses |
|
When there is no foreseeable limit on the period of time over which an intangible asset is expected to contribute to the cash flows of the Company, an intangible asset is determined to have an indefinite life. Indefinite life intangible assets are not amortized but tested for impairment annually or more frequently when indicators of impairment exist. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, such individual indefinite-life intangible asset is impaired by the amount of the excess.
The estimated useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.
Impairment of long-lived assets
The Company reviews long-lived assets, including property and equipment and definite life intangible assets, for impairment annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable independent cash flows are available (“asset group”). An impairment loss is recognized when the sum of projected undiscounted cash flows is less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the carrying value of the asset group. Fair value can be determined using a market approach, income approach or cost approach. The reversal of impairment losses is prohibited.
Impairment of goodwill and indefinite life intangible assets
Goodwill and indefinite life intangible assets are tested for impairment annually, or more frequently when events or circumstances indicate that impairment may have occurred. As part of the impairment evaluation, the Company may elect to perform an assessment of qualitative factors. If this qualitative assessment indicates that it is more likely than not that the fair value of the indefinite-lived intangible asset or the reporting unit (for goodwill) is less than its carrying value, a quantitative impairment test to compare the fair value to the carrying value is performed. An impairment charge is recorded if the carrying value exceeds the fair value.
Leases
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and right-of-use liabilities (current and non-current) in the balance sheets. Finance lease ROU assets are included in property and equipment, net and ROU liabilities (current and non-current) in the balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets are classified as a finance lease or an operating lease. A finance lease is a lease in which 1) ownership of the property transfers to the lessee by the end of the lease term; 2) the lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise; 3) the lease is for a major part of the remaining economic life of the underlying asset; 4) The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already included in the lease payments equals or exceeds substantially all of the fair value; or 5) the underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. The Company classifies a lease as an operating lease when it does not meet any one of these criteria.
ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the incremental borrowing rate is used based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. The ROU assets also include any lease payments made and excludes
88
lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option.
For finance leases, lease expenses are the sum of interest on the lease obligations and amortization of the ROU assets, resulting in a front-loaded expense pattern. ROU assets are amortized based on the lesser of the lease term and the useful life of the leased asset according to the property and equipment accounting policy. If ownership of the ROU assets transfers to the Company at the end of the lease term or if the Company is reasonably certain to exercise a purchase option, amortization is calculated using the estimated useful life of the leased asset, according to the property and equipment accounting policy. For operating leases, the lease expenses are generally recognized on a straight-line basis over the lease term and recorded to general and administrative expenses in the statements of net loss and comprehensive loss.
The Company has elected to apply the practical expedient, for each class of underlying asset, except real estate leases, to not separate non-lease components from the associated lease components of the lessee’s contract and account for both components as a single lease component.
The Company has elected not to recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less that do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise. Short-term leases include real estate and vehicles and are not significant in comparison to the Company’s overall lease portfolio. The Company continues to recognize the lease payments associated with these leases as expenses on a straight-line basis over the lease term.
Convertible notes
The Company accounts for its convertible notes with a cash conversion feature in accordance with ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”), which requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The initial proceeds from the sale of convertible notes are allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of similar nonconvertible debt that could have been issued at such time. The equity component represents the excess initial proceeds received over the fair value of the liability component of the notes as of the date of issuance. The resulting debt discount is amortized over the period during which the convertible notes are expected to be outstanding as additional non-cash interest expenses.
Upon repurchase of convertible debt instruments, ASC 470-20 requires the issuer to allocate total settlement consideration, inclusive of transaction costs, amongst the liability and equity components of the instrument based on the fair value of the liability component immediately prior to repurchase. The difference between the settlement consideration allocated to the liability component and the net carrying value of the liability component, including unamortized debt issuance costs, would be recognized as gain (loss) on extinguishment of debt in the statements of net loss and comprehensive loss. The remaining settlement consideration allocated to the equity component would be recognized as a reduction of additional paid-in capital in the balance sheets.
Revenue recognition
The Company’s primary source of revenue is from wholesale of cannabis products to dispensary locations and direct retail sales to eligible customers at the Company-owned dispensaries. Substantially all of the Company’s retail revenue is from the direct sale of cannabis products to medical customers.
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The following table represents the Company’s disaggregated revenue by source:
| | Year Ended | ||||
|
| 2022 |
| 2021 | ||
Retail | | $ | | | $ | |
Wholesale | |
| | |
| |
Total | | $ | | | $ | |
Revenue is recognized when control of the promised goods or services, through performance obligations by the Company, is transferred to the customer in an amount that reflects the consideration it expects to be entitled to in exchange for the performance obligations. More specifically, wholesale revenues are recognized upon delivery and acceptance by wholesale customers. Retail revenues are recognized at the point of sale. Discounts are recorded at the time of revenue recognition. Returns were not material during the years ended December 31, 2022 and 2021, but are recognized when the customer is refunded. Revenues are presented net of discounts and returns.
Sales taxes collected from customers are remitted to the appropriate taxing jurisdictions and are excluded from sales revenue as the Company considers itself a pass-through conduit for collecting and remitting sales taxes. Excise duties that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer are included in revenue. Freight revenues on all product sales, when applicable, are also recognized, on a consistent manner, at a point in time. The term between invoicing and when payment is due is not significant and the period between when the entity transfers the promised good or service to the customer and when the customer pays for that good or service is one year or less.
Contract liabilities
A contract liability is the obligation to transfer goods or services to a customer for which the Company has received consideration from the customer. If a customer pays consideration before the Company transfers goods or services, a contract liability is recognized when the payment is made. Contract liabilities are recognized as revenue when the Company performs under the contract.
The Company considers whether there are other promises in the contracts that are separate performance obligations to which a portion of the transaction price needs to be allocated. In determining the transaction price for the sale of goods, the Company considers the effects of variable consideration and the existence of significant financing components (if any).
(i)Variable consideration
Some contracts for the sale of goods may provide customers with a right of return, volume discount, bonuses for volume/quality achievement, or sales allowance. In addition, the Company may provide in certain circumstances, a retrospective price reduction to a customer based primarily on inventory movement. These items give rise to variable consideration. The Company uses the expected value method to estimate the variable consideration because this method best predicts the amount of variable consideration to which the Company will be entitled. The Company uses historical evidence, current information and forecasts to estimate the variable consideration. The requirements in ASC 606 on constraining estimates of variable consideration are applied to determine the amount of variable consideration that can be included in the transaction price. The Company reduces revenue and recognizes a contract liability equal to the amount expected to be refunded to the customer in the form of a future rebate or credit for a retrospective price reduction, representing its obligation to return the customer’s consideration. The estimate is updated at each reporting period.
(ii)Significant financing component
The Company may receive short-term advances from its customers. Using the practical expedient in ASC 606, the Company does not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a promised good to a
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customer and when the customer pays for that good or service will be one year or less. The Company has not, nor expects to receive long-term advances from customers.
(iii)Contract balance
Contract assets
A contract asset is the right to consideration in exchange for goods or services transferred to the customer. If the Company performs by transferring goods to a customer before the customer pays consideration or before payment is due, a contract asset is recognized for the earned consideration.
Accounts receivable
A receivable represents the Company’s right to an amount of consideration that is unconditional (i.e., only the passage of time is required before payment of the consideration).
Cost of sales
Cost of sales represents costs directly related to manufacturing and distribution of the Company’s products. Primary costs include raw materials, packaging, direct labor, overhead, shipping and handling and the depreciation of manufacturing equipment and production facilities. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance and property taxes. Cost of sales also includes inventory valuation adjustments. The Company recognizes the cost of sales as the associated revenues are recognized.
Stock-based compensation
The Company measures and recognizes compensation expense for stock options and restricted stock units (RSUs) to employees and non-employees on a straight-line basis over the vesting period based on their grant date fair values. Prior to the adoption of ASU 2018-07 on January 1, 2019, the fair value of stock options to non-employees were re-measured at each reporting date until one of either of the counterparty’s commitment to perform is established or until the performance is complete. The Company estimates the fair value of stock options on the date of grant using the Black-Scholes option pricing model. Determining the estimated fair value of at the grant date requires judgment in determining the appropriate valuation model and assumptions, including the fair value of subordinated voting shares on the grant date, risk-free rate, volatility rate, annual dividend yield and the expected term. The volatility rate is based on historical volatilities of public companies operating in a similar industry to the Company, as well as the Company’s historical volatility. The Company estimates the fair value of RSUs to be the closing market price of the Company’s stock on the business day immediately preceding the grant date.
For stock options granted, the fair value of common stock at the date of grant was determined by the Board of Directors with assistance from management. The Company does not estimate forfeiture rates when calculating compensation expense for stock options or RSUs. The Company records forfeitures as they occur.
Fully vested, non-forfeitable equity instruments issued to parties other than employees are measured on the date they are issued where there is no specific performance required by the grantee to retain those equity instruments. Stock-based payment transactions with non-employees are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Where fully vested, non-forfeitable equity instruments are granted to parties other than employees in exchange for notes or financing receivable, the note or receivable is presented in additional paid-in capital on the balance sheets.
Income taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
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Management assesses the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Changes in recognition or measurement are reflected in the period in which judgment occurs.
New accounting pronouncements not yet adopted
In October of 2021 FASB issued ASU 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The update is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The required date of adoption is January 1, 2023, and the Company is evaluating potential future impacts on the Company’s financial statements.
3. Business Combinations and Dispositions
Dispositions
On March 31, 2022, the Company sold the rights to a
On October 1, 2020, the Company reached a definitive agreement with Ayr Strategies Inc. (“Ayr”) to sell all of the assets and liabilities of its affiliated company, Ohio Medical Solutions, Inc. (“OMS”) for $
On November 1, 2021, subsidiaries and an affiliate of the Company entered into a Purchase Agreement with subsidiaries and an affiliate of Copperstate Farms, LLC (“Copperstate”) pursuant to which the Company sold its Phoenix dispensary and cultivation licenses, dispensary inventory and equipment, dispensary lease, and all dispensary revenue-producing contracts to Copperstate (the “Transaction”). On November 18, 2021, the Transaction closed. Cash consideration received of $
Asset Acquisitions
Acquisition of MJ Distributing C201, LLC and MJ Distributing P132, LLC
On April 10, 2019, the Company entered into a definitive agreement to acquire
The acquisition of MJ Distributing was completed on January 5, 2021. As part of the closing of the acquisition the restricted cash of $
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$
Acquisition of the Assets of Charm City Medicus, LLC
On July 8, 2021, the Company’s subsidiary, Vireo of Charm City, LLC, signed a definitive agreement to purchase substantially all the assets of Charm City Medicus, LLC, a medical cannabis dispensary located in Baltimore, Maryland, and closed the transaction on November 19, 2021. Consideration paid totaled $
Assets Held for Sale
As of December 31, 2022 the Company identified property, equipment, and lease assets and liabilities associated with the businesses in Maryland, Nevada, Massachusetts, and Puerto Rico with carrying amounts that are expected to be recovered principally through sale or disposal rather than through continuing use. The sale of these assets and liabilities is highly probable, they can be sold in their immediate condition, and the sales are expected to occur within the next twelve months. As such, these assets and liabilities have been classified as “held for sale.” The carrying value of these net assets exceeded fair value less expected cost to sell, and as such, the Company recorded an impairment loss of $
Assets held for sale |
| |
|
Property and equipment | | $ | |
Intangible assets | | | |
Operating lease, right-of-use asset | | | |
Deposits | | | |
Total assets held for sale | | $ | |
| | | |
Liabilities held for sale | |
|
|
Right of Use Liability | | $ | |
Total liabilities held for sale | | $ | |
4. Fair Value Measurements
The Company complies with ASC 820, Fair Value Measurements, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability.
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The following tables present information about the Company’s assets that are measured at fair value on a recurring basis as of December 31, 2022 and 2021 indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:
| | Quoted prices in | | Other | | Significant | | | | |||
| | active markets for | | observable | | unobservable | | | | |||
| | identical assets | | inputs | | inputs | | | | |||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total | ||||
December 31, 2022 |
| |
|
| |
|
| |
|
| |
|
Cash | | $ | | | $ | — | | $ | — | | $ | |
Total assets | | $ | | | $ | — | | $ | — | | $ | |
| | | | | | | | | | | | |
December 31, 2021 | | | | | | | | | | | | |
Cash | | $ | | | $ | — | | $ | — | | $ | |
Total assets | | $ | | | $ | — | | $ | — | | $ | |
Items measured at fair value on a non-recurring basis
The Company’s non-financial assets, such as prepayments and other current assets, long lived assets, including property and equipment, goodwill, and intangible assets, are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized. In connection with an evaluation of such non-financial assets during the year ended December 31, 2022, the carrying values of property and equipment and intangible assets and were concluded to exceed their fair values. As a result, the Company recorded impairment charges that incorporates fair value measurements. The Company used Level 2 fair value inputs when a buyer quote was received, or similar assets had been sold recently in the market. To the extent a market for the asset didn’t exist, or was illiquid, the Company used Level 3 fair value inputs (refer to Notes 9 & 12).
The carrying value of the Company’s accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short-term nature, and the carrying value of notes receivable and long-term debt approximates fair value as they bear a market rate of interest.
5. Accounts Receivable
Accounts receivables are comprised of the following items:
| | December 31, | | December 31, | ||
|
| 2022 |
| 2021 | ||
Trade receivable | | $ | | | $ | |
Tax withholding receivable | | | | | | |
Other | |
| | |
| |
Total | | $ | | | $ | |
Included in the trade receivables, net balance at December 31, 2022, and 2021, is an allowance for doubtful accounts of $
6. Notes Receivable
As of December 31, 2022, and 2021, the Company had a total of $
94
7. Inventory
Inventory is comprised of the following items:
|
| December 31, | | December 31, | ||
|
| 2022 |
| 2021 | ||
Work-in-progress | | $ | | | $ | |
Finished goods | |
| | |
| |
Other | |
| | |
| |
Total | | $ | | | $ | |
Inventory is written down for any obsolescence, spoilage and excess inventory or when the net realizable value of inventory is less than the carrying value. Inventory valuation adjustments included in cost of sales on the statements of net loss and comprehensive loss is comprised of the following:
|
| December 31, | ||||
|
| 2022 |
| 2021 | ||
Work-in-progress | | $ | | | $ | |
Finished goods | |
| | |
| |
Other | |
| | |
| — |
Total | | $ | | | $ | |
During the years ended December 31, 2022 and 2021, the Company recorded write downs to net realizable value in its Maryland and Arizona subsidiaries. Based on the market sales price relative to the cost to produce certain inventories, these costs could not be recovered, and as a consequence net realizable value was less than carrying value of inventory. Additionally, the Company recorded inventory reserves related to expected future spoilage of inventory. Accordingly, inventory valuation adjustments amounting to $
8. Prepayments and other current assets
Prepayments and other current assets are comprised of the following items:
|
| December 31, | | December 31, | ||
|
| 2022 |
| 2021 | ||
Prepaid Insurance | | $ | | | $ | |
Other Prepaid Expenses | |
| | |
| |
Total | | $ | | | $ | |
95
9. Property and Equipment, Net
Property and equipment, net consisted of the following:
|
| December 31, | | December 31, | ||
|
| 2022 |
| 2021 | ||
Land | | $ | | | $ | |
Buildings and leasehold improvements | |
| | |
| |
Furniture and equipment | |
| | |
| |
Software | |
| | |
| |
Vehicles | |
| | |
| |
Construction-in-progress | |
| | |
| |
Right of use asset under finance lease | |
| | |
| |
| |
| | |
| |
Less: accumulated depreciation | |
| ( | |
| ( |
Total | | $ | | | $ | |
For the years ended December 31, 2022 and 2021, total depreciation on property and equipment was $
As of December 31, 2022, in conjunction with the Company’s held for sale assessment and disposal of certain long-term assets, the Company evaluated whether property and equipment showed any indicators of impairment, and it was determined that the recoverable amount of certain net assets was below book value. As a result, the Company recorded an impairment charge of $
10. Leases
Components of lease expenses are listed below:
|
| December 31, | | December 31, | ||
|
| 2022 | | 2021 | ||
Finance lease cost | | | | | |
|
Amortization of ROU assets | | $ | | | $ | |
Interest on lease liabilities | |
| | |
| |
Operating lease costs | |
| | |
| |
Total lease costs | | $ | | | $ | |
96
Future minimum lease payments (principal and interest) on the leases are as follows:
|
| Operating Leases |
| Finance Leases |
| | | ||
|
| December, 2022 |
| December, 2022 |
| Total | |||
2023 | | $ | | | $ | | | $ | |
2024 | |
| | |
| | |
| |
2025 | |
| | |
| | |
| |
2026 | |
| | |
| | |
| |
2027 | |
| | |
| | |
| |
Thereafter | |
| | |
| | |
| |
Total minimum lease payments | | $ | | | $ | | | $ | |
Less discount to net present value | | | ( | |
| ( | |
| ( |
Less liabilities held for sale | | | ( | | | — | | | ( |
Present value of lease liability | | $ | | | $ | | | $ | |
The Company has entered into various lease agreements for the use of buildings used in production and retail and wholesale sales of cannabis products.
On October 1, 2022, the Company terminated the existing lease agreements for the cultivation and processing facilities in Arizona. The right of use liability exceeded the right of use asset at the time of termination resulting in a gain on disposal of $
On September 24, 2021, the Company signed a third amendment to the existing lease agreements for the cultivation and processing facilities in New York. Under the terms of the amendment, the term of the lease was extended to September 23, 2041, and provides for additional tenant improvements up to $
Supplemental cash flow information related to leases
|
| December 31, | ||||
|
| 2022 |
| 2021 | ||
Cash paid for amounts included in the measurement of lease liabilities: | | |
|
| |
|
Lease principal payments | | $ | | | $ | |
Non-cash additions to ROU assets | |
| | |
| |
Amortization of operating leases | |
| | |
| |
Other information about lease amounts recognized in the financial statements
|
| December 31, |
| | ||
|
| 2022 |
| 2021 |
| |
Weighted-average remaining lease term (years) – operating leases | |
| | | ||
Weighted-average remaining lease term (years) – finance leases | |
| | | ||
Weighted-average discount rate – operating leases | | | % | | % | |
Weighted-average discount rate – finance leases | | | % | | % | |
11. Goodwill
The following table shows the change in carrying amount of goodwill:
Goodwill - January 1, 2021 |
| $ | |
Dispositions | |
| ( |
Goodwill - December 31, 2021 and 2022 | | $ | |
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Goodwill is tested for impairment annually or more frequently if indicators of impairment exist or if a decision is made to dispose of business. The valuation date for the Company annual impairment testing is December 31. On this date, the Company performed a qualitative test to determine whether it is necessary to perform a two-step goodwill impairment test.
After assessing the totality of the events and circumstances surrounding the performance and outlook of the Company’s cash generating units with goodwill it was determined that it is more likely than not that the fair value of a reporting unit exceeds its carrying amount. As such, the first and second steps of the goodwill impairment test are unnecessary, and
12. Intangibles
Intangible assets are comprised of the following items:
|
| Licenses |
| Royalty Asset |
| Total | |||
Balance December 31, 2020 | | $ | | | $ | |
| $ | |
Additions | |
| | |
| — |
|
| |
Divestitures (Note 3) | |
| ( | |
| — |
|
| ( |
Amortization | |
| ( | |
| — |
|
| ( |
Impairment | | | ( | | | | | | ( |
Balance, December 31, 2021 | | $ | | | $ | |
| $ | |
Divestitures (Note 3) | |
| — | |
| ( |
|
| ( |
Transfer to held for sale (Note 3) | | | ( | | | — | | | ( |
Amortization | |
| ( | |
| — |
|
| ( |
Balance, December 31, 2022 | | $ | | | $ | — |
| $ | |
Amortization expense for intangibles was $
The Company estimates that amortization expense will be $
13. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities are comprised of the following items:
|
| December 31, | | December 31, | ||
|
| 2022 |
| 2021 | ||
Accounts payable – trade | | $ | | | $ | |
Accrued Expenses | |
| | |
| |
Taxes payable | |
| | |
| |
Contract liability | |
| | |
| |
Total accounts payable and accrued liabilities | | $ | | | $ | |
14. Long-Term Debt
During the year ended December 31, 2017, the Company signed a promissory note payable in the amount of $
98
promissory note payable in the amount of $
On March 25, 2021, the Company entered into a credit agreement for a senior secured delayed draw term loan with an aggregate principal amount of up to $
On March 25, 2021, in connection with closing the Credit Facility, Goodness Growth issued (a)
On November 18, 2021, the Company and lenders amended the Credit Facility to provide for an additional loan of $
On January 31, 2022, Goodness Growth and certain of its subsidiaries, as borrowers (collectively, “Borrowers”), entered into a Third Amendment to the Credit Facility (the “Third Amendment”) providing for additional delayed draw term loans of up to $
During the year ended December 31, 2022, the Company drew $
Unless otherwise specified, all deferred financing costs are treated as a contra-liability, to be netted against the outstanding loan balance and amortized over the remaining life of the loan.
On November 19, 2021, the Company signed a promissory note payable in the amount of $
99
The following table shows a summary of the Company’s long-term debt:
|
| December 31, | | December 31, | ||
|
| 2022 |
| 2021 | ||
Beginning of year | | $ | | | $ | |
Proceeds | |
| | |
| |
Note payable issued in Charm City acquisition | | | — | | | |
Deferred financing costs | | | ( | | | ( |
PIK interest | | | | | | |
Amortization of deferred financing costs | | | | | | |
Principal payments | | | | | | ( |
End of period | |
| | |
| |
Less: Current portion | |
| | |
| — |
Total long-term debt | | $ | | | $ | |
As of December 31, 2022, stated maturities of long-term debt were as follows:
2023 | | $ | |
2024 | |
| |
Thereafter | | | — |
Total | | $ | |
15. Stockholders’ Equity
Shares
The Company’s certificate of incorporation authorized the Company to issue the following classes of shares with the following par value and voting rights as of December 31, 2021. Thef liquidation and dividend rights are identical among Shares equally in our earnings and losses on an as converted basis.
| | | | | | |
|
| Par Value |
| Authorized |
| Voting Rights |
Subordinate Voting Share (“SVS”) |
| |
|
| ||
Multiple Voting Share (“MVS”) |
| |
|
| ||
Super Voting Share |
| |
|
|
Subordinate Voting Shares
Holders of Subordinate Voting Shares are entitled to
Multiple Voting Shares
Holders of Multiple Voting Shares will be entitled to votes for each Multiple Voting Share held.
Multiple Voting Shares each have the restricted right to convert to Subordinate Voting Shares subject to adjustments for certain customary corporate changes.
Super Voting Shares
Holders of Super Voting Shares will be entitled to in respect of each Subordinate Voting Share into which such Super Voting Share could ultimately then be converted, which for greater certainty, shall initially equal one thousand votes per Super Voting Share. Each Super Voting share shall be convertible into one hundred Subordinate Voting Share
100
Shares Issued
During the year ended December 31, 2022,
During the year ended December 31, 2022, employee stock options were exercised for
During the year ended December 31, 2021, employee stock options were exercised for
During the year ended December 31, 2021,
On June 4, 2021, the Company issued
On March 31, 2021, as part of a settlement and release of claims regarding a dispute over certain post-termination terms under his employment agreement, the Company issued
16. Stock-Based Compensation
Stock Options
In January 2019, the Company adopted the 2019 Equity Incentive Plan under which the Company may grant incentive stock option, restricted shares, restricted share units (“RSUs”), or other awards. Under the terms of the plan, a total of
Options granted under the equity incentive plan were valued using the Black-Scholes option pricing model with the following weighted average assumptions:
|
| December 31, | | December 31, |
|
|
| 2022 |
| 2021 |
|
Risk-Free Interest Rate | | | % | | % |
Weighted Average Exercise Price | $ | | $ | | |
Expected Life of Options (years) | | | | ||
Expected Annualized Volatility | | | % | | % |
Expected Forfeiture Rate | | N/A |
| N/A | |
Expected Dividend Yield | | N/A |
| N/A | |
101
Stock option activity for the Company for the years ended December 31, 2022 and 2021 is presented below:
|
| |
| Weighted Average |
| Weighted Avg. | |
| | Number of Shares | | Exercise Price | | Remaining Life | |
Balance, December 31, 2020 |
| | | $ | |
| |
Forfeitures |
| ( | |
| |
| — |
Exercised | | ( | |
| |
| — |
Granted |
| | |
| |
| — |
Balance, December 31, 2021 |
| | | $ | |
| |
Forfeitures |
| ( | |
| |
| — |
Exercised |
| ( | |
| |
| — |
Granted |
| | |
| |
| — |
Options Outstanding at December 31, 2022 |
| | | $ | |
| |
| | | | | | | |
Options Exercisable at December 31, 2022 |
| | | $ | |
| |
During the years ended December 31, 2022 and 2021, the Company recognized $
The Company does not estimate forfeiture rates when calculating compensation expense. The Company records forfeitures as they occur.
Warrants
Subordinate Voting Share (SVS) warrants entitle the holder to purchase
Warrants issued were valued using the Black-Scholes option pricing model with the following assumptions:
|
| December 31, | | December 31, |
SVS Warrants |
| 2022 |
| 2021 |
Risk-Free Interest Rate | | | % | N/A |
Expected Life (years) | | |
| N/A |
Expected Annualized Volatility | | | % | N/A |
Expected Forfeiture Rate | | N/A |
| N/A |
Expected Dividend Yield | | N/A |
| N/A |
|
| December 31, | | December 31, | |
SVS Warrants Denominated in C$ |
| 2022 |
| 2021 | |
Risk-Free Interest Rate | | N/A | | | % |
Expected Life of Options (years) | | N/A | | |
|
Expected Annualized Volatility | | N/A | | | % |
Expected Forfeiture Rate | | N/A |
| N/A | |
Expected Dividend Yield | | N/A |
| N/A | |
102
A summary of the warrants outstanding is as follows:
|
| Number of |
| Weighted Average |
| Weighted Average | |
SVS Warrants | | Warrants | | Exercise Price | | Remaining Life | |
Warrants outstanding at December 31, 2020 |
| | | $ | |
| |
Exercised | | ( | | | | | |
Expired | | ( | | | | | — |
Forfeited | | ( | | | | | |
Warrants outstanding at December 31, 2021 |
| — | | $ | — |
| — |
Granted |
| | | | |
| |
Warrants outstanding at December 31, 2022 | | | | $ | | | |
| | | | | | | |
Warrants exercisable at December 31, 2022 |
| | | $ | |
| |
|
| Number of |
| Weighted Average |
| Weighted Average | |
SVS Warrants Denominated in C$ | | Warrants | | Exercise Price | | Remaining Life | |
Warrants outstanding at December 31, 2020 |
| — | | $ | — |
| — |
Granted |
| | |
| |
| — |
Warrants outstanding at December 31, 2021 |
| | | $ | |
| |
Granted | | — | | | — | | — |
Warrants outstanding at December 31, 2022 | | | | $ | | | |
| | | | | | | |
Warrants exercisable at December 31, 2022 |
| | | $ | |
| |
|
| Number of |
| Weighted Average |
| Weighted Average | |
MVS Warrants | | Warrants | | Exercise Price | | Remaining Life | |
Warrants outstanding at December 31, 2020 |
| | | $ | |
| |
Issued |
| — | |
| — |
| — |
Warrants outstanding at December 31, 2021 |
| | | $ | |
| |
Expired | | ( | | | | | — |
Warrants outstanding at December 31, 2022 |
| — | | $ | — |
| — |
| | | | | | | |
Warrants exercisable at December 31, 2022 |
| — | | $ | — |
| — |
During the years ended December 31, 2022 and 2021, $
As of December 31, 2021, there were
RSUs
The expense associated with RSUs is based on closing price of the Company’s Subordinate Voting Shares on the business day immediately preceding the grant date, adjusted for the absence of future dividends and is amortized on a straight-line basis over the periods during which the restrictions lapse. The Company currently has RSUs that vest over a
103
A summary of RSUs is as follows:
|
| |
| Weighted Avg. | |
| | Number of Shares | | Fair Value | |
Balance, December 31, 2021 |
| — | | $ | — |
Granted on March 15, 2022 | | | | | |
Granted on December 15, 2022 |
| | |
| |
Balance, December 31, 2022 |
| | | $ | |
17. Commitments and Contingencies
Legal proceedings
Schneyer
On February 25, 2019, Dr. Mark Schneyer (“Schneyer”) filed a lawsuit in Minnesota District Court, Fourth District (the “Court”), on his own behalf and, derivatively, on behalf of Dorchester Capital, LLC, naming Vireo Health, Inc. (“Vireo U.S.”), Dorchester Management, LLC (“Dorchester Management”), and Dorchester Capital, LLC (“Capital”), as defendants. The essence of the claims made by Schneyer is Vireo U.S. paid an inadequate price for MaryMed, LLC (“MaryMed”), which it purchased it from Capital in 2018, and that the consideration given – shares of preferred stock in Vireo U.S. – was distributed inappropriately by Capital at the direction of Dorchester Management (the managing member of Capital). Schneyer, who is a Class B member of Capital, is seeking unspecified damages in excess of $
Simultaneously with the complaint, Schneyer filed a motion seeking a temporary restraining order (“TRO”) to prevent the “further transfer” of MaryMed which would, Schneyer claimed, occur if Vireo U.S.’s RTO transactions were allowed to occur. The Court held a hearing on the motion for TRO on March 5, 2019 and denied the motion on the same day.
Weeks prior to commencement of the litigation, Dorchester Management had appointed a special litigation committee (“SLC”) on behalf of Capital to investigate the consideration provided by Vireo U.S. for the purchase of MaryMed and assess any potential claims Capital may have as a result of the transaction. The SLC, a retired judge who engaged another retired judge as legal counsel to the SLC, was appointed in accordance with Minnesota law, issued a report on May 1, 2021, recommending, among other things, that certain claims be permitted to proceed (the “Remaining Derivative Claims”) and other claims not be permitted to proceed by the Court (the “Rejected Derivative Claims”).
On July 7, 2021, Schneyer filed a Second Amended Complaint asserting direct claims on behalf of himself and the Remaining Derivative Claims on behalf of Capital and some Rejected Derivative Claims on behalf of Capital. Under Delaware law, Capital has a right to control the litigation of the Remaining Derivative Claims, the Rejected Derivative Claims, and any other derivative allegations that may be asserted on behalf of Capital. On August 17, 2021, Management exercised this right for Capital and appointed a second independent special litigation committee (the “Second SLC”), a partner at an international law firm, to manage the litigation of the claims raised in Schneyer’s Second Amended Complaint. On August 31, 2021, Capital filed a complaint at the Second SLC’s direction alleging the Remaining Derivative Claims and the Rejected Derivative Claims. Schneyer opposed the appointment of the Second SLC.
On December 9, 2021, the Court dismissed Schneyer’s claim for rescissory damages and the Remaining Derivative Claim alleging fraud. The Court also ruled that the Remaining Derivative Claims should be pursued by the Second SLC. Finally, the Court also denied Schneyer’s request to seek punitive damages.
On February 22, 2022, the Minnesota Court of Appeals denied the immediate review of the December 9, 2021 order.
104
On June 20,2022 the Court issued an order amending and realigning the complaint brought by Capital for the Remaining Derivative Claims. The order also denied Vireo U.S.’ and Dorchester Management’s motion to dismiss the Remaining Derivative Claims brought by Capital.
Following this order, the litigation will proceed with Schneyer’s
Vireo U.S. believes that Schneyer’s claims lack merit and expects to be vindicated in the SLC process or, in the alternative, prevail in the litigation, if and when it proceeds. However, should Vireo U.S. not ultimately prevail, it is not possible to estimate the amount or range of potential loss, if any.
Verano
On January 31, 2022, the Company entered into the Arrangement Agreement with Verano, pursuant to which Verano was to acquire all of the issued and outstanding shares of Goodness Growth pursuant to a Plan of Arrangement. Subject to the terms and conditions set forth in the Arrangement Agreement and the Plan of Arrangement, holders of Goodness Growth Shares would receive
On October 13, 2022, Goodness Growth received a notice of purported termination of the Arrangement Agreement (the “Notice”) from Verano. The Notice asserted certain breaches of the Arrangement Agreement, including claims the Company’s public filings and communications with respect to its business and ongoing operations were misleading and that the Company breached its representations to Verano under the Arrangement Agreement. Verano also claimed, as a result of such breaches, it is entitled to payment of the $
On October 21, 2022, Goodness Growth commenced an action in the Supreme Court of British Columbia against Verano after Verano wrongfully repudiated the Arrangement Agreement. The Company is seeking damages, costs and interest, based on Verano's breach of contract and of its duty of good faith and honest performance. On November 14, 2022, Verano filed counterclaims against the Company for the termination fee and transaction expenses described above. Due to uncertainties inherent in litigation, it is not possible for Goodness Growth to predict the timing or final outcome of the legal proceedings against Verano or to determine the amount of damages, if any, that may be awarded.
Lease commitments
The Company leases various facilities, under non-cancelable finance and operating leases, which expire at various dates through September 2041.
105
18. General and Administrative Expenses
General and administrative expenses are comprised of the following items:
| | Year Ended | ||||
|
| 2022 |
| 2021 | ||
Salaries and benefits | | $ | | | $ | |
Professional fees | |
| | |
| |
Insurance expenses | |
| | |
| |
Marketing | | | | | | |
Other expenses | |
| | |
| |
Total | | $ | | | $ | |
19. Income Taxes
For financial reporting purposes, loss before income taxes includes the following components:
| | | | | | |
| | Years Ended December 31, | ||||
| | 2022 |
| 2021 | ||
United States | | $ | ( | | $ | ( |
Total | | $ | ( | | $ | ( |
The (recoveries) expenses for income taxes consists of:
| | | | | | |
| | Year ended December 31, | ||||
| | 2022 |
| 2021 | ||
Current: | | |
|
| |
|
Federal | | $ | | | $ | |
State | |
| | |
| |
Total | |
| | |
| |
| | | | | | |
Deferred: | |
|
| |
|
|
Federal | |
| ( | |
| |
State | |
| | |
| ( |
Total | |
| ( | |
| ( |
Total | | $ | | | $ | |
| | | | | | |
| | Year ended December 31, | ||||
| | 2022 |
| 2021 | ||
Loss before income taxes: | | $ | ( | | $ | ( |
Income tax benefits at statutory rate | |
| ( | |
| ( |
State Taxes | |
| | |
| ( |
Non-deductible expenses | |
| | | | — |
Stock based and other compensation | |
| | | | — |
Change in valuation allowance | | | | |
| |
Other | | | ( | |
| — |
Income tax expense, net | | $ | | | $ | |
106
The following table summarizes the components of deferred tax:
| | | | | | |
|
| 2022 |
| 2021 | ||
Deferred assets |
| |
|
| |
|
Operating loss carryforwards - United States | | $ | | | $ | |
Allowance for doubtful accounts | |
| | |
| |
Inventory reserve | |
| | |
| |
Financing leases | |
| | |
| |
Intangible assets | |
| | |
| |
Property and equipment | | | | | | |
Capital loss carryforward | | | | | | |
Share based compensation | |
| | |
| |
Total Deferred tax assets | |
| | |
| |
Less valuation allowance | |
| ( | |
| ( |
Net deferred tax assets | |
| | |
| |
Deferred tax liabilities | |
| | |
| |
Related party management fee receivables | |
| | |
| |
Note Receivable | |
| | |
| |
Total deferred tax liabilities | |
| | |
| |
Net deferred asset/(tax liabilities) | | $ | | | $ | |
At December 31, 2022, the Company had United States federal net operating loss carryforwards of approximately $
The Company recognizes the financial statement impact of a tax position only after determining that the relevant tax authority would more-likely-than-not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest impact that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
The Company recognizes interest and, if applicable, penalties (not included in the “unrecognized tax benefits” table above) for any uncertain tax positions. Interest and penalties are recorded as a component of income tax expenses. As of both December 31, 2022 and 2021, the Company had a cumulative balance of accrued interest and penalties on unrecognized tax positions of $
The Company’s federal and state income tax returns are subject to examination by income taxing authorities, generally for three years after the returns are filed. The Company is not currently under examination in any jurisdiction for any period. The Company believes it is no longer subject to income tax examinations for fiscal periods ended prior to 2019.
107
20. Supplemental Cash Flow Information(1)
|
| Year Ended | ||||
|
| 2022 |
| 2021 | ||
Cash paid for interest | | $ | | | $ | |
Cash paid for income taxes | |
| | |
| |
Change in construction accrued expenses | |
| | |
| ( |
Non-cash investing | |
|
| |
|
|
Acquisition of Nevada through issuance of SVS | |
| — | |
| |
Acquisition of Nevada through restricted cash and deferred acquisition costs | |
| — | |
| |
Acquisition of Charm City through issuance of SVS | | | — | | | |
Acquisition of Charm City through issuance of note payable | | | — | | | |
| (1) | For supplemental cash flow information related to leases, refer to Note 10. |
21. Financial Instruments
Credit risk
Credit risk is the risk of loss associated with counterparty’s inability to fulfill its payment obligations. The Company’s credit risk is primarily attributable to cash, accounts receivable, and notes receivable. A small portion of cash is held on hand, from which management believes the risk of loss is remote. Trade receivables relate primarily to wholesale sales. The Company does not have significant credit risk with respect to customers. The Company’s maximum credit risk exposure is equivalent to the carrying value of these instruments. The Company has been granted licenses pursuant to the laws of the states of Massachusetts, Maryland, Minnesota, Nevada, New Mexico, New York, and Puerto Rico with respect to cultivating, processing, and/or distributing marijuana. Presently, this industry is illegal under United States federal law. The Company has, and intends, to adhere strictly to the state statutes in its operations.
Liquidity risk
The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. As of December 31, 2021, the Company’s financial liabilities consist of accounts payable and accrued liabilities, debt. The Company manages liquidity risk by reviewing its capital requirements on an ongoing basis. Historically, the Company’s main source of funding has been additional funding from investors and debt issuances. The Company’s access to financing is always uncertain. There can be no assurance of continued access to significant equity financing.
Legal Risk
Vireo U.S. operates in the United States. The United States federal government regulates drugs through the Controlled Substances Act (21 U.S.C. § 811), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug. Under United States federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States, and a lack of accepted safety for the use of the drug under medical supervision. The United States Food and Drug Administration has not approved marijuana as a safe and effective drug for any indication. In the United States marijuana is largely regulated at the state level. State laws regulating cannabis are in direct conflict with the federal Controlled Substances Act, which makes cannabis use and possession federally illegal.
Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency rates. The Company is not exposed to significant currency risk.
108
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company currently carries variable interest-bearing debt subject to fluctuations in the United States Prime rate. A change of 100 basis points in interest rates during the year ended December 31, 2022, would have resulted in a corresponding change in the statement of loss and comprehensive loss of $
22. Related Parties Transactions
As of December 31, 2022, and 2021, there were $
For the years ended December 31, 2022, and 2021, the Company paid a related party (Bengal Impact Partners, of which a member of the Board of Directors is a managing partner) $
The Company granted
Certain directors and officers of the Company (Kyle Kingsley, Amber Shimpa, and Stephen Dahmer) owned OMS which was controlled by the Company through a management agreement. OMS was sold on March 31, 2021 (Note 3). None of the proceeds received from this transaction were paid to the aforementioned directors and officers, rather, they were owed and paid to the Company
23. Subsequent Events
In January of 2023 the Company granted
On February 24, 2023, the Company signed the fourth amendment to the existing lease agreements for the cultivation and processing facilities in New York. The amendment provides for additional tenant improvements of $
On March 31, 2023, the Company executed a fifth amendment to its credit facility with its senior secured lender, Chicago Atlantic Admin, LLC (the "Agent"), an affiliate of Green Ivy Capital, and a group of lenders. The amended credit facility extends the maturity date on its Delayed Draw Loans to April 30, 2024, through the issuance of
As conditions of the financing activities described above, the Company also agreed to make certain corporate governance changes. Chelsea Grayson and Amber Shimpa agreed to resign from the Company’s Board of Directors, effective immediately. The resignations of Ms. Grayson and Ms. Shimpa resulted in a reduction in the number of current members of the Company’s Board to
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
109
Item 9A.Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a 15(e) and 15d 15(e)) are designed to ensure that information required to be disclosed by us in reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure. We, under the supervisions of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2022 and, based on that evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; (2) provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that our receipts and expenditures are being made only in accordance with appropriate authorizations; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness for future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
During the year ended December 31, 2021, we identified a material weakness in our internal control environment related to the accounting treatment of warrants issued in connection with the Credit Facility, which have a Canadian dollar exercise price. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management has an established process for appropriately accounting for infrequent and unusual transactions, however, management misapplied the GAAP accounting guidance. The material weakness did not result in any material misstatements to the financial statements issued for the year ended December 31, 2021. Solely due to this material weakness, the Company’s management concluded that at December 31, 2021, the Company’s internal control over financial reporting was not effective. During the year ended December 31, 2022, management updated its control procedures over the accounting for infrequent and unusual transactions. More specifically, management added a process step to consult with external GAAP accounting experts when a new significant, infrequent, or unusual transaction occurs.
As of December 31, 2022, our management evaluated and assessed, with the participation of our CEO and CFO, the effectiveness of our internal control over financial reporting, using the criteria set forth in “Internal Control – Integrated Framework (2013)” by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework.
Our CEO and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-K, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this Form 10-K. Additionally, the Company’s management have concluded that the material weakness identified during the year ended December 31, 2021, has been remediated, and the Company’s internal control over financial reporting was effective for the year ended December 31, 2022. Davidson & Company LLP has issued an unqualified opinion on our financial statements, which is included in Item 8 of this Form 10-K.
110
Attestation Report of Independent Auditor
In accordance with the JOBS Act enacted on April 5, 2012, the Company qualifies as an “emerging growth company,” which entitles the Company to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not EGCs. Specifically, the JOBS Act defers the requirement to have the Company’s independent auditor assess the Company’s internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act. As such, the Company is exempted from the requirement to include an auditor attestation report in this Annual Report for so long as the Company remains an EGC, which may be for as long as five years following its initial registration in the United States.
Changes in Internal Control over Financial Reporting
As noted above, during the year ended December 31, 2022, management remediated its control over the accounting of infrequent and unusual transactions by adding a process step to consult with external GAAP accounting experts when a new significant, infrequent, or unusual transaction occurs. There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) during the year ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.Other Information
None.
Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10.Directors, Executive Officers and Corporate Governance
The information required by this item will be set forth in our 2023 Management Information Circular and Proxy Statement with respect to our 2023 annual and special meeting of shareholders and is incorporated herein by reference.
Item 11.Executive Compensation
The information required by this item will be set forth in our 2023 Management Information Circular and Proxy Statement with respect to our 2022 annual and special meeting of shareholders and is incorporated herein by reference.
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item will be set forth in our 2023 Management Information Circular and Proxy Statement with respect to our 2022 annual and special meeting of shareholders and is incorporated herein by reference.
Item 13.Certain Relationships and Related Transactions and Director Independence
The information required by this item will be set forth in our 2023 Management Information Circular and Proxy Statement with respect to our 2022 annual and special meeting of shareholders and is incorporated herein by reference.
111
Item 14.Principal Accountant Fees and Services
The information required by this item will be set forth in our 2023 Management Information Circular and Proxy Statement with respect to our 2022 annual and special meeting of shareholders and is incorporated herein by reference.
PART IV
Item 15.Exhibits and Financial Statement Schedules
The following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.
EXHIBIT INDEX
Exhibit | Description of Exhibit | |||
2.1+ | | | ||
| | | ||
3.1# | | |||
| | | ||
3.2 | | |||
| | | ||
3.3 | | |||
| | | ||
4.1#* | | |||
| |
| ||
4.2# | | Form of Warrant to Purchase Subordinate Voting Shares of Vireo Health International, Inc. | ||
| |
| ||
4.3 | | |||
| |
| ||
4.4 | | |||
| | | ||
4.5 | | |||
| |
| ||
4.6 | | |||
| | | ||
10.1†# | | |||
| |
| ||
10.2†# | | |||
| |
| ||
10. 3†# | | Form of Incentive Stock Option Agreement under the Vireo Health, Inc. 2018 Equity Incentive Plan | ||
| |
| ||
10.4†# | | |||
| |
| ||
112
10.5†# | | ||
| |
| |
10.6†# | | ||
| |
| |
10.8†#* | | ||
| |
| |
10.9#* | | Lease Agreement between IIP-NY 2 LLC and Vireo Health of New York, LLC, dated October 23, 2017 | |
| |
| |
10.10# | | ||
| |
| |
10.11# | | ||
| |
| |
10.12#* | | ||
| |
| |
10.13# | | ||
| |
| |
10.14#* | | Lease Agreement between IIP-MN 1 LLC and Minnesota Medical Solutions, LLC, dated November 8, 2017 | |
| | | |
10.15# | | ||
| | | |
10.16# | | ||
| |
| |
10.17# | | ||
| |
| |
10.18# | | ||
| |
| |
10.19†# | | Employment Agreement between Vireo Health, Inc. and Amber Shimpa, effective as of December 1, 2020 | |
| |
| |
10.20†# | | ||
| |
| |
10.21†# | | ||
| |
| |
10.22†# | | Employment Agreement between Vireo Health, Inc. and John Heller, effective as of December 1, 2020 | |
| |
| |
10.23+ | | ||
| |
| |
10.24+ | | ||
113
| | | |
10.25*+ | | ||
| | | |
10.26* | | ||
| | | |
10.27* | | ||
| | | |
10.28+ | | ||
| | | |
10.29† | | ||
| | | |
10.30† | | ||
| | | |
10.31† | | ||
| | | |
10.32† | | ||
| | | |
10.33 | | Fourth Amendment to Credit Agreement, dated March 2, 2022, by and among Goodness Growth Holdings, Inc., and certain of its subsidiaries, the persons from time-to-time party thereto as guarantors, the lenders party thereto, and Chicago Atlantic Advisers, LLC as administrative and collateral agent (incorporated by reference to Exhibit 10.38 to our Annual Report on Form 10-K filed March 15, 2022) | |
| | | |
10.34† | | | |
| | | |
10.35† | | | |
10.36† | | | |
10.37† | | | |
114
10.38† | | ||
| | | |
10.39† | | ||
| | | |
10.40† | | ||
| | | |
10.41† | | ||
| | | |
10.42† | | ||
10.43 | | | |
10.44 | | | |
| |
| |
21.1 | | ||
23.1 | | ||
| |
| |
24.1 | | Power of Attorney (included on signature page) | |
| |
| |
31.1 | | Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer | |
| |
| |
31.2 | | Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer | |
| |
| |
32.1 | | Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
| | | |
101 | | Includes the following financial and related information from Goodness Growth’s Annual Report on Form 10-K as of and for the year ended December 31, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Income, (3) the Consolidated Statements of Comprehensive Income, (4) the Consolidated Statements of Changes in Stockholders’ Equity, (5) the Consolidated Statements of Cash Flows, and (6) Notes to Consolidated Financial Statements | |
| | | |
104 | | The cover page from this Annual Report on Form 10-K, formatted in Inline XBRL | |
†Indicates a management contract or compensatory plan or arrangement.
# | Previously filed as an exhibit to our registration statement on Form 10 filed on November 5, 2020 (File No. 000-56225) and subsequent amendments to our registration statement on Form 10 filed on December 22, 2020 and January 20, 2021. |
* | Certain confidential information has been excluded from this exhibit because it is both (i) not material and (ii) is the type of information that the registrant treats as private or confidential. |
+Pursuant to Item 601(a)(5) of Regulation S-K, schedules have been omitted and will be furnished on a supplemental basis to the Securities and Exchange Commission upon request.
115
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: March 31, 2023 | GOODNESS GROWTH HOLDINGS, INC. | ||
By: | /s/ Joshua Rosen | ||
Name: | Joshua Rosen | ||
Title: | Interim Chief Executive Officer | ||
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kyle E. Kingsley, John A. Heller and J. Michael Schroeder, acting alone or together with another attorney-in-fact, as his or her true and lawful attorney-in-fact, with full power of substitution and re-substitution for him and in his or her name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection with therewith, with the SEC, hereby ratifying and confirming all that said attorney-in-fact or his substitute, each acting alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Name and Signature |
| Title |
| Date |
|
|
|
|
|
/s/ Joshua Rosen Joshua Rosen |
| Interim Chief Executive Officer & Director |
| March 31, 2023 |
|
|
|
|
|
/s/ John A. Heller John A. Heller |
| Chief Financial Officer |
| March 31, 2023 |
|
|
|
|
|
/s/ Amber H. Shimpa Amber H. Shimpa |
| President & Director |
| March 31, 2023 |
|
|
|
|
|
/s/ Chelsea A. Grayson Chelsea A. Grayson |
| Director |
| March 31, 2023 |
|
|
|
|
|
/s/ Ross M. Hussey Ross M. Hussey |
| Director |
| March 31, 2023 |
|
|
|
|
|
/s/ Victor Mancebo Victor Mancebo |
| Director |
| March 31, 2023 |
|
|
|
|
|
/s/ Judd T. Nordquist Judd T. Nordquist | | Director |
| March 31, 2023 |
| | | | |
/s/ Kyle E. Kingsley Kyle E. Kingsley |
| Executive Chairman and Director |
| March 31, 2023 |
117
EXHIBIT 10.35
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (“Second Amendment”) is made effective as of December 14, 2022 (“Effective Date”) by and among Goodness Growth Holdings, Inc., a British Columbia corporation (“Parent”), Vireo Health, Inc., a Delaware corporation (the “Employer”) and Kyle Kingsley, an individual residing in the State of Minnesota (“Employee”) (collectively “Parties” or individually “Party”).
RECITALS
WHEREAS, the Employer and Employee entered into an Employment Agreement dated December 1, 2020 and a First Amendment to Employment Agreement dated February 2, 2022 (collectively, the “Current Agreement”); and
WHEREAS, at its meeting on July 14, 2022, Parent Company authorized and directed Employer to grant compensation to Employee, consisting of Parent company stock options and restricted stock units (“Restricted Stock Units”), in order to incent Employee to continue his employment with Employer; and
WHEREAS, the Parties wish to amend the Current Agreement as set forth in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, the receipt and sufficiency of which are hereby acknowledged, Parent, Employer and Employee, intending legally to be bound, hereby agree as follows:
AGREEMENT
| a. | Stock Options. The Employer shall cause the Parent Company to grant to Employee the right (the “Option”) to purchase 671,402 subordinate voting shares of the Parent Company’s capital stock (“Shares”) at an exercise price equal to the volume weighted-average closing price of like shares on the Canadian Securities Exchange for the two trading days immediately preceding the Grant Date. The Option shall have a ten-year term. One-fourth (1/4) of the Option will vest on December 31, 2023. 6.25% of the Option will vest on March 31, 2024, and on the last day of each calendar quarter thereafter, until the Option is fully vested, on December 31, 2026. The foregoing description of some of the principal terms of the Option is not binding on the Employer or Parent Company. The terms and conditions of the Option shall be as set forth in the applicable grant agreement. |
| b. | Restricted Stock Units. The Employer shall cause the Parent Company to grant to Employee 679,064 Restricted Stock Units (the “RSU Award”), each of which represents the right to receive one subordinate voting share (“Share”) of the Parent Company’s capital stock (or a cash payment equal to the Fair Market Value of one Share) upon settlement of the RSU Award. The Award will vest in three equal installments, on the first three anniversaries of the date of grant, provided that Employee is an employee, director or independent contractor of the Employer or its affiliate on the applicable vesting date. The vested portion of the RSU Award will settle on the earliest to occur of: (i) the third anniversary of the grant date; (ii) the death or |
| permanent disability (as defined in 409A) of the Employee; (iii) the date of a change in control of the Parent Company or the Employer; or (iv) eighteen (18) months after Employee’s separation from service (as defined in 409A) by the Company without Cause or by Employee for Good Reason. The foregoing description of some of the principal terms of the RSU Award is not binding on the Employer or Parent Company. The terms and conditions of the RSU Award shall be as set forth in the applicable grant agreement. |
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT was voluntarily and knowingly executed by the Parties effective as of the Effective Date first set forth above.
VIREO HEALTH, INC.
Date: December 14, 2022By: /John Heller/
Its: CFO
EMPLOYEE:
Date: December 14, 2022/Kyle Kingsley/
GOODNESS GROWTH HOLDINGS, INC.
Date: December 14, 2022By: /John Heller/
Its: CFO
EXHIBIT 10.36
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (“Second Amendment”) is made effective as of December 14, 2022 (“Effective Date”) by and among Goodness Growth Holdings, Inc., a British Columbia corporation (“Parent”), Vireo Health, Inc., a Delaware corporation (the “Employer”) and John Heller, an individual residing in the State of Minnesota (“Employee”) (collectively “Parties” or individually “Party”).
RECITALS
WHEREAS, the Employer and Employee entered into an Employment Agreement dated December 1, 2020 and a First Amendment to Employment Agreement dated February 2, 2022 (collectively, the “Current Agreement”); and
WHEREAS, at its meeting on July 14, 2022, Parent Company authorized and directed Employer to grant compensation to Employee, consisting of Parent company stock options and restricted stock units (“Restricted Stock Units”), in order to incent Employee to continue his employment with Employer; and
WHEREAS, the Parties wish to amend the Current Agreement as set forth in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, the receipt and sufficiency of which are hereby acknowledged, Parent, Employer and Employee, intending legally to be bound, hereby agree as follows:
AGREEMENT
| a. | Stock Options. The Employer shall cause the Parent Company to grant to Employee the right (the “Option”) to purchase 370,712 subordinate voting shares of the Parent Company’s capital stock (“Shares”) at an exercise price equal to the volume weighted-average closing price of like shares on the Canadian Securities Exchange for the two trading days immediately preceding the Grant Date. The Option shall have a ten-year term. One-fourth (1/4) of the Option will vest on December 31, 2023. 6.25% of the Option will vest on March 31, 2024, and on the last day of each calendar quarter thereafter, until the Option is fully vested, on December 31, 2026. The foregoing description of some of the principal terms of the Option is not binding on the Employer or Parent Company. The terms and conditions of the Option shall be as set forth in the applicable grant agreement. |
| b. | Restricted Stock Units. The Employer shall cause the Parent Company to grant to Employee 308,665 Restricted Stock Units (the “RSU Award”), each of which represents the right to receive one subordinate voting share (“Share”) of the Parent Company’s capital stock (or a cash payment equal to the Fair Market Value of one Share) upon settlement of the RSU Award. The Award will vest in three equal installments, on the first three anniversaries of the date of grant, provided that Employee is an employee, director or independent contractor of the Employer or its affiliate on the applicable vesting date. The vested portion of the RSU Award will settle on the earliest to occur of: (i) the third anniversary of the grant date; (ii) the death or |
| permanent disability (as defined in 409A) of the Employee; (iii) the date of a change in control of the Parent Company or the Employer; or (iv) eighteen (18) months after Employee’s separation from service (as defined in 409A) by the Company without Cause or by Employee for Good Reason. The foregoing description of some of the principal terms of the RSU Award is not binding on the Employer or Parent Company. The terms and conditions of the RSU Award shall be as set forth in the applicable grant agreement. |
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT was voluntarily and knowingly executed by the Parties effective as of the Effective Date first set forth above.
VIREO HEALTH, INC.
Date: December 14, 2022By: /Kyle Kingsley/
Its: CEO
EMPLOYEE:
Date: December 14, 2022/John Heller/
GOODNESS GROWTH HOLDINGS, INC.
Date: December 14, 2022By: /Kyle Kingsley/
Its: CEO
EXHIBIT 10.37
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (“Second Amendment”) is made effective as of December 14, 2022 (“Effective Date”) by and among Goodness Growth Holdings, Inc., a British Columbia corporation (“Parent”), Vireo Health, Inc., a Delaware corporation (the “Employer”) and John Heller, an individual residing in the State of Minnesota (“Employee”) (collectively “Parties” or individually “Party”).
RECITALS
WHEREAS, the Employer and Employee entered into an Employment Agreement dated December 1, 2020 and a First Amendment to Employment Agreement dated February 2, 2022 (collectively, the “Current Agreement”); and
WHEREAS, at its meeting on July 14, 2022, Parent Company authorized and directed Employer to grant compensation to Employee, consisting of Parent company stock options and restricted stock units (“Restricted Stock Units”), in order to incent Employee to continue his employment with Employer; and
WHEREAS, the Parties wish to amend the Current Agreement as set forth in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, the receipt and sufficiency of which are hereby acknowledged, Parent, Employer and Employee, intending legally to be bound, hereby agree as follows:
AGREEMENT
| a. | Stock Options. The Employer shall cause the Parent Company to grant to Employee the right (the “Option”) to purchase 247,141 subordinate voting shares of the Parent Company’s capital stock (“Shares”) at an exercise price equal to the volume weighted-average closing price of like shares on the Canadian Securities Exchange for the two trading days immediately preceding the Grant Date. The Option shall have a ten-year term. One-fourth (1/4) of the Option will vest on December 31, 2023. 6.25% of the Option will vest on March 31, 2024, and on the last day of each calendar quarter thereafter, until the Option is fully vested, on December 31, 2026. The foregoing description of some of the principal terms of the Option is not binding on the Employer or Parent Company. The terms and conditions of the Option shall be as set forth in the applicable grant agreement. |
| b. | Restricted Stock Units. The Employer shall cause the Parent Company to grant to Employee 205,777 Restricted Stock Units (the “RSU Award”), each of which represents the right to receive one subordinate voting share (“Share”) of the Parent Company’s capital stock (or a cash payment equal to the Fair Market Value of one Share) upon settlement of the RSU Award. The Award will vest in three equal installments, on the first three anniversaries of the date of grant, provided that Employee is an employee, director or independent contractor of the Employer or its affiliate on the applicable vesting date. The vested portion of the RSU Award will settle on the earliest to occur of: (i) the third anniversary of the grant date; (ii) the death or |
| permanent disability (as defined in 409A) of the Employee; (iii) the date of a change in control of the Parent Company or the Employer; or (iv) eighteen (18) months after Employee’s separation from service (as defined in 409A) by the Company without Cause or by Employee for Good Reason. The foregoing description of some of the principal terms of the RSU Award is not binding on the Employer or Parent Company. The terms and conditions of the RSU Award shall be as set forth in the applicable grant agreement. |
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT was voluntarily and knowingly executed by the Parties effective as of the Effective Date first set forth above.
VIREO HEALTH, INC.
Date: December 14, 2022By: /Kyle Kingsley/
Its: CEO
EMPLOYEE:
Date: December 14, 2022/Patrick Peters/
GOODNESS GROWTH HOLDINGS, INC.
Date: December 14, 2022By: /Kyle Kingsley/
Its: CEO
EXHIBIT 10.38
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (“Second Amendment”) is made effective as of December 14, 2022 (“Effective Date”) by and among Goodness Growth Holdings, Inc., a British Columbia corporation (“Parent”), Vireo Health, Inc., a Delaware corporation (the “Employer”) and J. Michael Schroeder, an individual residing in the State of Florida (“Employee”) (collectively “Parties” or individually “Party”).
RECITALS
WHEREAS, the Employer and Employee entered into an Employment Agreement dated December 1, 2020 and a First Amendment to Employment Agreement dated February 2, 2022 (collectively, the “Current Agreement”); and
WHEREAS, at its meeting on July 14, 2022, Parent Company authorized and directed Employer to grant compensation to Employee, consisting of Parent company stock options and restricted stock units (“Restricted Stock Units”), in order to incent Employee to continue his employment with Employer; and
WHEREAS, the Parties wish to amend the Current Agreement as set forth in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, the receipt and sufficiency of which are hereby acknowledged, Parent, Employer and Employee, intending legally to be bound, hereby agree as follows:
AGREEMENT
| a. | Stock Options. The Employer shall cause the Parent Company to grant to Employee the right (the “Option”) to purchase 308,927 subordinate voting shares of the Parent Company’s capital stock (“Shares”) at an exercise price equal to the volume weighted-average closing price of like shares on the Canadian Securities Exchange for the two trading days immediately preceding the Grant Date. The Option shall have a ten-year term. One-fourth (1/4) of the Option will vest on December 31, 2023. 6.25% of the Option will vest on March 31, 2024, and on the last day of each calendar quarter thereafter, until the Option is fully vested, on December 31, 2026. The foregoing description of some of the principal terms of the Option is not binding on the Employer or Parent Company. The terms and conditions of the Option shall be as set forth in the applicable grant agreement. |
| b. | Restricted Stock Units. The Employer shall cause the Parent Company to grant to Employee 257,221 Restricted Stock Units (the “RSU Award”), each of which represents the right to receive one subordinate voting share (“Share”) of the Parent Company’s capital stock (or a cash payment equal to the Fair Market Value of one Share) upon settlement of the RSU Award. The Award will vest in three equal installments, on the first three anniversaries of the date of grant, provided that Employee is an employee, director or independent contractor of the Employer or its affiliate on the applicable vesting date. The vested portion of the RSU Award will settle on the earliest to occur of: (i) the third anniversary of the grant date; (ii) the death or |
| permanent disability (as defined in 409A) of the Employee; (iii) the date of a change in control of the Parent Company or the Employer; or (iv) eighteen (18) months after Employee’s separation from service (as defined in 409A) by the Company without Cause or by Employee for Good Reason. The foregoing description of some of the principal terms of the RSU Award is not binding on the Employer or Parent Company. The terms and conditions of the RSU Award shall be as set forth in the applicable grant agreement. |
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT was voluntarily and knowingly executed by the Parties effective as of the Effective Date first set forth above.
VIREO HEALTH, INC.
Date: December 14, 2022By: /Kyle Kingsley/
Its: CEO
EMPLOYEE:
Date: December 14, 2022/J. Michael Schroeder/
GOODNESS GROWTH HOLDINGS, INC.
Date: December 14, 2022By: /Kyle Kingsley/
Its: CEO
EXHIBIT 10.39
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (“Second Amendment”) is made effective as of December 14, 2022 (“Effective Date”) by and among Goodness Growth Holdings, Inc., a British Columbia corporation (“Parent”), Vireo Health, Inc., a Delaware corporation (the “Employer”) and Amber Shimpa, an individual residing in the State of Minnesota (“Employee”) (collectively “Parties” or individually “Party”).
RECITALS
WHEREAS, the Employer and Employee entered into an Employment Agreement dated December 1, 2020 and a First Amendment to Employment Agreement dated February 2, 2022 (collectively, the “Current Agreement”); and
WHEREAS, at its meeting on July 14, 2022, Parent Company authorized and directed Employer to grant compensation to Employee, consisting of Parent company stock options and restricted stock units (“Restricted Stock Units”), in order to incent Employee to continue her employment with Employer; and
WHEREAS, the Parties wish to amend the Current Agreement as set forth in this Amendment.
NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, the receipt and sufficiency of which are hereby acknowledged, Parent, Employer and Employee, intending legally to be bound, hereby agree as follows:
AGREEMENT
| a. | Stock Options. The Employer shall cause the Parent Company to grant to Employee the right (the “Option”) to purchase 321,284 subordinate voting shares of the Parent Company’s capital stock (“Shares”) at an exercise price equal to the volume weighted-average closing price of like shares on the Canadian Securities Exchange for the two trading days immediately preceding the Grant Date. The Option shall have a ten-year term. One-fourth (1/4) of the Option will vest on December 31, 2023. 6.25% of the Option will vest on March 31, 2024, and on the last day of each calendar quarter thereafter, until the Option is fully vested, on December 31, 2026. The foregoing description of some of the principal terms of the Option is not binding on the Employer or Parent Company. The terms and conditions of the Option shall be as set forth in the applicable grant agreement. |
| b. | Restricted Stock Units. The Employer shall cause the Parent Company to grant to Employee 267,510 Restricted Stock Units (the “RSU Award”), each of which represents the right to receive one subordinate voting share (“Share”) of the Parent Company’s capital stock (or a cash payment equal to the Fair Market Value of one Share) upon settlement of the RSU Award. The Award will vest in three equal installments, on the first three anniversaries of the date of grant, provided that Employee is an employee, director or independent contractor of the Employer or its affiliate on the applicable vesting date. The vested portion of the RSU Award will settle on the earliest to occur of: (i) the third anniversary of the grant date; (ii) the death or |
| permanent disability (as defined in 409A) of the Employee; (iii) the date of a change in control of the Parent Company or the Employer; or (iv) eighteen (18) months after Employee’s separation from service (as defined in 409A) by the Company without Cause or by Employee for Good Reason. The foregoing description of some of the principal terms of the RSU Award is not binding on the Employer or Parent Company. The terms and conditions of the RSU Award shall be as set forth in the applicable grant agreement. |
THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT was voluntarily and knowingly executed by the Parties effective as of the Effective Date first set forth above.
VIREO HEALTH, INC.
Date: December 14, 2022By: /Kyle Kingsley/
Its: CEO
EMPLOYEE:
Date: December 14, 2022/Amber Shimpa/
GOODNESS GROWTH HOLDINGS, INC.
Date: December 14, 2022By: /Kyle Kingsley/
Its: CEO
EXHIBIT 10.43
FIFTH AMENDMENT TO LEASE AGREEMENT
THIS FIFTH AMENDMENT TO LEASE AGREEMENT (this “Amendment”) is entered into effective as of the 24th day of February 2023 (the “Amendment Effective Date”), by and between IIP-MN 1 LLC, a Delaware limited liability company (“Landlord”), and Vireo Health of Minnesota, LLC, a Minnesota limited liability company (f/k/a Minnesota Medical Solutions, LLC (“Tenant”)).
RECITALS
AGREEMENT
NOW, THEREFORE, Landlord and Tenant, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, agree as follows:
"20.4.12. If at any time Tenant or any affiliate of Tenant defaults under any other lease agreement entered into with Landlord or any affiliate of Landlord (each, an "Additional Lease Agreement" and collectively, the "Additional Lease Agreements"), and such default is not cured within any applicable notice and cure period."
Landlord Indemnitees for, from and against any and all cost or liability for compensation claimed by any such broker or agent employed or engaged by it or claiming to have been employed or engaged by it.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
2
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date and year first above written.
LANDLORD:
IIP-MN 1 LLC,
a Delaware limited liability company
By:/Brian Wolfe/
Title:Vice President, General Counsel and Secretary
TENANT:
VIREO HEALTH OF MINNESOTA, LLC,
a Minnesota limited liability company
By: /Kyle Kingsley/
Title: Chief Executive Officer
3
EXHIBIT 10.44
FOURTH AMENDMENT TO LEASE AGREEMENT
THIS FOURTH AMENDMENT TO LEASE AGREEMENT (this “Amendment”) is entered into as of February 24, 2023 (the “Amendment Effective Date”), by and between IIP-NY 2 LLC, a Delaware limited liability company (“Landlord”), and Vireo Health of New York, LLC, a New York limited liability company (“Tenant”).
RECITALS
AGREEMENT
NOW, THEREFORE, Landlord and Tenant, in consideration of the mutual promises contained herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, agree as follows:
"Tenant shall cause appropriate improvements consistent with the Permitted Use (the "Tenant Improvements") to be constructed in the Premises pursuant to the Work Letter attached hereto as Exhibit E (the "Work Letter") at a cost to Landlord not to exceed Fifty- Three Million Four Hundred Thirty-Five Thousand Dollars ($53,435,000.00) (the "TI Allowance")."
In addition, the last two sentences of Section 5.2 of the Existing Lease are hereby deleted in their entirety and replaced with the following:
"In addition, Landlord’s obligation to disburse any of the TI Allowance in excess of Fifty- Two Million Nine Hundred Thirty-Five Thousand Dollars ($52,935,000.00) shall be conditional upon the satisfaction of the following: (a) Tenant's delivery to Landlord of a certificate of occupancy for the Premises suitable for the Permitted Use, as applicable; (b) Tenant's delivery to Landlord of a Certificate of Substantial Completion in the form of the American Institute of Architects document G704, executed by the project architect and the general contractor or such other form or certification as may be reasonably acceptable to Landlord; (c) Tenant's satisfaction of the conditions precedent to funding of the TI Allowance set forth in Section 6.3 of the Work Letter; and (d) there shall be no uncured event of default by Tenant under this Lease. Following the completion of the Tenant Improvements, Landlord may order, at Tenant’s expense, a current title report or lien search for the Premises to confirm that the Premises remains free and clear of all liens relating to the completion of the Tenant Improvements. Tenant agrees to promptly pay or
reimburse Landlord for the costs relating to such title report or lien search upon receipt of an invoice from Landlord."
"20.4.12. If at any time Tenant or any affiliate of Tenant defaults under any other lease agreement entered into with Landlord or any affiliate of Landlord (each, an "Additional Lease Agreement" and collectively, the "Additional Lease Agreements"), and such default is not cured within any applicable notice and cure period."
2
3
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment as of the date and year first above written.
LANDLORD:
IIP-NY 2 LLC,
a Delaware limited liability company
By:/Brian Wolfe/
Title:Vice President, General Counsel and Secretary
TENANT:
VIREO HEALTH OF NEW YORK, LLC,
a New York limited liability company
By: /Kyle Kingsley/
Title: Executive Chairman
EXHIBIT F
MONTHLY BASE RENT AND PROPERTY MANAGEMENT FEE SCHEDULE
[See Attached]
Month | Base Rent | Management Fee | Total |
2/1/2023 | 615,460.25 | 9,231.90 | 624,692.15 |
3/1/2023 | 656,531.68 | 9,847.97 | 666,379.65 |
4/1/2023 | 656,531.68 | 9,847.97 | 666,379.65 |
5/1/2023 | 656,531.68 | 9,847.97 | 666,379.65 |
6/1/2023 | 656,531.68 | 9,847.97 | 666,379.65 |
7/1/2023 | 656,531.68 | 9,847.97 | 666,379.65 |
8/1/2023 | 656,531.68 | 9,847.97 | 666,379.65 |
9/1/2023 | 659,779.62 | 9,896.69 | 669,676.31 |
10/1/2023 | 671,471.20 | 10,072.07 | 681,543.27 |
11/1/2023 | 673,964.00 | 10,109.46 | 684,073.46 |
12/1/2023 | 673,964.00 | 10,109.46 | 684,073.46 |
1/1/2024 | 673,964.00 | 10,109.46 | 684,073.46 |
2/1/2024 | 674,231.86 | 10,113.48 | 684,345.34 |
3/1/2024 | 675,464.00 | 10,131.96 | 685,595.96 |
4/1/2024 | 675,464.00 | 10,131.96 | 685,595.96 |
5/1/2024 | 675,464.00 | 10,131.96 | 685,595.96 |
6/1/2024 | 675,464.00 | 10,131.96 | 685,595.96 |
7/1/2024 | 675,464.00 | 10,131.96 | 685,595.96 |
8/1/2024 | 675,464.00 | 10,131.96 | 685,595.96 |
9/1/2024 | 678,801.26 | 10,182.02 | 688,983.28 |
10/1/2024 | 690,822.00 | 10,362.33 | 701,184.33 |
11/1/2024 | 693,402.05 | 10,401.03 | 703,803.08 |
12/1/2024 | 693,402.05 | 10,401.03 | 703,803.08 |
1/1/2025 | 693,402.05 | 10,401.03 | 703,803.08 |
2/1/2025 | 693,677.94 | 10,405.17 | 704,083.11 |
3/1/2025 | 694,947.05 | 10,424.21 | 705,371.26 |
4/1/2025 | 694,947.05 | 10,424.21 | 705,371.26 |
5/1/2025 | 694,947.05 | 10,424.21 | 705,371.26 |
6/1/2025 | 694,947.05 | 10,424.21 | 705,371.26 |
7/1/2025 | 694,947.05 | 10,424.21 | 705,371.26 |
8/1/2025 | 694,947.05 | 10,424.21 | 705,371.26 |
9/1/2025 | 698,376.08 | 10,475.64 | 708,851.72 |
10/1/2025 | 710,735.32 | 10,661.03 | 721,396.35 |
11/1/2025 | 713,405.67 | 10,701.09 | 724,106.76 |
12/1/2025 | 713,405.67 | 10,701.09 | 724,106.76 |
1/1/2026 | 713,405.67 | 10,701.09 | 724,106.76 |
2/1/2026 | 713,689.84 | 10,705.35 | 724,395.19 |
3/1/2026 | 714,997.02 | 10,724.96 | 725,721.98 |
4/1/2026 | 714,997.02 | 10,724.96 | 725,721.98 |
5/1/2026 | 714,997.02 | 10,724.96 | 725,721.98 |
6/1/2026 | 714,997.02 | 10,724.96 | 725,721.98 |
7/1/2026 | 714,997.02 | 10,724.96 | 725,721.98 |
8/1/2026 | 714,997.02 | 10,724.96 | 725,721.98 |
9/1/2026 | 718,520.35 | 10,777.81 | 729,298.16 |
10/1/2026 | 731,227.65 | 10,968.42 | 742,196.07 |
11/1/2026 | 733,991.46 | 11,009.87 | 745,001.33 |
Month | Base Rent | Management Fee | Total |
12/1/2026 | 733,991.46 | 11,009.87 | 745,001.33 |
1/1/2027 | 733,991.46 | 11,009.87 | 745,001.33 |
2/1/2027 | 734,284.15 | 11,014.26 | 745,298.41 |
3/1/2027 | 735,630.55 | 11,034.45 | 746,665.00 |
4/1/2027 | 735,630.55 | 11,034.45 | 746,665.00 |
5/1/2027 | 735,630.55 | 11,034.45 | 746,665.00 |
6/1/2027 | 735,630.55 | 11,034.45 | 746,665.00 |
7/1/2027 | 735,630.55 | 11,034.45 | 746,665.00 |
8/1/2027 | 735,630.55 | 11,034.45 | 746,665.00 |
9/1/2027 | 739,250.77 | 11,088.76 | 750,339.53 |
10/1/2027 | 752,316.00 | 11,284.74 | 763,600.74 |
11/1/2027 | 755,176.55 | 11,327.64 | 766,504.19 |
12/1/2027 | 755,176.55 | 11,327.64 | 766,504.19 |
1/1/2028 | 755,176.55 | 11,327.64 | 766,504.19 |
2/1/2028 | 755,478.03 | 11,332.16 | 766,810.19 |
3/1/2028 | 756,864.81 | 11,352.97 | 768,217.78 |
4/1/2028 | 756,864.81 | 11,352.97 | 768,217.78 |
5/1/2028 | 756,864.81 | 11,352.97 | 768,217.78 |
6/1/2028 | 756,864.81 | 11,352.97 | 768,217.78 |
7/1/2028 | 756,864.81 | 11,352.97 | 768,217.78 |
8/1/2028 | 756,864.81 | 11,352.97 | 768,217.78 |
9/1/2028 | 760,584.59 | 11,408.77 | 771,993.36 |
10/1/2028 | 774,017.89 | 11,610.27 | 785,628.16 |
11/1/2028 | 776,978.56 | 11,654.68 | 788,633.24 |
12/1/2028 | 776,978.56 | 11,654.68 | 788,633.24 |
1/1/2029 | 776,978.56 | 11,654.68 | 788,633.24 |
2/1/2029 | 777,289.08 | 11,659.33 | 788,948.41 |
3/1/2029 | 778,717.47 | 11,680.76 | 790,398.23 |
4/1/2029 | 778,717.47 | 11,680.76 | 790,398.23 |
5/1/2029 | 778,717.47 | 11,680.76 | 790,398.23 |
6/1/2029 | 778,717.47 | 11,680.76 | 790,398.23 |
7/1/2029 | 778,717.47 | 11,680.76 | 790,398.23 |
8/1/2029 | 778,717.47 | 11,680.76 | 790,398.23 |
9/1/2029 | 782,539.54 | 11,738.09 | 794,277.63 |
10/1/2029 | 796,351.34 | 11,945.28 | 808,296.62 |
11/1/2029 | 799,415.63 | 11,991.24 | 811,406.87 |
12/1/2029 | 799,415.63 | 11,991.24 | 811,406.87 |
1/1/2030 | 799,415.63 | 11,991.24 | 811,406.87 |
2/1/2030 | 799,735.47 | 11,996.04 | 811,731.51 |
3/1/2030 | 801,206.71 | 12,018.11 | 813,224.82 |
4/1/2030 | 801,206.71 | 12,018.11 | 813,224.82 |
5/1/2030 | 801,206.71 | 12,018.11 | 813,224.82 |
6/1/2030 | 801,206.71 | 12,018.11 | 813,224.82 |
7/1/2030 | 801,206.71 | 12,018.11 | 813,224.82 |
8/1/2030 | 801,206.71 | 12,018.11 | 813,224.82 |
9/1/2030 | 805,133.89 | 12,077.01 | 817,210.90 |
Month | Base Rent | Management Fee | Total |
10/1/2030 | 819,334.92 | 12,290.03 | 831,624.95 |
11/1/2030 | 822,506.46 | 12,337.60 | 834,844.06 |
12/1/2030 | 822,506.46 | 12,337.60 | 834,844.06 |
1/1/2031 | 822,506.46 | 12,337.60 | 834,844.06 |
2/1/2031 | 822,835.89 | 12,342.54 | 835,178.43 |
3/1/2031 | 824,351.27 | 12,365.27 | 836,716.54 |
4/1/2031 | 824,351.27 | 12,365.27 | 836,716.54 |
5/1/2031 | 824,351.27 | 12,365.27 | 836,716.54 |
6/1/2031 | 824,351.27 | 12,365.27 | 836,716.54 |
7/1/2031 | 824,351.27 | 12,365.27 | 836,716.54 |
8/1/2031 | 824,351.27 | 12,365.27 | 836,716.54 |
9/1/2031 | 828,386.45 | 12,425.79 | 840,812.24 |
10/1/2031 | 842,987.74 | 12,644.82 | 855,632.56 |
11/1/2031 | 846,270.28 | 12,694.06 | 858,964.34 |
12/1/2031 | 846,270.28 | 12,694.06 | 858,964.34 |
1/1/2032 | 846,270.28 | 12,694.06 | 858,964.34 |
2/1/2032 | 846,609.59 | 12,699.15 | 859,308.74 |
3/1/2032 | 848,170.44 | 12,722.56 | 860,893.00 |
4/1/2032 | 848,170.44 | 12,722.56 | 860,893.00 |
5/1/2032 | 848,170.44 | 12,722.56 | 860,893.00 |
6/1/2032 | 848,170.44 | 12,722.56 | 860,893.00 |
7/1/2032 | 848,170.44 | 12,722.56 | 860,893.00 |
8/1/2032 | 848,170.44 | 12,722.56 | 860,893.00 |
9/1/2032 | 852,316.58 | 12,784.75 | 865,101.33 |
10/1/2032 | 867,329.48 | 13,009.94 | 880,339.42 |
11/1/2032 | 870,726.91 | 13,060.90 | 883,787.81 |
12/1/2032 | 870,726.91 | 13,060.90 | 883,787.81 |
1/1/2033 | 870,726.91 | 13,060.90 | 883,787.81 |
2/1/2033 | 871,076.40 | 13,066.14 | 884,142.54 |
3/1/2033 | 872,684.07 | 13,090.26 | 885,774.33 |
4/1/2033 | 872,684.07 | 13,090.26 | 885,774.33 |
5/1/2033 | 872,684.07 | 13,090.26 | 885,774.33 |
6/1/2033 | 872,684.07 | 13,090.26 | 885,774.33 |
7/1/2033 | 872,684.07 | 13,090.26 | 885,774.33 |
8/1/2033 | 872,684.07 | 13,090.26 | 885,774.33 |
9/1/2033 | 876,944.23 | 13,154.16 | 890,098.39 |
10/1/2033 | 892,380.40 | 13,385.71 | 905,766.11 |
11/1/2033 | 895,896.74 | 13,438.46 | 909,335.20 |
12/1/2033 | 895,896.74 | 13,438.46 | 909,335.20 |
1/1/2034 | 895,896.74 | 13,438.46 | 909,335.20 |
2/1/2034 | 896,256.72 | 13,443.86 | 909,700.58 |
3/1/2034 | 897,912.61 | 13,468.70 | 911,381.31 |
4/1/2034 | 897,912.61 | 13,468.70 | 911,381.31 |
5/1/2034 | 897,912.61 | 13,468.70 | 911,381.31 |
6/1/2034 | 897,912.61 | 13,468.70 | 911,381.31 |
7/1/2034 | 897,912.61 | 13,468.70 | 911,381.31 |
Month | Base Rent | Management Fee | Total |
8/1/2034 | 897,912.61 | 13,468.70 | 911,381.31 |
9/1/2034 | 902,289.93 | 13,534.36 | 915,824.29 |
10/1/2034 | 918,161.39 | 13,772.43 | 931,933.82 |
11/1/2034 | 921,800.80 | 13,827.02 | 935,627.82 |
12/1/2034 | 921,800.80 | 13,827.02 | 935,627.82 |
1/1/2035 | 921,800.80 | 13,827.02 | 935,627.82 |
2/1/2035 | 922,171.58 | 13,832.58 | 936,004.16 |
3/1/2035 | 923,877.15 | 13,858.16 | 937,735.31 |
4/1/2035 | 923,877.15 | 13,858.16 | 937,735.31 |
5/1/2035 | 923,877.15 | 13,858.16 | 937,735.31 |
6/1/2035 | 923,877.15 | 13,858.16 | 937,735.31 |
7/1/2035 | 923,877.15 | 13,858.16 | 937,735.31 |
8/1/2035 | 923,877.15 | 13,858.16 | 937,735.31 |
9/1/2035 | 928,374.84 | 13,925.62 | 942,300.46 |
10/1/2035 | 944,693.93 | 14,170.41 | 958,864.34 |
11/1/2035 | 948,460.72 | 14,226.91 | 962,687.63 |
12/1/2035 | 948,460.72 | 14,226.91 | 962,687.63 |
1/1/2036 | 948,460.72 | 14,226.91 | 962,687.63 |
2/1/2036 | 948,842.62 | 14,232.64 | 963,075.26 |
3/1/2036 | 950,599.36 | 14,258.99 | 964,858.35 |
4/1/2036 | 950,599.36 | 14,258.99 | 964,858.35 |
5/1/2036 | 950,599.36 | 14,258.99 | 964,858.35 |
6/1/2036 | 950,599.36 | 14,258.99 | 964,858.35 |
7/1/2036 | 950,599.36 | 14,258.99 | 964,858.35 |
8/1/2036 | 950,599.36 | 14,258.99 | 964,858.35 |
9/1/2036 | 939,330.10 | 14,089.95 | 953,420.05 |
10/1/2036 | 902,302.51 | 13,534.54 | 915,837.05 |
11/1/2036 | 902,302.51 | 13,534.54 | 915,837.05 |
12/1/2036 | 902,302.51 | 13,534.54 | 915,837.05 |
1/1/2037 | 902,302.51 | 13,534.54 | 915,837.05 |
2/1/2037 | 902,695.87 | 13,540.44 | 916,236.31 |
3/1/2037 | 904,505.31 | 13,567.58 | 918,072.89 |
4/1/2037 | 904,505.31 | 13,567.58 | 918,072.89 |
5/1/2037 | 904,505.31 | 13,567.58 | 918,072.89 |
6/1/2037 | 904,505.31 | 13,567.58 | 918,072.89 |
7/1/2037 | 904,505.31 | 13,567.58 | 918,072.89 |
8/1/2037 | 904,505.31 | 13,567.58 | 918,072.89 |
9/1/2037 | 909,823.93 | 13,647.36 | 923,471.29 |
10/1/2037 | 927,299.39 | 13,909.49 | 941,208.88 |
11/1/2037 | 927,299.39 | 13,909.49 | 941,208.88 |
12/1/2037 | 927,299.39 | 13,909.49 | 941,208.88 |
1/1/2038 | 927,299.39 | 13,909.49 | 941,208.88 |
2/1/2038 | 927,704.55 | 13,915.57 | 941,620.12 |
3/1/2038 | 929,568.27 | 13,943.53 | 943,511.80 |
4/1/2038 | 929,568.27 | 13,943.53 | 943,511.80 |
5/1/2038 | 929,568.27 | 13,943.53 | 943,511.80 |
Month | Base Rent | Management Fee | Total |
6/1/2038 | 929,568.27 | 13,943.53 | 943,511.80 |
7/1/2038 | 929,568.27 | 13,943.53 | 943,511.80 |
8/1/2038 | 929,568.27 | 13,943.53 | 943,511.80 |
9/1/2038 | 935,033.15 | 14,025.51 | 949,058.66 |
10/1/2038 | 952,989.19 | 14,294.84 | 967,284.03 |
11/1/2038 | 952,989.19 | 14,294.84 | 967,284.03 |
12/1/2038 | 952,989.19 | 14,294.84 | 967,284.03 |
1/1/2039 | 952,989.19 | 14,294.84 | 967,284.03 |
2/1/2039 | 953,406.50 | 14,301.10 | 967,707.60 |
3/1/2039 | 955,326.14 | 14,329.89 | 969,656.03 |
4/1/2039 | 955,326.14 | 14,329.89 | 969,656.03 |
5/1/2039 | 955,326.14 | 14,329.89 | 969,656.03 |
6/1/2039 | 955,326.14 | 14,329.89 | 969,656.03 |
7/1/2039 | 955,326.14 | 14,329.89 | 969,656.03 |
8/1/2039 | 955,326.14 | 14,329.89 | 969,656.03 |
9/1/2039 | 960,941.30 | 14,414.12 | 975,355.42 |
10/1/2039 | 979,391.14 | 14,690.87 | 994,082.01 |
11/1/2039 | 979,391.14 | 14,690.87 | 994,082.01 |
12/1/2039 | 979,391.14 | 14,690.87 | 994,082.01 |
1/1/2040 | 979,391.14 | 14,690.87 | 994,082.01 |
2/1/2040 | 979,820.97 | 14,697.32 | 994,518.29 |
3/1/2040 | 981,798.20 | 14,726.98 | 996,525.18 |
4/1/2040 | 981,798.20 | 14,726.98 | 996,525.18 |
5/1/2040 | 981,798.20 | 14,726.98 | 996,525.18 |
6/1/2040 | 981,798.20 | 14,726.98 | 996,525.18 |
7/1/2040 | 981,798.20 | 14,726.98 | 996,525.18 |
8/1/2040 | 981,798.20 | 14,726.98 | 996,525.18 |
9/1/2040 | 987,567.79 | 14,813.52 | 1,002,381.31 |
10/1/2040 | 1,006,524.99 | 15,097.88 | 1,021,622.87 |
11/1/2040 | 1,006,524.99 | 15,097.88 | 1,021,622.87 |
12/1/2040 | 1,006,524.99 | 15,097.88 | 1,021,622.87 |
1/1/2041 | 1,006,524.99 | 15,097.88 | 1,021,622.87 |
2/1/2041 | 1,006,967.72 | 15,104.52 | 1,022,072.24 |
3/1/2041 | 1,009,004.26 | 15,135.06 | 1,024,139.32 |
4/1/2041 | 1,009,004.26 | 15,135.06 | 1,024,139.32 |
5/1/2041 | 1,009,004.26 | 15,135.06 | 1,024,139.32 |
6/1/2041 | 1,009,004.26 | 15,135.06 | 1,024,139.32 |
7/1/2041 | 1,009,004.26 | 15,135.06 | 1,024,139.32 |
8/1/2041 | 1,009,004.26 | 15,135.06 | 1,024,139.32 |
9/1/2041 - 9/23/2041 | 778,231.36 | 11,673.47 | 789,904.83 |
Exhibit 21.1
SUBSIDIARIES
Subsidiary | State of Organization |
1776 Hemp, LLC | Delaware |
EHF Cultivation Management, LLC | Arizona |
Elephant Head Farm, LLC | Arizona |
MaryMed, LLC dba Green Goods | Maryland |
Mayflower Botanicals Inc. | Massachusetts, but converted to For Profit 11/16/2018 |
MJ Distributing C201, LLC | Nevada |
MJ Distributing P132, LLC | Nevada |
Resurgent Biosciences, Inc. (fka Resurgent Pharmaceuticals, Inc.) | Delaware |
Retail Management Associates, LLC | Arizona |
Verdant Grove, LLC | Delaware, but converted to Massachusetts on 3/21/2020 |
Vireo Health of Arizona, LLC | Delaware |
Vireo Health of Charm City, LLC dba Green Goods Baltimore | Maryland |
Vireo Health of Massachusetts, LLC | Delaware |
Vireo Health of Minnesota, LLC (fka Minnesota Medical Solutions LLC) dba Green Goods | Minnesota |
Vireo Health of Nevada I, LLC | Nevada |
Vireo Health of New Mexico, LLC | Delaware |
Vireo Health of New York LLC (fka Empire State Health Solutions LLC) | New York |
Vireo Health of Puerto Rico, LLC | Delaware |
Vireo Health de Puerto Rico LLC | Puerto Rico |
Vireo Health, Inc. | Delaware |
Xaas Agro, Inc. | Puerto Rico |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement (No. 333-252690) on Form S-8 of our report dated March 29, 2023, relating to the financial statements of Goodness Growth Holdings, Inc. appearing in this Annual Report on Form 10-K for the year ended December 31, 2022.
/s/ Davidson & Company LLP | |
| |
Vancouver, Canada | Chartered Professional Accountants |
March 31, 2023 | |
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, Kyle E. Kingsley, certify that:
1. I have reviewed this Annual Report on Form 10-K of Goodness Growth Holdings, Inc.;
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;
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;
4. The registrant’s other certifying officer 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)) for the registrant and have:
(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; and
(b) 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
(c) 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.
5. The registrant’s other certifying officer 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):
(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
(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: March 31, 2023 | | |
| | |
By: | /s/ Joshua Rosen |
|
| Joshua Rosen |
|
| Interim Chief 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, John A. Heller, certify that:
1. I have reviewed this Annual Report on Form 10-K of Goodness Growth Holdings, Inc.;
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;
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;
4. The registrant’s other certifying officer 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)) for the registrant and have:
(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; and
(b) 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
(c) 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.
5. The registrant’s other certifying officer 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):
(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
(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: March 31, 2023 | | |
| | |
By: | /s/ John A. Heller |
|
| John A. Heller |
|
| Chief Financial Officer |
|
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the report of Goodness Growth Holdings, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Joshua Rosen |
|
Joshua Rosen |
|
Interim Chief Executive Officer |
|
March 31, 2023 |
|
/s/ John A. Heller |
|
John A. Heller |
|
Chief Financial Officer |
|
March 31, 2023 |
|