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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

   

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

OR

   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 000-56225

GOODNESS GROWTH HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

British Columbia, Canada

    

82-3835655

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

207 South 9th Street, Minneapolis, MN

55402

(Address of principal executive offices)

(Zip Code)

(612) 999-1606

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

None

None

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  þ    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  þ    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

    

Accelerated filer

Non-accelerated filer

þ

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No  þ

As of August 11, 2021, the registrant had the following number of shares of each of its classes of registered securities outstanding: Subordinate Voting Shares – 78,315,477; Multiple Voting Shares – 414,949; and Super Voting Shares – 65,411.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GOODNESS GROWTH HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In U.S Dollars, unaudited and condensed)

    

June 30, 

    

December 31, 

2021

2020

Assets

 

  

 

  

Current assets:

 

  

 

  

Cash

$

20,826,356

$

25,513,180

Restricted cash

 

 

1,592,500

Accounts receivable, net of allowance for doubtful accounts of $257,729 and $132,490, respectively

 

2,444,967

 

696,994

Inventory

 

16,727,640

 

12,644,895

Prepayments and other current assets

 

1,863,841

 

1,552,278

Notes receivable

 

100,561

 

293,700

Deferred acquisition costs

 

 

28,136

Assets Held for Sale

 

 

4,596,445

Deferred financing costs

 

 

120,266

Total current assets

 

41,963,365

 

47,038,394

Property and equipment, net

 

42,104,121

 

30,566,259

Operating lease, right-of-use asset

 

8,762,777

 

8,163,844

Notes receivable, long-term

 

3,750,000

 

3,750,000

Intangible assets, net

 

11,181,670

 

8,409,419

Goodwill

 

3,132,491

 

3,132,491

Deposits

 

1,413,719

 

1,412,124

Deferred tax assets

 

367,000

 

157,000

Total assets

$

112,675,143

$

102,629,531

Liabilities

 

  

 

  

Current liabilities

 

  

 

  

Accounts Payable and Accrued liabilities

 

10,012,597

 

13,477,303

Right of use liability

 

1,284,248

 

857,294

Convertible notes, net of issuance costs

 

 

900,000

Long-Term debt, current portion

 

1,110,000

 

1,110,000

Liabilities held for sale

 

 

3,595,301

Warrant Liability

 

3,705,859

 

Total current liabilities

 

16,112,704

 

19,939,898

Right-of-use liability

 

21,787,039

 

20,343,063

Long-Term debt

 

18,533,128

 

Total liabilities

$

56,432,871

$

40,282,961

Commitments and contingencies (refer to Note 20)

 

  

 

  

Stockholders’ equity

 

  

 

  

Subordinate Voting Shares ($- par value, unlimited shares authorized; 72,660,602 shares issued and outstanding)

 

 

Multiple Voting Shares ($- par value, unlimited shares authorized; 459,950 shares issued and outstanding)

 

 

Super Voting Shares ($- par value; unlimited shares authorized; 65,411 shares issued and outstanding, respectively)

 

 

Additional Paid in Capital

 

170,442,492

 

164,079,614

Accumulated deficit

 

(114,200,220)

 

(101,733,044)

Total stockholders' equity

$

56,242,272

$

62,346,570

Total liabilities and stockholders' equity

$

112,675,143

$

102,629,531

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

2

GOODNESS GROWTH HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF NET LOSS AND COMPREHENSIVE LOSS

(In U.S. Dollars, unaudited and condensed)

    

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2021

    

2020

2021

    

2020

Revenue

$

14,230,900

$

12,215,365

$

27,420,789

$

24,333,932

Cost of sales

 

 

 

 

Product costs

 

7,273,011

 

8,430,507

 

14,779,059

 

17,132,160

Inventory valuation adjustments

 

45,000

 

194,234

 

113,000

 

333,242

Gross profit

 

6,912,889

 

3,590,624

 

12,528,730

 

6,868,530

Operating expenses:

 

 

 

 

Selling, general and administrative

 

8,299,682

 

6,283,343

 

16,335,673

 

13,160,468

Stock-based compensation expenses

 

1,408,080

 

8,985,422

 

3,722,655

 

11,721,360

Depreciation

 

246,247

 

219,662

 

417,809

 

222,628

Amortization

 

206,442

 

154,191

 

412,885

 

308,381

Total operating expenses

 

10,160,451

 

15,642,618

 

20,889,022

 

25,412,837

Loss from operations

 

(3,247,562)

 

(12,051,994)

 

(8,360,292)

 

(18,544,307)

Other income (expense):

 

 

 

 

Gain on disposal of assets held for sale

 

 

 

437,107

 

Derivative gain (loss)

 

1,531,371

 

(2,292,130)

 

1,689,900

 

(966,202)

Interest expenses, net

 

(2,756,358)

 

(1,543,169)

 

(3,782,504)

 

(2,993,433)

Other income (expenses)

 

(98,055)

 

141,859

 

(41,387)

 

(327,413)

Other expenses, net

 

(1,323,042)

 

(3,693,440)

 

(1,696,884)

 

(4,287,048)

Loss before income taxes

 

(4,570,604)

 

(15,745,434)

 

(10,057,176)

 

(22,831,355)

Current income tax expenses

 

(885,000)

 

(346,900)

 

(2,620,000)

 

(852,000)

Deferred income tax recoveries

 

(25,000)

 

(23,000)

 

210,000

 

55,000

Net loss and comprehensive loss

 

(5,480,604)

 

(16,115,334)

 

(12,467,176)

 

(23,628,355)

Net loss per share - basic and diluted

$

(0.04)

$

(0.16)

$

(0.10)

$

(0.25)

Weighted average shares used in computation of net loss per share - basic and diluted

 

125,557,734

 

98,871,038

 

120,856,801

 

93,695,441

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

3

GOODNESS GROWTH HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY

(In U.S. Dollars, unaudited and condensed)

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, 2020

 

23,684,411

$

 

549,928

$

 

65,411

$

127,476,624

$

(78,790,850)

$

48,685,774

Shares issued in private placement

 

13,651,574

 

 

 

 

 

 

4,058,460

 

 

4,058,460

Stock-based compensation

 

 

 

 

 

 

 

11,721,360

 

 

11,721,360

Net loss

 

 

 

 

 

 

 

 

(23,628,355)

 

(23,628,355)

Balance at June 30, 2020

 

37,335,985

$

 

549,928

$

 

65,411

$

$

143,256,444

$

(102,419,205)

$

40,837,239

Balance, January 1, 2021

51,062,559

554,128

65,411

$

164,079,614

$

(101,733,044)

$

62,346,570

Conversion of MVS shares

13,197,700

(131,978)

Shares issued in Nevada acquisition

 

1,050,000

 

 

 

 

 

 

1,564,500

 

 

1,564,500

Shares issued

 

1,185,293

 

 

 

 

 

 

2,314,016

 

 

2,314,016

Options exercised

 

3,659,668

 

 

 

 

 

 

1,075,723

 

 

1,075,723

Warrants exercised

 

7,110,481

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

1,408,639

 

 

1,408,639

Net Loss

 

 

 

 

 

 

 

 

(12,467,176)

 

(12,467,176)

Balance at June 30, 2021

 

77,265,701

$

 

422,150

$

 

65,411

$

$

170,442,492

$

(114,200,220)

$

56,242,272

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

4

GOODNESS GROWTH HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In U.S. Dollars, except for per share data, unaudited and condensed)

Six Months Ended June 30,

    

2021

    

2020

CASH FLOWS FROM OPERATING ACTIVITIES

  

 

  

Net loss

$

(12,467,176)

$

(23,628,355)

Adjustments to reconcile net loss to net cash used in operating activities:

 

  

 

  

Inventory valuation adjustments

 

113,000

 

333,242

Depreciation

 

417,809

 

222,628

Depreciation capitalized into inventory

 

986,896

 

1,057,849

Non-cash operating lease expense

 

519,176

 

624,625

Amortization of intangible assets

 

412,885

 

308,381

Stock-based payments

 

3,722,655

 

11,721,360

Interest Expense

 

886,628

 

Gain/loss

 

-

 

53,077

Deferred income tax

 

(210,000)

 

(1,103,100)

Accretion

 

195,197

 

348,382

Derivative (Gain) Loss

 

(1,689,900)

 

966,202

Gain on disposal of OMS

 

(437,107)

 

Change in operating assets and liabilities:

 

 

  

Accounts Receivable

 

(1,531,985)

 

128,106

Prepaid expenses

 

(292,260)

 

525,028

Inventory

 

(4,059,044)

 

(516,787)

Accounts payable and accrued liabilities

 

(4,182,954)

 

1,838,680

Change in assets and liabilities held for sale

 

124,843

 

(369,485)

Net cash used in operating activities

$

(17,491,337)

$

(7,490,167)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

PP&E Additions

$

(11,028,976)

$

(1,402,085)

Proceeds from sale of OMS net of cash

 

1,150,000

 

Deposits

 

(1,595)

 

16,265

Net cash provided by (used in) investing activities

$

(9,880,571)

$

(1,385,820)

CASH FLOWS FROM FINANCING ACTIVITIES

 

  

 

  

Proceeds from issuance of shares

$

-

$

7,613,490

Deferred financing costs

 

(865,769)

 

Proceeds from long-term debt

 

24,028,295

 

Convertible debt payment

 

(900,000)

 

Proceeds from option exercises

 

1,075,723

 

Lease payments

 

(653,165)

 

(652,477)

Net cash provided by financing activities

$

22,685,084

$

6,961,013

Net change in cash and restricted cash

$

(4,686,824)

$

(1,914,974)

Cash and restricted cash, beginning of period

$

25,513,180

$

9,234,173

Cash and restricted cash, end of period

$

20,826,356

$

7,319,199

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

5

GOODNESS GROWTH HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Description of Business and Summary

Goodness Growth Holdings, Inc. (“Goodness Growth” or the “Company”) (formerly, Darien Business Development Corp.) was incorporated under the Alberta Business Corporations Act on November 23, 2004. On March 18, 2019, the Company completed a Reverse Takeover Transaction (“RTO”) with Vireo Health Inc. (“Vireo U.S.”), whereby the Company acquired Vireo U.S., the shareholders of Vireo U.S. became the controlling shareholders of the Company, and the Company changed its name to Vireo Health International, Inc. Following the RTO, the Company was 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 physician-led, science-focused organization that cultivates and manufactures pharmaceutical-grade cannabis and cannabis extracts. Goodness Growth operates cannabis cultivation, production, and dispensary facilities in Arizona, Maryland, Minnesota, New Mexico, and New York through its subsidiaries.

While marijuana and CBD-infused products are legal under the laws of a large number of 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 is “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.

Since being declared a global pandemic in March 2020, the spread of COVID-19 has severely impacted virtually all areas of the globe. In many countries, including the United States, businesses were forced to cease or limit operations for long or indefinite periods of time. Measures taken to contain the spread of the virus, including travel bans, quarantines, social distancing, and closures of non-essential services triggered significant disruptions to businesses worldwide, resulting in an economic slowdown. Global stock markets have also experienced great volatility. Governments and central banks have responded with monetary and fiscal interventions to stabilize economic conditions.

The duration and impact of the COVID-19 pandemic, as well as the effectiveness of government and central bank responses, remains unclear at this time notwithstanding the loosening or elimination of restrictions in some areas. It is not possible to reliably estimate the duration and severity of these consequences, as well as their impact on the financial position and results of the Company for future periods.

2. Summary of Significant Accounting Policies

Basis of presentation

The accompanying unaudited condensed consolidated financial statements reflect the accounts of the Company. The information included in these statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Form 10-K for the year ended December 31, 2020 (the “Annual Financial Statements”). The unaudited condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”).

These unaudited condensed consolidated financial statements have been prepared on a going concern basis, which assumes 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.

6

For the three and six months ended June 30, 2021, the Company reported a net loss of $5,480,604 and $12,467,176, respectively.  For the three and six months ended June 30, 2020, the Company reported a net loss of $16,115,334 and $23,628,355, respectively.

For the six months ended June 30, 2021, the Company had cash flows used in operating activities of $17,491,337. The Company had net cash outflows for the six months ended June 30, 2021 of $4,686,824.

The Company had working capital of $25,850,661 and $27,098,496 as of June 30, 2021, and December 31, 2020, respectively, reflecting a decrease in cash of $4,686,824 for the six months ended June 30, 2021.

Current management forecasts and related assumptions support the view that the Company can adequately manage the operational needs of the business.

These unaudited condensed 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 unaudited condensed consolidated financial statements include the accounts of the following entities wholly owned, or effectively controlled by the Company during the period ended June 30, 2021:

Name of entity

    

Place of  incorporation

Goodness Growth Holdings, Inc.

 

British Columbia, CAN

Vireo Health, Inc.

 

Delaware, USA

Vireo Health of New York, LLC

 

New York, USA

Minnesota Medical Solutions, LLC

 

Minnesota, USA

Ohio Medical Solutions, Inc.

 

Delaware, 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

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 Company's unaudted condensed consolidated financial statements.

Recently adopted accounting pronouncements

In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options

7

accounted for under Topic 815. ASU 2020-01 is effective for the Company beginning January 1, 2021. 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 unaudited condensed 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 unaudited condensed 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, 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 year ended December 31, 2020, the Company completed divestitures of four subsidiaries, further described in Note 3. None of these divestitures 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.

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.

8

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 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.

The anti-dilutive shares outstanding for three month periods ending June 30, 2021 and 2020 were as follows:

June 30, 

2021

    

2020

Stock options

23,928,810

 

22,728,577

Warrants

4,395,949

 

31,640,183

Convertible notes

 

223,529

Total

28,324,759

 

54,592,289

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 one business segment, namely as the cannabis segment cultivates, processes and distributes medical and adult-use cannabis products in a variety of formats, as well as related accessories. The Company’s Chief Executive Officer is the Company’s chief operating decision maker.

9

Cash and cash equivalents

Cash and cash equivalents is 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 no cash equivalents for the years presented.

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, accrued expenses and other current liabilities approximate their fair value due to their short-term nature, and the carrying value of long-term loans and convertible 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.

Inventory

Inventory is comprised of work-in-progress, finished goods and non-cannabis. Cost includes harvested finished goods, harvested cannabis (bud and trim) in progress, cannabis oil in progress, accessories, and packaging materials.

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 records 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.

10

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 five to fifteen years, the estimated useful life of property and equipment, other than buildings, ranges from three to ten years. 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 one to sixty-four years.

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 complete 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. Cost is measured based on the fair values of cash consideration paid and equity interests issued. The cost of an intangible asset acquired is its acquisition date fair value.

Amortization of definite life intangible assets is calculated on a straight-line basis over the estimated useful lives of the assets as follows:

Licenses

    

4-20 years

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 whenever events or changes in circumstances indicate that the carrying value of an asset may not be

11

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 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

12

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

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.

The Company generates substantially all its revenue from the direct sale of cannabis products through contracts with medical customers. Cannabis products are sold through various distribution channels. Revenue is recognized when the control of the goods is transferred to the customer, which occurs at a point in time, typically upon delivery to or receipt by the customer, depending on shipping terms.

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.

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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 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 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

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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.

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.

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. 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

The Company has not adopted any new or amended standards during the period ended June 30, 2021.

3. Business Combinations and Dispositions

Dispositions

On October 1, 2020, the Company caused three of its executives to enter into a definitive agreement with a third party to sell all of the assets and liabilities of its affiliated company, Ohio Medical Solutions, LLC (“OMS”), which was owned by such executives, for $1,150,000 in cash. On March 31, 2021, the sale of OMS was completed.  As part of this transaction, the Company transferred assets and liabilities with a net book value of $712,893.  Consideration received exceeded OMS’s net assets at the time of sale, resulting in a gain of $437,107 which was recorded in the unaudted condensed consolidated statement of loss and comprehensive loss for the six months ended June 30, 2021.

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 100% of the membership interests in MJ Distributing C201, LLC and MJ Distributing P132, LLC (“MJ Distributing”) which currently hold licenses to cultivate and distribute, respectively, medical and adult-use cannabis in the state of Nevada. The purpose of this acquisition was to acquire a medical marijuana license in the state of Nevada. The acquisition was financed with cash on hand and stock.

The acquisition of MJ Distributing was completed on January 5, 2021. As part of the closing of the acquisition the restricted cash of $1,592,500 was transferred to the sellers, the convertible notes in escrow were cancelled, and the Company issued

15

1,050,000 subordinate voting shares to the sellers. Management determined the total consideration paid of $1,592,500 in restricted cash, $1,564,500 associated with the fair value of the subordinate voting shares issued, and $28,136 of incurred acquisition costs, was equal to the fair value of the intangible asset acquired, or $3,185,136. The related operating results are included in the accompanying unaudited condensed consolidated statements of operations, changes in shareholders’ equity, and statement of cash flows commencing from the date of acquisition.

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.

The following tables present information about the Company’s assets that are measured at fair value on a recurring basis as of June 30, 2021, and December 31, 2020, 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

June 30, 2021

 

  

 

  

 

  

 

  

Cash

$

20,826,356

$

$

$

20,826,356

Restricted cash

 

 

 

 

Total assets

$

20,826,356

$

$

$

20,826,356

Warrant liability

3,705,859

3,705,859

Total liabilities

$

$

$

3,705,859

$

3,705,859

December 31, 2020

Cash

 

25,513,180

 

 

 

25,513,180

Restricted cash

 

1,592,500

1,592,500

Total assets

$

27,105,680

$

$

$

27,105,680

The following table reflects the activity for the Company’s warrant derivative liability for the private placement measured at fair value using Level 3 inputs:

    

Warrant Liability

Balance as of December 31, 2020

Issuance

$

5,395,759

Adjustments to estimated fair value

 

(1,689,900)

Balance as of June 30, 2021

$

3,705,859

The resulting gain upon revaluation of $1,689,900 for the six month period ended June 30, 2021, is reflected in the unaudited condensed consolidated statement of net loss and comprehensive loss.

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 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, 2020, the fair values of intangible assets and goodwill were concluded to exceed their

16

carrying values. As a result, the Company did not record impairment charges during the year ended December 31, 2020. No additional impairment was determined necessary as of June 30, 2021.

The estimated fair value of cash and cash equivalents, accounts receivable, net, accounts payable, and accrued expenses and other current liabilities at June 30, 2021 and December 31, 2020 approximate their carrying amount due to short term nature of these instruments.

5. Trade Receivables

Trade receivables are comprised of the following items:

June 30, 

December 31, 

    

2021

    

2020

Trade receivable

$

2,312,266

$

486,807

Tenant improvements receivable

 

 

127,160

Other

 

132,701

 

83,027

Total

$

2,444,967

$

696,994

Included in the trade receivables, net balance at June 30, 2021 is an allowance for doubtful accounts of $257,729 and $132,490 at December 31, 2020.

6. Notes Receivable

As of June 30, 2021, the Company had a total of $3,850,561 in notes receivable and $4,043,700 at December 31, 2020. The June 30, 2021 balance is comprised primarily of the $3,750,000 four-year note with an 8 percent coupon rate payable quarterly obtained as part of the disposition of Pennsylvania Medical Solutions in August of 2020.

7. Inventory

Inventory is comprised of the following items net of inventory reserves of $161,000 and $290,000 as of June 30, 2021, and December 31, 2020, respectively:

    

June 30, 

December 31, 

    

2021

    

2020

Work-in-progress

$

11,410,299

$

8,317,502

Finished goods

 

4,531,979

 

3,980,900

Non-cannabis inventory

 

785,362

 

346,493

Total

$

16,727,640

$

12,644,895

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:

    

Three Months Ended June 30,

Six Months Ended June 30,

    

2021

    

2020

2021

    

2020

Work-in-progress

$

$

$

$

Finished goods

 

45,000

 

194,234

 

113,000

 

333,242

Non-cannabis inventory

 

 

 

 

Total

$

45,000

$

194,234

$

113,000

$

333,242

During the three and six months ended June 30, 2021 and 2020, the Company recorded write downs to net realizable value and adjustments to the inventory reserve. Based on the market sales prices relative to the cost to produce certain inventories net realizable value was less than the carrying value of inventory.

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8. Prepayments and other current assets

Prepayments and other current assets are comprised of the following items:

    

June 30, 

December 31, 

    

2021

    

2020

Prepaid Insurance

$

1,149,310

$

921,600

Other Prepaid Expenses

 

714,531

 

630,678

Total

$

1,863,841

$

1,552,278

9. Deferred Acquisition Costs

As of June 30, 2021, the Company had a total of $0 in deferred acquisition costs. The December 31, 2020 balance of $28,136 relating to the acquisition of MJ Distributing was released upon the closing of the acquisition on January 5, 2021 (Note 3).

10. Property and Equipment, Net

Property and equipment, net consisted of the following:

    

June 30, 

December 31, 

    

2021

    

2020

Land

$

1,366,650

$

1,309,949

Buildings and leasehold improvements

 

14,543,367

 

7,280,665

Furniture and equipment

 

6,695,681

 

4,635,602

Software

 

221,540

 

221,540

Vehicles

 

513,135

 

379,852

Construction-in-progress

 

11,488,545

 

9,276,852

Right of use asset under finance lease

 

13,491,738

 

12,351,838

 

48,320,656

 

35,456,298

Less: accumulated depreciation

 

(6,216,535)

 

(4,890,039)

Total

$

42,104,121

$

30,566,259

For the six months ended June 30, 2021 and 2020, total depreciation on property and equipment was $1,404,705 and $1,280,477, respectively. For the six months ended June 30, 2021 and 2020, accumulated amortization of the right of use asset under finance lease amounted to $2,024,551 and $2,786,418, respectively. The right of use asset under finance lease of $13,491,738 consists of leased processing and cultivation premises. The Company capitalized into inventory $986,896 and $1,057,849 relating to depreciation associated with manufacturing equipment and production facilities as of June 30, 2021 and 2020, respectively. The capitalized depreciation costs associated are added to inventory and expensed through Cost of Sales Product Cost on the unaudited condensed consolidated statements of net loss and comprehensive loss.

11. Leases

Components of lease expenses are listed below:

    

June 30, 

    

2021

Finance lease cost

  

Amortization of ROU assets

$

458,505

Interest on lease liabilities

 

1,774,316

Operating lease expense

 

1,308,916

Total lease expenses

$

3,541,737

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Future minimum lease payments (principal and interest) on the leases are as follows:

    

Operating Leases

    

Finance Leases

    

    

June 30, 2021

    

June 30, 2021

    

Total

2021

$

2,426,535

$

3,207,756

$

5,634,291

2022

 

2,446,918

 

3,355,409

 

5,802,327

2023

 

2,180,276

 

3,313,906

 

5,494,182

2024

 

2,020,405

 

3,249,275

 

5,269,680

2025

 

1,619,600

 

3,361,488

 

4,981,088

Thereafter

 

3,369,175

 

68,733,017

 

72,102,192

Total minimum lease payments

$

14,062,909

$

85,220,851

$

99,283,760

Less discount to net present value

 

  

 

(76,212,473)

Present value of lease liability

$

23,071,287

The Company has entered into various lease agreements for the use of buildings used in production and retail sales of cannabis products.

Supplemental cash flow information related to leases:

    

June 30, 

    

2021

Cash paid for amounts included in the measurement of lease liabilities:

  

Financing cash flows from finance leases

$

653,165

Non-cash additions to ROU assets

 

2,369,610

Amortization of operating leases

 

630,776

Other information about lease amounts recognized in the financial statements:

    

June 30, 

    

2021

    

Weighted-average remaining lease term (years) – operating leases

6.07

 

Weighted-average remaining lease term (years) – finance leases

19.79

 

Weighted-average discount rate – operating leases

0.15

%  

Weighted-average discount rate – finance leases

22.31

%  

12. Goodwill

The following table shows the change in carrying amount of goodwill:

Goodwill - January 1, 2020

    

$

3,132,491

Impairment

 

Goodwill - December 31, 2020 and June 30, 2021

$

3,132,491

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’s annual impairment testing is December 31. On this date the Company performed a Step 1 goodwill impairment analysis. No indicators of impairment exist as of June 30, 2021.

13. Intangibles

During the six months ended June 30, 2021, the Company acquired cannabis licenses in Nevada.  The fair value allocated to a license is depreciated over its expected useful life, which is estimated to be 15 years.

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Intangible assets are comprised of the following items:

    

Licenses

    

Royalty Asset

    

Total

Balance, December 31, 2019

$

9,001,237

$

 

$

9,001,237

Additions (Note 3)

 

 

68,276

 

 

68,276

Dispostions

 

(45,000)

 

 

 

(45,000)

Amortization

 

(615,094)

 

 

 

(615,094)

Balance, December 31, 2020

$

8,341,143

$

68,276

 

$

8,409,419

Additions (Note 3)

 

3,185,136

 

 

 

3,185,136

Amortization

 

(412,885)

 

 

 

(412,885)

Balance, June 30, 2021

$

11,113,394

$

68,276

 

$

11,181,670

Amortization expense for intangibles was $206,442 and $412,885 during the three and  six months ended June 30, 2021, respectively, and $154,191 and $308,381 during the three and six months ending June 30, 2020, respectively. Amortization expense is recorded in operating expenses on the unaudited condensed consolidated statements of net loss and comprehensive loss.

The Company estimates that amortization expense will be $825,772 per year for the next five fiscal years.

14. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities are comprised of the following items:

    

June 30, 

December 31, 

    

2021

    

2020

Accounts payable – trade

$

1,295,036

$

900,929

Accrued Expenses

 

5,608,793

 

5,106,407

Taxes payable

 

2,734,270

 

7,227,245

Contract liability

 

374,498

 

242,722

Total accounts payable and accrued liabilities

$

10,012,597

$

13,477,303

15. Long-Term Debt

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 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”). 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 $986,035 which were paid in cash. Obligations under the Credit Facility are secured by substantially all the assets of the borrowers. The Credit Facility and related documents also provide for the payment of certain fees to the agent, including a closing fee equal to 3% of each loan advanced, and a 3.25% closing fee to the broker. The unpaid principal amounts outstanding under the Credit Facility bear interest at a rate of (a) 13.625% 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 to 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 (Note 16) which is treated as a deferred financing cost.

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