LEASES

12 Months Ended

Dec. 31, 2022

LEASES

LEASES

NOTE 10. LEASES

The Company’s leases consist primarily of real estate leases for retail, cultivation, and manufacturing facilities.

All but one of the Company’s leases are classified as operating leases. The lease for the retail dispensary acquired in the Green Man Transaction is classified as a finance lease. The current and non-current portions of the operating lease liabilities and finance lease liabilities are disclosed separately on the accompanying consolidated balance sheets. The finance lease ROU asset is included in property and equipment, net (see Note 8) and the operating lease ROU asset is disclosed separately on the accompanying consolidated balance sheets. As the rate implicit in the Company’s leases is not readily determinable, we used an estimated incremental borrowing rate of 20% in determining the present value of lease payments.

The operating lease expense for the years ended December 31, 2022 and December 31, 2021 is as follows:

For the year ended December 31,	2022		2021
Straight-line operating lease expense	$	743,156	$	495,988
Variable lease cost		133,689		50,197
Short-term lease cost		—		68,768
Total operating lease expense	$	876,845	$	614,953

The expense associated with the finance lease cost was not material for the year ended December 31, 2022 as the commencement date of the lease was December 19, 2022.

Related party leases

As of December 31, 2022, three of the Company’s operating leases, one retail dispensary lease, one cultivation facility lease, and one lease that includes both cultivation and retail, are related party leases as the landlords are current board members or employees. Another retail dispensary lease was with a related party through May 2022 when the building was sold to an unaffiliated third-party. During the year ended December 31, 2021, the related party operating leases consisted of one dispensary lease and one cultivation facility. As of December 31, 2022, the ROU asset, operating lease liability, current, and operating lease liability, non-current for the related party leases are $1,074,958, $526,378, and $618,617, respectively. For the years ended December 31, 2022 and December 31, 2021, the total lease expense for related party leases was $434,437 and $516,383, respectively.

Lease Maturities

Future remaining minimum lease payments on our operating leases and finance lease are as follows:

Year ending December 31,	Operating leases		Finance lease
2023	$	1,433,188	$	200,000
2024		1,458,810		205,400
2025		1,146,340		171,043
2026		820,391		136,940
2027		507,871		143,102
Thereafter		965,356		818,100
Total		6,331,956		1,674,585
Less: Present value adjustment		(2,357,182)		(912,155)
Lease liability		3,974,774		762,430
Less: Lease liability, current		(1,433,184)		(55,777)
Lease liability, non-current	$	2,541,590	$	706,653

The total remaining lease payments in the table above include $2,995,100 related to renewal option periods that management is reasonably certain will be exercised. The majority of this amount relates to the flagship Trees location in Englewood, Colorado and the retail and certain cultivation facilities that were acquired in the Green Tree Acquisition and are eligible for renewal in 2023.

The total remaining minimum lease payments in the table above exclude $474,574 related to leases that are fully executed but have not yet commenced as of December 31, 2022.

As of December 31, 2022, the weighted average remaining term of the Company’s operating leases is 5 years and the remaining term on the finance lease is 10 years.

None of the Company’s leases contain residual value guarantees or restrictive covenants.

Supplemental cash flow information

For the year ended December 31,	2022		2021
Supplemental cash flow information
Cash paid for amounts included in operating lease liability	$	685,214	$	439,826
Cash paid for amounts included in finance lease liability	$	4,194	$	—
Supplemental lease disclosures of non-cash transactions:
ROU assets obtained in exchange for operating lease liabilities	$	2,235,798	$	1,311,124
ROU assets obtained in exchange for finance lease liabilities	$	766,623	$	—
Reduction of operating lease ROU asset and operating lease liabilities from remeasurement (1)	$	(1,097,651)	$	—

(1) In April 2022, the lease for Seven-Five Farm, a cultivation facility, was amended and the remaining lease payments were reduced. Upon modification, management reassessed the lease term and concluded that it was not reasonably certain that any of the renewal option periods in the lease would be exercised. This conclusion was different than the conclusion reached at the initial commencement of the lease in 2020. The significant drop in the wholesale cost of marijuana flower and the current economic environment in the cannabis industry, particularly in the cultivation sector, is the primary driver of this change. As a result, the measurement of the ROU asset and operating lease liability no longer includes the payments associated with the renewal option periods.