UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __to __
Commission File Number: 000-56294
COLUMBIA CARE INC.
(Exact Name of Registrant as Specified in its Charter)
British Columbia
98-1488978
(State or other jurisdiction of
incorporation or organization)
(I.R.S. EmployerIdentification No.)
680 Fifth Ave., 24th Floor
New York, New York
10019
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: (212) 634-7100
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐
As of August 8, 2022, there were 386,406,231 shares of common stock, no par value per share, outstanding.
Table of Contents
Page
FORWARD-LOOKING STATEMENTS
2
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
3
Condensed Consolidated Statements of Operations and Comprehensive Loss
4
Condensed Consolidated Statements of Changes in Equity
5
Condensed Consolidated Statements of Cash Flows
7
Notes to Unaudited Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
28
Item 4.
Controls and Procedures
PART II.
OTHER INFORMATION
29
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
30
Signatures
32
i
This Quarterly Report on Form 10-Q contains “forward-looking statements” regarding Columbia Care Inc. and its subsidiaries (collectively referred to as “Columbia Care,” “we,” “us,” “our,” or the “Company”). We make forward-looking statements related to future expectations, estimates, and projections that are uncertain and often contain words such as, but not limited to, “may”, “would”, “could”, “should”, “will”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “expect” or other similar words or phrases. These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and assumptions that are difficult to predict. Particular risks and uncertainties that could cause our actual results to be materially different from those expressed in our forward-looking statements include those listed below:
•
the satisfaction of the conditions precedent to the closing of the Cresco Transaction (as defined herein);
the receipt of any necessary regulatory approvals in connection with Cresco Transaction (as defined herein);
the impact of the Cresco Transaction (as defined herein) on the Company’s current and future operations, financial condition and prospects;
the value of the Cresco Labs Shares (as defined herein);
the costs of the Cresco Transaction (as defined herein) and potential payment of a termination fee in connection with the Cresco Transaction (as defined herein);
the ability to successfully integrate with the operations of Cresco Labs (as defined herein) and realize the expected benefits of the Cresco Transaction (as defined herein);
the fact that marijuana remains illegal under federal law;
the application of anti-money laundering laws and regulations to the Company;
legal, regulatory, or political change to the cannabis industry;
access to the services of banks;
access to public and private capital;
unfavorable publicity or consumer perception of the cannabis industry;
expansion to the adult-use market;
the impact of laws, regulations, and guidelines;
the impact of Section 280E of the Internal Revenue Code;
the impact of state laws pertaining to the cannabis industry;
the Company’s reliance on key inputs, suppliers and skilled labor;
the difficulty of forecasting the Company’s sales;
constraints on marketing products;
potential cyber-attacks and security breaches;
net operating loss and other tax attribute limitations;
the impact of changes in tax laws;
the volatility of the market price of the Common Shares;
reliance on management;
litigation;
future results and financial projections; and
the impact of global financial conditions
The list of factors above is illustrative and by no means exhaustive. Additional information regarding these risks and other risks and uncertainties we face is contained in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2021, and our Form 10, dated May 9, 2022. Although the Company has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking information, there may be other factors that cause results not to be as anticipated, estimated, or intended.
We urge readers to consider these risks and uncertainties in evaluating our forward-looking statements. We caution readers not to place undue reliance upon any such forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Expressed in thousands of U.S. dollars, except share data)
June 30, 2022
December 31, 2021
Assets
Current assets:
Cash
$
81,440
82,198
Accounts receivable, net of allowances of $2,222 and, $2,542, respectively
11,193
18,302
Inventory
121,514
94,567
Prepaid expenses and other current assets
28,333
29,252
Prepaid Income Tax
11,510
—
Assets held for sale
2,120
Total current assets
256,110
226,439
Property and equipment, net
373,877
339,692
Right of use assets - operating leases, net
190,204
179,099
Right of use assets - finance leases, net
64,645
66,442
Goodwill
184,018
Intangible assets, net
337,798
367,787
Other non-current assets
13,813
13,035
Total assets
1,420,465
1,376,512
Liabilities and Equity
Current liabilities:
Accounts payable
35,046
44,007
Accrued expenses and other current liabilities
57,211
126,954
Income tax payable
26,537
Contingent consideration
25,680
29,345
Current portion of lease liability - operating leases
9,266
9,056
Current portion of lease liability - finance leases
5,665
5,092
Current portion of long-term debt, net
4,509
1,884
Liabilities held for sale
1,122
Total current liabilities
138,499
243,997
Long-term debt, net
321,157
159,017
Deferred taxes
85,908
79,477
Long-term lease liability - operating leases
188,201
176,004
Long-term lease liability - finance leases
68,534
70,268
11,680
11,596
Derivative liability
1,098
6,795
Other long-term liabilities
77,419
78,535
Total liabilities
892,496
825,689
Commitments and contingencies
Stockholders' Equity:
Common Stock, no par value, unlimited shares authorized as of June 30, 2022 and December 31, 2021, respectively, 386,406,231 and 361,423,270 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
Preferred Stock, no par value, unlimited shares authorized as of June 30, 2022 and December 31, 2021, respectively, none issued and outstanding as of June 30, 2022 and December 31, 2021
Proportionate voting shares, no par value, unlimited shares authorized as of June 30, 2022 and December 31, 2021, respectively; 12,298,128 and 14,729,636 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
Additional paid-in-capital
1,099,033
1,039,726
Accumulated deficit
(568,462
)
(468,335
Equity attributable to Columbia Care Inc.
530,571
571,391
Non-controlling interest
(2,602
(20,568
Total equity
527,969
550,823
Total liabilities and equity
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Expressed in thousands of U.S. dollars, except for number of shares and per share amounts)
Three months ended
Six months ended
June 30, 2021
Revenue
129,571
102,387
252,658
188,482
Cost of sales related to inventory production
(78,723
(59,288
(145,183
(111,595
Cost of sales related to business combination fair value adjustments to inventory
(1,352
-
(1,492
Gross profit
50,848
41,747
107,475
75,395
Selling, general and administrative expenses
(72,956
(52,503
(144,248
(100,537
Loss from operations
(22,108
(10,756
(36,773
(25,142
Other expense:
Interest (expense) income on leases, net
(1,370
(1,614
(2,796
(2,764
Interest (expense) income, net
(11,484
(4,009
(22,728
(7,865
Other income (expense), net
(591
572
(530
319
Total other expense
(13,445
(5,051
(26,054
(10,310
Loss before income taxes
(35,553
(15,807
(62,827
(35,452
Income tax expense
(18,702
(2,850
(19,334
(12,368
Net loss and comprehensive loss
(54,255
(18,657
(82,161
(47,820
Net gain/(loss) attributable to non-controlling interests
(427
(513
(1,697
(894
Net loss attributable to shareholders
(53,828
(18,144
(80,464
(46,926
Weighted-average number of shares used in earnings per share - basic and diluted
394,023,144
313,771,867
385,258,892
304,346,270
Loss attributable to shares (basic and diluted)
(0.14
(0.06
(0.21
(0.15
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Expressed in thousands of U.S. dollars, except for number of shares)
Proportionate
Additional
Accumulated
Total Columbia Care Inc.
Non-Controlling
Total
Shares
Voting Shares
Paid-in Capital
Deficit
Shareholders' Equity
Interest
Equity
Balance, December 31, 2021
361,423,270
14,729,636
Equity-based compensation (1)
237,486
6,358
Warrants exercised
180,000
425
Net loss
(26,636
(1,270
(27,906
Balance, March 31, 2022
361,840,756
1,046,509
(494,971
551,538
(21,838
529,700
21,034,418
49,346
Issuance of shares in connection with acquisitions
1,099,549
3,178
Cancellation of restricted stock awards
Conversion of convertible notes
Conversion between classes of shares
2,431,508
(2,431,508
Non-controlling interest buyout
(19,663
19,663
Balance, June 30, 2022
386,406,231
12,298,128
(1)
The amounts shown are net of any shares withheld by the Company to satisfy certain tax withholdings in connection with vesting of equity-based awards.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (CONTINUED)
(expressed in thousands of U.S. dollars, except for number of shares)
Balance, December 31, 2020
250,003,917
26,507,914
632,062
(325,238
306,824
(19,875
286,949
190,925
7,792
Issuance of shares, net
21,792,500
133,151
971,541
4,972
9,236,733
(9,236,733
(13,770
(8,077
262,200
808
(28,782
(381
(29,163
Balance, March 31, 2021
282,444,046
17,263,104
778,785
(354,020
424,765
(20,256
404,509
4,787,211
2,582
54,238,143
189,019
4,550,139
23,919
1,584,570
(1,584,570
(85,755
(330,646
551,743
1,093
Non-controlling interest buyouts
1,964
1,960
(1,960
Balance, June 30, 2021
348,070,097
15,347,888
997,362
(372,164
625,198
(22,729
602,469
(1) The amounts shown are net of any shares withheld by the Company to satisfy certain tax withholdings in connection with vesting of equity-based awards.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(expressed in thousands of U.S. dollars)
Six Months Ended June 30,
2022
2021
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
41,268
17,725
Equity-based compensation
14,052
13,334
Debt amortization expense
4,073
2,428
Loss on Conversion of debts
1,580
Earnout adjustment
476
Provision for obsolete inventory and other assets
272
1,942
Change in fair value of derivative liability
(5,697
(1,913
13,762
4,888
Other
730
(154
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable
6,978
1,842
(27,218
(8,472
(1,684
(4,347
Other assets
(12,961
5,578
Payroll liabilities
(1,230
(1,994
(2,920
(110
(22,842
(4,991
Income taxes payable
(38,047
3,314
13,366
(1,945
Net cash used in operating activities
(99,783
(19,115
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired
(963
(35,214
Purchases of property and equipment
(58,673
(32,261
Cash paid for other acquisition
(15,727
Proceeds from sale of plant, property and equipment
255
Cash (paid) received on deposits, net
1,699
(1,402
Cash for loan under Cannascend and Corsa Verde agreements
(281
Net cash used in investing activities
(57,682
(84,885
Cash flows from financing activities:
Proceeds from issuance of debt
153,250
74,500
Debt issuance costs
(7,698
(2,980
Proceeds from issue of equity
133,559
Equity issuance costs
(408
Repayment of debt
(278
Issuance of Mortgage
16,500
Repayment of sellers note
(1,125
(7,875
Payment of lease liabilities
(2,966
(4,590
Exercise of warrants
1,901
Taxes paid on equity based compensation
(401
(2,965
Net cash provided by financing activities
157,707
191,142
Net increase (decrease) in cash
242
87,142
Cash and restricted cash at beginning of the period
82,533
71,969
Cash and restricted cash at end of the period
82,775
159,111
Reconciliation of cash and cash equivalents and restricted cash:
Cash and cash equivalents
148,750
Restricted cash
1,335
10,361
Cash and cash equivalents and restricted cash, end of period
Supplemental disclosure of cash flow information:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
12,424
10,168
Operating cash flows from finance leases
2,913
2,413
Financing cash flows from finance leases
2,965
4,590
Cash paid for interest on other obligations
12,180
6,141
Cash paid for income taxes
43,759
4,312
Lease liabilities arising from the recognition of finance right-of-use assets
10,406
13,456
Lease liabilities arising from the recognition of operating right-of-use assets
1,851
31,382
Supplemental disclosure of non-cash investing and financing activities:
Non-cash fixed asset additions within accounts payable and accrued expenses
7,957
15,182
Shares issued in connection with business acquisitions
132,201
NOTES TO THE CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE three AND SIX months ended jUNE 30, 2022 and 2021
(Expressed in thousands of U.S. dollars, except for share and per share amounts)
1.
OPERATIONS OF THE COMPANY
Columbia Care Inc. (“the Company” or “the Parent”), was incorporated under the laws of the Province of Ontario on August 13, 2018. The Company's principal mission is to improve lives by providing cannabis-based health and wellness solutions and derivative products to qualified patients and consumers. The Company’s head office and principal address is 680 Fifth Ave. 24th Floor, New York, New York 10019. The Company’s registered and records office address is 666 Burrard St #1700, Vancouver, British Columbia V6C 2X8.
On April 26, 2019, the Company completed a reverse takeover (“RTO”) transaction and private placement. Following the RTO, the Company’s Common Shares were listed on the Aequitas NEO exchange, trading under the symbol “CCHW”. As of the time of this report, the Company’s Common Shares are also listed on the Canadian Securities Exchange (the “CSE”) under the symbol “CCHW”, the OTCQX Best Market under the symbol “CCHWF” and on the Frankfurt Stock Exchange under the symbol “3LP.
On March 23, 2022, the Company jointly announced with Cresco Labs LLC (“Cresco Labs”) that the Company and Cresco Labs have entered into a definitive arrangement agreement (the “Arrangement Agreement”) pursuant to which Cresco Labs will acquire all of the issued and outstanding shares (the “Company Shares”) of the Company (the “Cresco Transaction”). Subject to customary closing conditions and necessary regulatory approvals, the Cresco Transaction is expected to close around the end of 2022. Under the terms of the Arrangement Agreement, shareholders of the Company (the “Company Shareholders”) will receive 0.5579 of a subordinate voting share of Cresco Labs (each whole share, a “Cresco Labs Share”) for each Company common share (or equivalent) held, subject to adjustment, representing total consideration enterprise value of approximately US$2.0 billion based on the closing price of Cresco Labs Shares on the CSE as of March 22, 2022. After giving effect to the Cresco Transaction, Company Shareholders will hold approximately 35% of the pro forma Cresco Labs Shares (on a fully diluted in-the-money, treasury method basis).
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
The accompanying unaudited condensed interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP” or “GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”).
The accompanying unaudited condensed interim consolidated financial statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, comprehensive income, statement of shareholders’ equity, and cash flows of the Company for the interim periods presented. Except as otherwise disclosed, all such adjustments consist only of those of a normal recurring nature. Operating results for the three and six months ended June 30, 2022, are not necessarily indicative of the results that may be expected for the current year ending December 31, 2022. The financial data presented herein should be read in conjunction with the audited consolidated financial statements and accompanying notes as of and for the years ended December 31, 2021, and 2020 included in the Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).
The preparation of these unaudited condensed interim consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC and the instructions to Form 10-Q.
Significant Accounting Judgments, Estimates and Assumptions
The Company’s significant accounting policies are described in Note 2 to the Company’s 2021 Form 10-K, filed with the Securities and Exchange Commission, or SEC, on March 31, 2022. There have been no material changes to the Company’s significant accounting policies.
The Company’s revenues are disaggregated as follows:
Dispensary
109,457
85,942
212,799
159,899
Cultivation and wholesale
20,093
16,417
39,815
28,496
21
44
87
During the three and six months ended June 30, 2022, the Company netted discounts of $48,618 and $22,712, against the revenues, respectively. During the three and six months ended June 30, 2021, the Company netted discounts of $25,542 and $13,337, against the revenues, respectively. Discounts are provided by the Company during promotional days or weekends. Discounts are also provided to employees, seniors and other categories of customers and may include price reductions and coupons.
Income taxes
The Company calculated its actual effective tax rate for the interim period and applied that rate to the interim period results. In accordance with ASC 740-270, at the end of each interim period the Company is required to determine its best estimate of its annual effective tax rate and apply that rate in providing income taxes on an interim period. However, in certain circumstances when the Company concludes it is unable to reliably estimate the annual effective tax rate for the year, the actual effective tax rate for the interim period may be used. The Company believes that, at this time, the use of the actual effective tax rate is more appropriate than the estimated annual effective tax rate method as the estimated annual effective tax rate method is not reliable due the high degree of uncertainty in estimating annual pre-tax income due to the growth stage of the business, the correlation of SG&A expenses to revenue that are permanently disallowed via Section 280E of the Internal Revenue Code, and the timing of the completion of the Cresco transaction.
Modification of debt
The Company accounts for modifications of debt arrangements in accordance with ASC 470-50 Modifications and Extinguishments (“ASC 470-50”). As such, the Company continues to amortize any remaining unamortized debt discount as of debt modification date over the term of the amended debt. The Company expenses any fees paid to third parties and capitalizes creditor fees associated with the modification as a debt discount and amortizes them over the term of the amended debt.
Business Combinations
We include the results of operations of the businesses that we acquire as of the acquisition date. We allocate the purchase price of the acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase price over the fair values of identifiable assets and liabilities is recorded as goodwill. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
3.
INVENTORY
Details of the Company’s inventory are shown in the table below:
Accessories
778
815
Work-in-process - cannabis in cures and final vault
50,993
52,519
Finished goods - dried cannabis, concentrate and edible products
69,743
41,233
Total inventory
The inventory values are net of inventory write-downs as a result of obsolescence or unmarketability charged to cost of sales. As a result of local market conditions in Colorado, there was a $2,400 write-down during the three and six months ended June 30, 2022.
9
4.
CURRENT AND LONG-TERM DEBT
Current and long-term obligations, net, are shown in the table below:
2026 Notes
185,000
Term debt
38,215
69,965
2025 Convertible Notes
Mortgage Notes
36,271
20,000
2023 Convertible Notes
5,600
Acquisition related real estate notes
7,000
Acquisition related promissory notes
3,750
4,875
Acquisition related term debt
353,650
185,254
Unamortized debt discount
(15,206
(19,301
Unamortized deferred financing costs
(12,880
(5,379
Unamortized debt premium
102
327
Total debt, net
325,666
160,901
Less current portion, net*
(4,509
(1,884
Long-term portion
*The current portion of the debt includes scheduled payments on the mortgage note, acquisition related promissory notes and acquisition related notes payable, net of corresponding portion of the unamortized debt discount, and unamortized deferred financing costs.
The Company was in compliance with all financial covenants and was not in default of any provisions under any of its debt arrangements as of June 30, 2022.
Private Placement
On February 3, 2022, Columbia Care closed a private placement of $185,000 aggregate principal amount of 9.50% senior-secured first-lien notes due 2026 (the “2026 Notes”) and received aggregate gross proceeds of $153,250. The 2026 Notes are senior secured obligations of the Company and were issued at 100.0% of face value. The 2026 Notes accrue interest in arrears which is payable semi-annually and mature on February 3, 2026, unless earlier redeemed or repurchased. The Company may redeem the 2026 Notes at par, in whole or in part, on or after February 3, 2024, as more particularly described in the fourth supplemental trust indenture governing the 2026 Notes. In connection with the offering of the 2026 Notes, the Company exchanged $31,750 of the Company’s existing 13.0% Term Debt, pursuant to private agreements in accordance with the trust indenture, for an equivalent amount of 2026 Notes plus accrued but unpaid interest and any negotiated premium thereon.
The premium and paid interest were paid out of funds raised from the February 2022 Private Placement. The Company accounted for the exchange of $31,750 aggregate principal amount of the existing Term Debt as a debt modification in accordance with ASC 470-50. The total unamortized debt and debt issuance costs of $2,153, related to modified portion of the Term Debt, will be amortized over the term of the 2026 Notes using the effective interest method. The Company incurred $7,189 in creditor fees in connection with the modified Term Debt and 2026 Notes and $301 in third-party legal fees related to 2026 Notes which were capitalized and will be amortized over the term of the 2026 Notes using the effective interest rate method.
Total interest and amortization expense on the Company’s debt obligations during the three and six months ended June 30, 2022 and 2021 are as follows:
Interest expense
9,426
2,910
18,852
5,897
Amortization of debt discount
1,301
959
2,597
2,022
Amortization of debt premium
(38
(70
(87
(140
Amortization of debt issuance costs
875
298
1,564
546
Other interest (expense) income, net
(80
(88
(198
(460
Total interest expense
11,484
4,009
22,728
7,865
10
The weighted average interest rate on the Company’s indebtedness was 8.6%.
5.
ACQUISITIONS
Futurevision Holdings, Inc., Futurevision 2020, LLC and Medicine Man Longmont, LLC
On November 1, 2021, the Company acquired (the “Medicine Man Transaction”) a 100% ownership interest in Futurevision Holdings, Inc. and Futurevision 2020, LLC (collectively, “Medicine Man”), through the Agreement and Plan of Merger (the “Merger Agreement”). Concurrently with the Merger Agreement, the Company was granted an option (the “Option”) to purchase Medicine Man Longmont, LLC (“Medicine Man Longmont”). The Option was exercised by the Company on August 12, 2022 following the sale of the Company’s former TGS Longmont location in July 2022. The Company has recorded the Option as an intangible asset as of the November 1, 2021, closing date, at its estimated fair value of $5,899, which represents the ultimate purchase price associated with the underlying property, since the time period to exercise the Option is short and given the certainty expressed by management to exercise the Option. As of June 30, 2022 TGS Longmont is reflected within assets held for sale on the Company’s consolidated balance sheet. Medicine Man was formed in 2010 for the purpose of selling medicinal and recreational cannabis products in the state of Colorado. Medicine Man owns and operates vertically integrated cultivation facilities, manufacturing facilities and retail dispensaries in the state of Colorado. The Company executed the Medicine Man Transaction in order to continue to grow revenues; expand its cultivation facilities, manufacturing facilities and dispensaries; and expand in the Colorado market.
The following table summarizes the preliminary fair value of total consideration transferred and the fair value of each major class of consideration for Medicine Man:
Consideration transferred
Cash consideration
7,240
Closing shares
23,955
3,664
Purchase option obligation
5,899
Total unadjusted purchase price
40,758
Working capital adjustment
127
Total adjusted purchase price
40,885
Less: Cash and cash equivalents acquired
(1,250
Total purchase price, net of cash and cash equivalents acquired
39,635
Equity purchase consideration comprised 5,840,229 Common Shares of which 4,857,184 were issued during the year 2021. As per the terms of the Merger Agreement, the Company paid $836 in cash and issued 1,099,549 milestone shares in settlement of contingent consideration during April 2022.
Recognized amounts of identifiable assets acquired, and liabilities assumed, less cash and cash equivalents acquired:
Purchase price allocation
Assets acquired:
3,611
397
Option deposit
Property and equipment
1,498
Right of use assets
10,613
9,908
Intangible assets
30,370
(696
(1,910
Lease liabilities
(11,233
Deferred tax liabilities
(8,822
The purchase price has been allocated on the basis of the preliminary estimates of fair values of assets and liabilities assumed, resulting in a goodwill of $9,908. The goodwill consists of expected synergies from combining operations of the Company and Medicine Man, and intangible assets not qualifying for separate recognition such as formulations, proprietary technologies and acquired know-how. None of the goodwill is deductible for tax purposes. No adjustments to the preliminary
11
allocation of purchase price impacted goodwill during the three and six months ended June 30, 2022. As additional information becomes available, the Company may revise the allocation to certain assets and liabilities and finalize the acquisition accounting within the required measurement period of one year.
Medicine Man’s state licenses and trademarks represented identifiable intangible assets acquired in the amounts of $26,900 and $3,470 respectively, which were determined to have definite useful lives of 10 and 5 years respectively.
The fair value of the acquired assets and liabilities are provisional pending receipt of the final valuations for those assets and liabilities.
In conjunction with the Medicine Man Transaction, the Company expensed $1,099 of acquisition-related costs, which have been included in selling, general and administrative expenses on the Company’s consolidated statement of operations and comprehensive loss for the year ended December 31, 2021.
Accounting for the August 12, 2022 acquisition of the Medicine Man Longmont transaction will be captured in the Company's Q3 financial statements.
Agreement and Plan of Merger with Green Leaf Medical LLC
Effective June 11, 2021, the Company and certain subsidiaries entered into an agreement and plan of merger (the “gLeaf Agreement”) with Green Leaf Medical LLC (“gLeaf”). Under the gLeaf Agreement, the Company may be obligated to provide contingent consideration, payable in common shares of the Company (the “Milestone Shares”), to the shareholders of gLeaf if gLeaf achieves certain performance-based milestones. The Company has retained a third-party expert to independently assess whether Milestone Shares have been earned for the time period of July 1, 2021 to June 30, 2022.
Accordingly, there has been no change to the value of the related contingent liability reported on the Company’s balance sheet as of June 30, 2022.
6.
PROPERTY AND EQUIPMENT
Details of the Company’s property and equipment and related depreciation expense are summarized in the tables below:
Land and buildings
128,751
113,736
Furniture and fixtures
10,456
8,564
Equipment
41,612
36,052
Computers and software
3,507
2,914
Leasehold improvements
200,892
145,259
Construction in process
56,829
86,326
Total property and equipment, gross
442,047
392,851
Less: Accumulated depreciation
(68,170
(53,159
Total property and equipment, net
Total depreciation expense for three months ended
7,804
4,978
15,132
9,681
Included in:
Costs of sales related to inventory production
4,361
2,946
8,488
5,684
3,443
2,032
6,644
3,997
12
7.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Details of the Company’s prepaid expenses and other current assets are summarized in the table below:
Prepaid expenses
17,303
15,362
Short term deposits
5,621
6,960
Other current assets
4,197
5,822
Excise and sales tax receivable
1,212
1,108
8.
OTHER NON-CURRENT ASSETS
Details of the Company’s other non-current assets are summarized in the table below:
Long term deposits
5,413
5,602
Indemnification receivable
2,180
4,111
Investment in affiliates
775
776
335
Notes receivable
4,110
2,211
9.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Details of the Company’s accrued expenses and other current liabilities are summarized in the table below:
Accrued acquisition and settlement of pre-existing relationships
200
86,596
Taxes - property and other
9,962
14,062
Other accrued expenses
27,605
6,035
11,569
12,799
Other current liabilities
7,875
4,673
Construction in progress
2,789
As of June 30, 2022 the Company has recorded a net $7,000 relating to cross-indemnification claims relating to a prior acquisition.
10.
SHAREHOLDERS’ EQUITY
The Company had the following activity during the six months ended June 30, 2022:
Granted 9,561,144 time-based restricted stock units and 1,473,261 performance-based restricted stock units during the six months ended June 30, 2022.
Issued 2,395,792 Common Shares upon vesting of RSU’s. An additional 888,683 shares were sold to cover for taxes on the share-based compensation units that were issued during the six months ended June 30, 2022.
13
11.
WARRANTS
As of June 30, 2022 and December 31, 2021, outstanding equity-classified warrants to purchase Common Shares consisted of the following:
Expiration
Number of Shares Issued and Exercisable
Exercise Price
(Canadian Dollars)
October 1, 2025
648,783
8.12
April 26, 2024
5,394,945
10.35
May 14, 2023
1,723,250
3.10
1,818,788
2.95
1,998,788
1,897,000
5.84
11,482,766
7.22
11,662,766
7.15
Warrant activity for the six months ended June 30, 2022 and 2021 are summarized in the table below:
Number of
Warrants
Weighted average exercise price (Canadian Dollars)
Balance at December 31, 2020
13,147,919
6.91
Exercised
(1,485,153
5.01
Balance at June 30, 2021
Balance at December 31, 2021
(180,000
Balance at June 30, 2022
12.
LOSS PER SHARE
Basic and diluted net loss per share attributable to the Company was calculated as follows:
Numerator:
Less: Net gain/(loss) attributable to non-controlling interests
Denominator:
Weighted average shares outstanding - basic and diluted
Loss per share - basic and diluted
Certain share-based equity awards were excluded from the computation of dilutive loss per share because inclusion of these awards would have had an anti-dilutive effect.
14
13.
COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising out of breach of such agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and senior management that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. Other than the accruals mentioned in this Note, the Company has not accrued any liabilities related to any pending claims potentially subject to indemnification arrangements in its condensed interim consolidated financial statements.
For the quarter ended September 30, 2021, the Company had anticipatorily accrued $68,000 for potential share issuances and cash payments for purposes of acquisition and settlement of pre-existing relationships, inclusive of prospective acquisition costs relating to third-party entities and other litigation costs. On April 18, 2022, in connection with the accrual, the Company issued 18,755,082 common shares and on April 18, 2022 and April 24, 2022 paid approximately $26,000 to acquire, by merger, VentureForth Holdings, LLC, which is the owner of VentureForth. VentureForth holds two licenses from the Washington D.C. Alcoholic Beverage Regulation Administration (“ABRA”), specifically, one license to cultivate and manufacture medical cannabis and one license to dispense medical cannabis. The merger was approved by ABRA. The Company previously had a management services agreement with VentureForth. In further connection with the accrual, the shares issued, and amounts paid also amicably resolved, with no admissions of liability and in exchange for releases, certain direct, indirect, derivative and indemnification claims relating to a confidential arbitration to which VentureForth, a separate subsidiary of the Company and certain members of the Company’s management team were respondent parties.
Additionally, the Company may be contingently liable with respect to other claims incidental to the ordinary course of its operations. In the opinion of management, and based on management's consultation with legal counsel, the ultimate outcome of such other matters will not have a materially adverse effect on the Company. Accordingly, other than as noted in Footnote 9 above, no provisions has been made in these condensed interim consolidated financial statements for losses, if any, which might result from the ultimate disposition of these matters should they arise.
14.
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Fair Value Measurements
The following table presents the Company’s financial instruments that are measured at fair value on a recurring basis:
Level 1
Level 2
Level 3
(1,098
(37,360
(38,458
(6,795
(40,941
(47,736
During the period included in these financial statements, there were no transfers of amounts between levels.
15
The following table summarizes the valuation techniques and key inputs used in the fair value measurement of Level 3 financial instruments:
Financial asset/financial
liability
Valuation techniques
Significant unobservable
inputs
Relationship of unobservable
inputs to fair value
Market approach
Conversion Period
Increase or decrease in conversion period will result in an increase or decrease in fair value
Contingent Consideration
Discounted cash flow approach
Risk adjusted discount rate and forecasted EBITDA
Increase or decrease in risk adjusted discount rate and forecasted EBITDA will result in an increase or decrease in fair value
The carrying amounts of cash and restricted cash, accounts receivable, deposits and other current assets, accounts payable, accrued expenses, and other current liabilities, current portion of long-term debt and lease liability as of June 30, 2022 and December 31, 2021 approximate their fair values because of the short-term nature of these items and are not included in the table above. The Company’s notes receivable, other long-term payables, long-term debt and lease liabilities approximate fair value due to the market rate of interest used on initial recognition.
In addition to the disclosures for assets and liabilities required to be measured at fair value at the balance sheet date, companies are required to disclose the estimated fair values of all financial instruments, even if they are not presented at their fair value on the consolidated balance sheet. The fair values of financial instruments are estimates based upon market conditions and perceived risks as of June 30, 2022 and December 31, 2021. These estimates require management's judgment and may not be indicative of the future fair values of the assets and liabilities.
15.
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following:
256,346
Less: Accumulated impairment on goodwill
(72,328
Total goodwill, net
Licenses
278,479
285,854
Trademarks
59,694
Customer Relationships
52,500
Total intangible assets
390,673
398,048
Less: Accumulated amortization
(52,875
(30,261
Total intangible assets, net
The amortization expense for the three and six months ended June 30, 2022 and 2021 are as follows:
Amortization for the period included in selling, general and administrative expenses
10,454
2,906
22,658
5,812
16
16.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses are summarized in the table below:
Salaries and benefits
34,449
24,366
64,820
48,646
Professional fees
4,865
5,740
11,674
11,065
14,218
5,349
29,928
10,486
Operating facilities costs
11,058
7,062
21,095
13,650
Operating office and general expenses
2,856
3,959
5,633
7,418
Advertising and promotion
4,105
3,672
8,362
6,252
Other fees and expenses
1,405
2,355
2,736
3,020
Total selling, general and administrative expenses
72,956
52,503
144,248
100,537
17.
OTHER EXPENSE, NET
Other expense, net is summarized in the table below:
Change in fair value of the derivative liability
(6,380
(2,092
Loss on extinguishment of debt
Other expense
7,388
(60
7,406
Rental income
(893
(1,655
Total other expense, net
591
(572
530
(319
18.
SUBSEQUENT EVENTS
On March 23, 2022, the Company and Cresco Labs, announced the execution of the Arrangement Agreement, by and between the Company and Cresco Labs. On July 8, 2022, the Company held a special meeting of the shareholders of the Company at which the shareholders approved the Cresco Transaction. On July 15, 2022, the Company also obtained the final order from the Supreme Court of British Columbia approving the Arrangement Agreement with Cresco Labs.
On November 1, 2021, the Company acquired a 100% ownership interest in Medicine Man, through the Merger Agreement. Concurrently with the Merger Agreement, the Company was granted the Option to purchase Medicine Man Longmont. The Option was exercised by the Company on August 12, 2022 following the sale of the Company’s former TGS Longmont location in July 2022. The Company executed the Medicine Man Transaction in order to continue to grow revenues, expand its cultivation facilities, manufacturing facilities and dispensaries, and expand in the State of Colorado.
17
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This management’s discussion and analysis (“MD&A”) of the financial condition and results of operations of Columbia Care Inc. (“Columbia Care”, the “Company”, “us”, “our” or “we”) is supplemental to, and should be read in conjunction with, Columbia Care’s condensed interim consolidated financial statements and the accompanying notes for the three and six months ended June 30, 2022 and 2021. Except for historical information, the discussion in this section contains forward-looking statements that involve risks and uncertainties. Future results could differ materially from those discussed below for many reasons, including the risks described in “Disclosure Regarding Forward-Looking Statements,” “Item 1A-Risk Factors” and elsewhere in the Company’s 2021 Form 10-K filed with the SEC on March 31, 2022 and subsequent securities filings.
Columbia Care’s financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). Financial information presented in this MD&A is presented in thousands of United States dollars (“$” or “US$”), unless otherwise indicated.
OVERVIEW OF COLUMBIA CARE
Our principal business activity is the production and sale of cannabis. We strive to be the premier provider of cannabis-related products in each of the markets in which we operate. Our mission is to improve lives by providing cannabis-based health and wellness solutions through community partnerships, research, education and the responsible use of our products as a natural means to improve the quality of life of our patients and customers.
COLUMBIA CARE OBJECTIVES AND FACTORS AFFECTING OUR PERFORMANCE
As one of the largest fully integrated operators in the cannabis industry, our strategy to grow our business is comprised of the following key components:
Expansion and development within and outside our current markets
Patient-centric, provider-based model to leverage health and wellness focus
Consistency of proprietary product portfolio comprised of branded consumer and patient products
Intellectual property and data-driven innovation
Our performance and future success are dependent on several factors. These factors are also subject to inherent risks and challenges, some of which are discussed below.
Branding
We have established a national branding strategy across each of the jurisdictions in which we operate. Maintaining and growing our brand appeal is critical to our continued success.
Regulation
We are subject to the local and federal laws in the jurisdictions in which we operate. Outside of the United States, our products may be subject to tariffs, treaties and various trade agreements as well as laws affecting the importation of consumer goods. We hold all required licenses for the production and distribution of our products in the jurisdictions in which we operate and continuously monitor changes in laws, regulations, treaties and agreements. In recent years, a temporary federal legislative enactment that prohibits the Department of Justice from expending appropriated funds to enforce federal laws that interfere with a state's implementation of its own medical marijuana laws has been included in multiple Appropriations laws that have passed Congress. This so-called budget rider is known as the Rohrbacher-Farr Amendment. The Rohrbacher-Farr Amendment has been included in successive appropriations legislation or resolutions since 2015. The Rohrabacher-Farr Amendment was extended most recently through September 30, 2022. Notably, the Rohrbacher-Farr Amendment has applied only to medical marijuana programs and has not provided the same protections to enforcement related to adult-use activities.
Product Innovation and Consumer Trends
Our business is subject to changing consumer trends and preferences, which is dependent, in part, on continued consumer interest in new products. The success of new product offerings, depends upon a number of factors, including our ability to (i) accurately anticipate customer needs; (ii) develop new products that meet these needs; (iii) successfully commercialize new products; (iv) price products competitively; (v) produce and deliver products in sufficient volumes and on a timely basis; and (vi) differentiate product offerings from those of competitors.
Growth Strategies
We have a successful history of growing revenue and we believe we have a strong strategy aimed at continuing our history of expansion in both current and new markets. Our future depends, in part, on our ability to implement our growth strategy including (i) product innovations; (ii) penetration of new markets; (iii) growth of wholesale revenue through third party retailers and distributors; (iv) future development and expansion of e-commerce and home delivery distribution capabilities; and (v) expansion of our cultivation and manufacturing capacity. Our ability to implement this growth strategy depends, among other things, on our ability to develop new products that appeal to consumers, maintain and expand brand loyalty, maintain and improve product quality and brand recognition, maintain and improve competitive position in our current markets, and identify and successfully enter and market products in new geographic areas and segments.
Recent Announcements
On March 23, 2022, the Company and Cresco Labs announced the execution of the Arrangement Agreement, whereby, among other things, Cresco Labs will acquire 100% issued and outstanding shares of the Company. On July 8, 2022, the Company held a special meeting of the shareholders of the Company at which the shareholders approved the Cresco Transaction. On July 15, 2022, the Company also obtained the final order from the Supreme Court of British Columbia approving the Arrangement Agreement with Cresco Labs.
On November 1, 2021, the Company acquired a 100% ownership interest in Medicine Man, through the Merger Agreement. Concurrently with the Merger Agreement, the Company was granted the Option to purchase Medicine Man Medicine Man Longmont. The Option was exercised by the Company on August 12, 2022 following the sale of the Company’s former TGS Longmont location in July 2022. The Company executed the Medicine Man Transaction in order to continue to grow revenues; expand its cultivation facilities, manufacturing facilities and dispensaries; and expand in the State of Colorado.
SELECTED FINANCIAL INFORMATION
The following tables set forth selected consolidated financial information derived from our condensed interim consolidated financial statements and the respective accompanying notes prepared in accordance with U.S. GAAP.
During the periods discussed herein, our accounting policies have remained consistent. The selected and summarized consolidated financial information below may not be indicative of our future performance.
19
Statement of Operations:
$ Change
% Change
27,184
27
%
64,176
34
(19,435
33
(33,588
Cost of sales related to business combination fair value adjustments to inventories
1,352
(100
%)
1,492
9,101
22
32,080
43
(20,453
39
(43,711
(11,352
106
(11,631
46
Other expense, net
(8,394
166
(15,744
153
(15,852
556
(6,966
56
(35,598
191
(34,341
72
Net loss attributable to non-controlling interest
86
(17
(803
90
Net loss attributable to Columbia Care Inc.
(35,684
197
(33,538
71
Loss per share attributable to Columbia Care Inc. - based and diluted
(0.08
136
(0.05
35
Weighted average number of shares outstanding - basic and diluted
20
Summary of Balance Sheet items:
Total Assets
Total Liabilities
Total Long-Term Liabilities
753,997
581,692
Total Equity
RESULTS OF OPERATIONS
Comparison of the three and six months ended June 30, 2022 and 2021
The following tables summarizes our results of operations for the three months ended June 30, 2022 and 2021:
Three Months Ended
Change
Operating expenses
(19,746
125
Net loss attributable to non-controlling interests
Revenues
The increase in revenue of $27,184 for the three months ended June 30, 2022, as compared to the prior year period was primarily driven by the expansion of our existing wholesale and retail network and our recent acquisitions.
During the three months ended June 30, 2022, we experienced a revenue increase of $12,866 when compared to the prior period due to organic growth within our existing wholesale and retail network; this was also due to our recent acquisitions, including our 2020 acquisitions of The Green Solution and Project Cannabis, and our 2021 acquisitions of The Healing Center, Corsa Verde, gLeaf, Cannascend, and Medicine Man. Our existing wholesale and retail network contributed to a Revenue increase of $21,516 as compared to the prior period. Our acquisitions of Cannascend and Medicine Man contributed to an additional $14,318 of Revenue during the three months ended June 30, 2022, as compared to the prior year. Revenue increased by $14,266 related to our acquired retail facilities and $52 related to our acquired wholesale facilities.
Cost of Sales
The increase in cost of sales of $18,083 for the three months ended June 30, 2022, as compared to the prior year period, was primarily driven by the expansion of our existing wholesale and retail network and our recent acquisitions.
During the three months ended June 30, 2022, we experienced a cost of sales increase of $7,804 when compared to the prior period due to organic growth within our existing wholesale and retail network and due to our recent acquisitions, including 2020 acquisitions of The Green Solution and Project Cannabis, and our 2021 acquisitions of The Healing Center, Corsa Verde, gLeaf, Cannascend, and Medicine Man. Our acquisitions of Cannascend and Medicine Man contributed to an additional $8,910 of cost of sales during the three months ended June 30, 2022, as compared to the prior period. Furthermore, the cost of sales also increased by $1,912 due to a change in the valuation of certain inventory. Cost of sales increased by $8,701 related to our acquired retail facilities and $210 related to our acquired wholesale facilities.
Gross Profit
The increase in gross margin of $9,101 for the three months ended June 30, 2022, as compared to the prior year period, was primarily driven by the expansion of our existing wholesale and retail network and our recent acquisitions.
During the three months ended June 30, 2022, we experienced a gross margin increase of $5,061 when compared to the prior period due to organic growth within our existing wholesale and retail network and due to our recent acquisitions including 2020 acquisitions of The Green Solution and Project Cannabis, and our 2021 acquisitions of The Healing Center, Corsa Verde, gLeaf, Cannascend and Medicine Man. Our existing wholesale and retail network contributed to a gross margin increase of $5,439 as compared to the prior period. Our acquisitions of Cannascend and Medicine Man contributed to an additional $5,407 of gross margin during the three months ended June 30, 2022, as compared to the prior year. Gross margin increased by $5,565 related to our acquired retail facilities and decreased $158 related to our acquired wholesale facilities.
Operating Expenses
The increase of $20,453 in operating expenses for the three months ended June 30, 2022 as compared to the prior year period was primarily attributable to an increase in salary and benefits expenses of $10,083, depreciation and amortization of $8,869, and operating facility costs of $3,996; this was primarily offset by a decrease in operating office and general expenses by $1,103 as we limited further expansion in the size and scope of our administrative functions.
Other Expense, Net
The increase in other expense, net of $8,394 for the three months ended June 30, 2022 as compared to the prior year period was primarily due to an increase in interest expense by $6,516. This was partially offset by an increase in rental income of $893 and losses on disposal of assets for the 3 months ended June 2021 of $1,580 (which did not exist in the current period); this was partially offset by the change in fair value of a derivative liability of $4,288.
Provisions for Income Taxes
The Company recorded income tax expense of $18,702 for the three months ended June 30, 2022, as compared to income tax expense of $2,850 for the three months ended June 30, 2021.
The following tables summarizes our results of operations for the six months ended June 30, 2022 and 2021:
(27,375
77
The increase in revenue of $64,176 for the six months ended June 30, 2022, as compared to the prior year period was primarily driven by the expansion of our existing wholesale and retail network and our recent acquisitions.
During the six months ended June 30, 2022, we experienced a revenue increase of $35,724 when compared to the prior period due to organic growth within our existing wholesale and retail network and due to our recent acquisitions including 2020 acquisitions of The Green Solution and Project Cannabis, and our 2021 acquisitions of The Healing Center, Corsa Verde, gLeaf, Cannascend and Medicine Man. Our existing wholesale and retail network contributed to a revenue increase of $47,598 as compared to the prior period. Our acquisitions of The Healing Center, Cannascend, Corsa Verde, gLeaf and Medicine Man
contributed to an additional $28,451 of revenue during the six months ended June 30, 2022, as compared to the prior year. Revenue increased by $28,245 related to our acquired retail facilities and remained unchanged in relation to our acquired wholesale facilities.
The increase in cost of sales of $32,096 for the six months ended June 30, 2022, as compared to the prior year period, was primarily driven by the expansion of our existing wholesale and retail network and our recent acquisitions.
During the six months ended June 30, 2022, we experienced a cost of sales increase of $13,263 when compared to the prior period due to organic growth within our existing wholesale and retail network and due to our recent acquisitions; these include 2020 acquisitions of The Green Solution and Project Cannabis, and our 2021 acquisitions of The Healing Center, Corsa Verde, gLeaf, Cannascend, and Medicine Man.. Our acquisitions of The Healing Center, Cannascend, Corsa Verde, gLeaf and Medicine Man contributed to an additional $17,464 of cost of sales during the six months ended June 30, 2022, as compared to the prior period. Furthermore, the cost of sales also increased by $1,912 due to a change in the valuation of certain inventory. Cost of sales increased by $16,942 related to our acquired retail facilities and decreased $22 related to our acquired wholesale facilities.
The increase in gross margin of $32,080 for the six months ended June 30, 2022, as compared to the prior year period was primarily driven by the expansion of our existing wholesale and retail network and our recent acquisitions.
During the six months ended June 30, 2022, we experienced a gross margin increase of $22,462 when compared to the prior period due to organic growth within our existing wholesale and retail network and due to our recent acquisitions; these include 2020 acquisitions of The Green Solution and Project Cannabis, and our 2021 acquisitions of The Healing Center, Corsa Verde, gLeaf, Cannascend, and Medicine Man. Our existing wholesale and retail network contributed to a gross margin increase of $21,784 as compared to the prior period. Our acquisitions of The Healing Center, Cannascend, Corsa Verde, gLeaf and Medicine Man contributed to an additional $10,986 of gross margin during the six months ended June 30, 2022, as compared to the prior year. Gross margin increased by $11,303 related to our acquired retail facilities and decreased ($22) related to our acquired wholesale facilities.
The increase of $43,711 in operating expenses for the six months ended June 30, 2022 as compared to the prior year period was primarily attributable to an increase in depreciation and amortization of $19,442, salary and benefits costs of $16,174, operating facility costs of $7,445, and advertising and promotion expense of $2,110 as the Company expanded its operations and increased the size and scope of its administrative functions.
The increase in other expense, net of $15,744 for the six months ended June 30, 2022, as compared to the prior year period, was primarily due to increased interest expense on debt of $12,955, interest expense on debt issuance cost of $629, and interest expense on debt issuance on convertible debts of $323; this was offset by the increase in rental income of $1,655 and a loss on disposal of assets for the 6 months ended June 2021 of $1,580 (which did not exist in the current period).
The Company recorded income tax expense of $19,334 for the six months ended June 30, 2022, as compared to income tax expense of $12,368 for the six months ended June 30, 2021.
The Company’s current tax expense has increased in the current period, however, the decrease in total tax expense is largely due to the Company’s previous acquisition activity that had generated deferred tax liabilities now giving rise to a deferred tax benefit. The Company operates in the legal cannabis industry but is subject to Section 280E of the Internal Revenue Code (“Section 280E”) which prohibits the Company from deducting non cost of goods sold related expenses. The result of Section 280E’s application to the Company results in permanent disallowance of ordinary and necessary business expenses. As a result of Section 280E, the Company’s effective tax rate can be highly variable and may not necessarily correlate with pre-tax income or loss.
Non-GAAP Measures
We use certain non-GAAP measures, referenced in this MD&A. These measures are not recognized measures under GAAP and do not have a standardized meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other companies. Accordingly, these measures should not be considered in isolation from nor as a substitute for our financial information reported under GAAP. We use non-GAAP measures including EBITDA, Adjusted EBITDA and Adjusted EBITDA
23
margin which may be calculated differently by other companies. These non-GAAP measures and metrics are used to provide investors with supplemental measures of our operating performance and liquidity and thus highlight trends in our business that may not otherwise be apparent when relying solely on GAAP measures. 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. We also recognize that securities analysts, investors and other interested parties frequently use non-GAAP measures in the evaluation of companies within our industry. Finally, we use non-GAAP measures and metrics in order to facilitate evaluation of operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of executive compensation.
The following table provides a reconciliation of net loss for the period to EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2022 and 2021:
Six Months Ended
Income tax
18,702
2,850
19,334
12,368
20,058
9,202
Interest expense, net and debt amortization
11,499
5,623
24,169
10,629
EBITDA (non-GAAP measure)
(3,996
(982
2,610
(7,098
Adjustments:
Share-based compensation
7,678
5,548
Fair value mark-up for acquired inventory
Adjustments for acquisition and other non-core costs*
14,727
3,323
18,013
Fair-value changes on derivative liabilities
Adjusted EBITDA (non-GAAP measure)
12,029
8,729
28,978
12,487
Adjusted EBITDA margin (non-GAAP measure)
9.3
8.5
11.5
6.6
Gross margin
39.2
40.8
42.5
40.0
*Acquisition and other non-core costs include costs associated with acquisitions, litigation expenses and COVID-19 expenses.
Adjusted EBITDA
The increase in Adjusted EBITDA for the three and six months ended June 30, 2022, as compared to the prior year period, was primarily driven by improved gross margins and a greater operating income.
Our future financial results are subject to significant potential fluctuations caused by, among other things, growth of sales volume in new and existing markets and our ability to control operating expenses. In addition, our financial results may be impacted significantly by changes to the regulatory environment in which we operate, both on a local, state and federal level.
Liquidity and Capital Resources
Our primary need for liquidity is to fund working capital requirements of our business, capital expenditures and for general corporate purposes. Historically, we have relied on external financing as our primary source of liquidity. Our ability to fund our operations and to make capital expenditures depends on our ability to successfully secure financing through issuance of debt or equity, as well as our ability to improve our future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors, some of which are beyond our control.
We are currently meeting our obligations as they become due and are earning revenues from our operations. However, we have sustained losses since inception and may require additional capital in the future. We estimate that based on our current business operations and working capital, we will continue to meet our obligations as they become due in the short term. As we continue to seek growth through expansion or acquisition, our cash flow requirements and obligations could materially change. As of June 30, 2022, we did not have any significant external capital requirements.
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Recent Financing Transactions
On February 3, 2022, we closed a private placement of $185,000 aggregate principal amount of 9.50% senior-secured first-lien notes due 2026 (the “2026 Notes”). The 2026 Notes are senior secured obligations of the Company and were issued at 100.0% of face value. In connection with the offering of the 2026 Notes, the Company received binding commitments to exchange approximately $31,750 of the Company’s existing 13.0% Term Debt, pursuant to private agreements in accordance with the trust indenture, for an equivalent amount of 2026 Notes plus accrued but unpaid interest and any negotiated premium thereon. As a result of the note exchanges, the Company received aggregate gross proceeds of $153,250 in cash pursuant to the offering of the 2026 Notes.
Cash Flows
The following table summarizes the sources and uses of cash for each of the periods presented:
Net increase (decrease) in cash and cash equivalents
Operating Activities
During the six months ended June 30, 2022, operating activities used $99,783 of cash, primarily resulting from a net loss of $82,161 and net changes in operating assets and liabilities of $86,558; this was partially offset by depreciation and amortization of $41,268, equity-based compensation expense of $14,052, debt amortization expense of $4,073, a change in fair value of a derivative liability of $5,697, and a change in deferred taxes of $13,762. The net change in operating assets and liabilities was primarily due to an increase in inventory of $27,218, a decrease in accrued expenses and other current liabilities of $24,071, a decrease in accounts payable of $2,920, an increase in other assets of $12,961, an increase in prepaid expenses and other current assets of $1,684, and an increase in other long-term liabilities by $13,366.
During the six months ended June 30, 2021, operating activities used $19,115 of cash, primarily resulting from a net loss of $47,820, that was partially offset by depreciation and amortization of $17,725, and equity-based compensation expense of $13,334.
Investing Activities
During the six months ended June 30, 2022, investing activities used $57,682 of cash pursuant to purchases of property and equipment of $58,673; this was partially offset by proceeds from the sale of property and equipment of $255 and cash received on deposits of $1,699.
During the six months ended June 30, 2021, investing activities used $84,885 of cash primarily for purchases of property and equipment of $32,261 and business acquisitions of $15,727.
Financing Activities
During the six months ended June 30, 2022, financing activities provided $157,707 of cash, mainly due to $153,250 in net proceeds received from the issuance of debt and the issuance of a mortgage of $16,500; this was partially offset by lease liability payments of $2,966 and a debt issuance cost of $7,698.
During the six months ended June 30, 2021, financing activities provided $191,142 of cash primarily from proceeds from the issuance of equity of $133,559 and issuance of debt of $74,500, partially offset by repayment of a seller’s note of $7,875 and payment of lease liabilities of $4,590.
25
Contractual Obligations and Commitments
The following table summarizes contractual obligations as of June 30, 2022 and the effects that such obligations are expected to have on our liquidity and cash flows in future periods:
Payments Due by Period
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6 and beyond
Lease commitments
457,694
16,225
34,839
34,005
30,102
27,450
315,073
Sale-Leaseback commitments
212,505
9,612
9,922
10,243
10,573
10,915
161,240
Term debt (principal)
3,264
107
111
116
120
2,708
Interest on term debts and notes
76,504
23,271
17,748
17,695
16,728
951
Convertible debt (principal)
80,100
Interest on convertible debt
13,797
4,750
4,601
4,446
Mortgage notes (principal)
754
822
884
943
17,778
15,090
Mortgage notes (interest)
10,997
2,306
2,356
2,294
2,234
1,718
89
Closing promissory note (principal)
1,125
1,500
Closing promissory note (interest)
413
203
188
Acquisition related real estate notes (principal)
2,000
5,000
Acquisition related real estate notes (interest)
840
540
300
Total contractual obligations
1,126,350
97,103
79,983
150,325
245,696
58,092
495,151
The above table excludes purchase orders for inventory in the normal course of business.
Effects of Inflation
Rising inflation rates have had a substantial impact on our financial performance to date and may have an impact on our financial performance in the future as our ability to pass on an increase in costs is not entirely within our control.
Critical Accounting Estimates
We make judgements, estimates and assumptions about the future that affect assets and liabilities, and revenues and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the review affects both current and future periods.
The preparation of our condensed interim consolidated financial statements requires us to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the review affects both current and future periods.
Judgements estimates and assumptions with the most significant effect on the amounts recognized in the consolidated financial statements are described below.
FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT
Our financial instruments consist of cash and cash equivalents, accounts receivable, notes receivable, deposits and other current assets, accounts payable, accrued expenses, current taxes payable and other current liabilities like interest payable and payroll liabilities, derivative liability, debt and lease liabilities. The fair values of cash and restricted cash, accounts and notes receivable, deposits, accounts payable and accrued expenses and other current liabilities like interest payable and payroll liabilities, short-term debt and lease liabilities approximate their carrying values due to the relatively short-term to maturity or because of the market rate of interest used on initial recognition. Columbia Care classifies its derivative liability as fair value through profit and loss (FVTPL).
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Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of fair value contained within the hierarchy are:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and
Level 3 – Inputs for the asset or liability that are not based on observable market data.
Our assets measured at fair value on a nonrecurring basis include investments, assets and liabilities held for sale, long-lived assets and indefinite-lived intangible assets. We review the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually, for indefinite-lived intangible assets. Any resulting asset impairment would require that the asset be recorded at its fair value. The resulting fair value measurements of the assets are considered Level 3 measurements.
Financial Risk Management
We are exposed in varying degrees to a variety of financial instrument related risks. Our risk exposures and the impact on our financial instruments is summarized below:
Credit Risk
Credit risk is the risk of a potential loss to us if a customer or third party to a financial instrument fails to meet its contractual obligations. The maximum credit exposure at June 30, 2022 and December 31, 2021, is the carrying amount of cash and cash equivalents, subscription receivable, accounts receivable and notes receivable. We do not have significant credit risk with respect to our customers. All cash deposits are with regulated U.S. financial institutions.
We provide credit to our customers in the normal course of business and have established credit evaluation and monitoring processes to mitigate credit risk but have limited risk as the majority of our sales are transacted with cash. Through our Columbia Care National Credit program, we provide credit to customers in certain markets in which we operate.
Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our financial obligations associated with financial liabilities. We manage liquidity risk through the management of our capital structure. Our approach to managing liquidity is to estimate cash requirements from operations, capital expenditures and investments and ensure that we have sufficient liquidity to fund our ongoing operations and to settle obligations and liabilities when due.
To date, we have incurred significant cumulative net losses and we have not generated positive cash flows from our operations. We have therefore depended on financing from sale of our equity and from debt financing to fund our operations. Overall, we do not expect the net cash contribution from our operations and investments to be positive in the near term, and we therefore expect to rely on financing from equity or debt.
Market Risk
In addition to business opportunities and challenges applicable to any business operating in a fast-growing environment, our business operates in a highly regulated and multi-jurisdictional industry, which is subject to potentially significant changes outside of our control as individual states as well as the U.S. federal government may impose restrictions on our ability to grow our business profitably or enact new laws and regulations that open up new markets.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of our financial instrument will fluctuate because of changes in market interest rates. Our cash deposits bear interest at market rates.
Currency Risk
Our operating results and financial position are reported in thousands of U.S. dollars. We may enter into financial transactions denominated in other currencies, which would result in Columbia Care’s operations and financial position to be subject to currency transaction and translation risks.
As of June 30, 2022 and December 31, 2021, we had no hedging agreements in place with respect to foreign exchange rates. We have not entered into any agreements or purchased any instruments to hedge possible currency risks at this time.
Price Risk
Price risk is the risk of variability in fair value due to movements in equity or market prices. We are subject to the risk of price variability pursuant to our products due to competitive or regulatory pressures.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no significant material changes to the market risks as disclosed in the Company’s 2021 Form 10-K.
Item 4. Controls and Procedures.
Background
As previously reported in the Company’s 2021 Form 10-K, our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting, specifically relating to the lack of appropriate controls over management’s fair value modeling of complex accounting and financial reporting issues in the impairment testing of goodwill and intangible assets.
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report were effective to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and that it is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control
In response to the material weakness described above, the Company implemented a remediation plan to address the material weakness. These remediation efforts, outlined below, were intended both to address the identified material weaknesses and to enhance the Company’s overall financial control environment. The Company, including its CEO and CFO, does not expect that its internal controls and procedures will prevent or detect all error and all fraud. A control system, no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Following the year ended December 31, 2021, the Company implemented a new control, whereby the Company has utilized a new third party specializing in fair value modeling who will review and analyze, at the corporate level, potential impairment testing of goodwill and intangible assets on an annual basis or as necessary.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
A discussion of our litigation matters occurring in the period covered by this report is found in Reference to Part I, Item 1, Note 13, Commitments and Contingencies, in the Notes to Unaudited Interim Consolidated Financial Statements of this Form 10-Q.
Item 1A. Risk Factors
As of the date of this filing, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, of the Company’s 2021 Form 10-K, except as disclosed in Item 1A of our registration statement on Form 10, filed on May 9, 2022, which is incorporated by reference herein.
Item 2. Unregistered Sales of Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibit Index
Exhibit
Number
Description
2.1
Arrangement Agreement, dated March 23, 2022, between Cresco Labs Inc. and Columbia Care Inc. (incorporated by reference to Exhibit 2.1 of the Registrant’s Current Report on Form 8-K, filed with the SEC on March 29, 2022)
3.1
Articles of Columbia Care Inc. (incorporated by reference to Exhibit 3.1 of the Registrant’s Registration Statement on Form 10, filed with the SEC on December 14, 2021)
4.1
Warrant Agency Agreement dated September 20, 2018 between Canaccord Genuity Growth Corp. and Odyssey Trust Company (incorporated by reference to Exhibit 4.1 of the Registrant’s Registration Statement on Form 10, filed with the SEC on December 14, 2021)
4.2
Warrant Agreement dated April 26, 2019 between Columbia Care Inc. and Canaccord Genuity Corp. (incorporated by reference to Exhibit 4.2 of the Registrant’s Registration Statement on Form 10, filed with the SEC on December 14, 2021)
4.3
Trust Indenture made as of March 31, 2020 between Columbia Care Inc. and Odyssey Trust Company (incorporated by reference to Exhibit 4.3 of the Registrant’s Registration Statement on Form 10, filed with the SEC on December 14, 2021)
4.4
Warrant Indenture dated March 31, 2020 between Columbia Care Inc. and Odyssey Trust Company (incorporated by reference to Exhibit 4.4 of the Registrant’s Registration Statement on Form 10, filed with the SEC on December 14, 2021)
4.5
Trust Indenture made as of May 14, 2020 between Columbia Care Inc. and Odyssey Trust Company (incorporated by reference to Exhibit 4.5 of the Registrant’s Registration Statement on Form 10, filed with the SEC on December 14, 2021)
4.6
Warrant Indenture dated May 14, 2020 between Columbia Care Inc. and Odyssey Trust Company (incorporated by reference to Exhibit 4.6 of the Registrant’s Registration Statement on Form 10, filed with the SEC on December 14, 2021)
4.7
First Supplemental Indentures dated as of June 19, 2020 between Columbia Care Inc and Odyssey Trust Company (incorporated by reference to Exhibit 4.7 of the Registrant’s Registration Statement on Form 10, filed with the SEC on December 14, 2021)
4.8
Warrant Indenture dated July 2, 2020 between Columbia Care Inc. and Odyssey Trust Company (incorporated by reference to Exhibit 4.8 of the Registrant’s Registration Statement on Form 10, filed with the SEC on December 14, 2021)
4.9
Warrant Indenture dated October 29, 2020 between Columbia Care Inc. and Odyssey Trust Company (incorporated by reference to Exhibit 4.9 of the Registrant’s Registration Statement on Form 10, filed with the SEC on December 14, 2021)
4.10
Second Supplemental Indenture dated June 29, 2021 between Columbia Care Inc. and Odyssey Trust Company (incorporated by reference to Exhibit 4.10 of the Registrant’s amended Registration Statement on Form 10, filed with the SEC on January 28, 2022)
4.11
Third Supplemental Indenture dated February 2, 2022 between Columbia Care Inc. and Odyssey Trust Company (incorporated by reference to Exhibit 4.11 of the Registrant’s amended Registration Statement on Form 10, filed with the SEC on February 15, 2022)
4.12
Fourth Supplemental Indenture dated February 3, 2022 between Columbia Care Inc. and Odyssey Trust Company (incorporated by reference to Exhibit 4.12 of the Registrant’s amended Registration Statement on Form 10, filed with the SEC on February 15, 2022)
10.1
Form of Voting Support Agreement (incorporated by reference to Exhibit 10.1 of the Registrant’s Form 8-K, filed with the SEC on March 29, 2022)
10.2
Form of Lock-Up Agreement (incorporated by reference to Exhibit 10.2 of the Registrant’s Form 8-K, filed with the SEC on March 29, 2022)
31.1*
Certification of Principal Executive Officer 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.
31.2*
Certification of Principal Financial Officer 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.
32.1‡
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2‡
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
Filed herewith.
‡
Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company’s filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COLUMBIA CARE INC
Date: August 15, 2022
By:
/s/ Nicholas Vita
Nicholas Vita
Chief Executive Officer and Director
/s/ Derek Watson
Derek Watson
Chief Financial Officer