Verano Holdings Corp.: Form 10-Q for the period ended Jun 30, 2024

This management discussion and analysis (this “MD&A”) of the financial condition and results of operations of the Company is for the three and six months ended June 30, 2024 and June 30, 2023. It is supplemental to, and should be read in conjunction with, the Company’s Unaudited Interim Condensed Consolidated Financial Statements and the accompanying notes for the three and six months ended June 30, 2024 and with the Company’s 2023 Annual Audited Financials for the years ended December 31, 2023, 2022 and 2021 included in the Form 10-K. The financial statements referenced in this MD&A are prepared in accordance with GAAP. Financial information presented in this MD&A is presented in United States dollars (“$” or “US$”) and expressed in thousands, unless otherwise indicated. This MD&A contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those projected, forecasted, or expected in these forward-looking statements as a result of various factors, including, but not limited to, those discussed in the Form 10-K. See “Cautionary Statement Regarding Forward-Looking Statements” above and “Risk Factors” in Part I, Item 1A. “Risk Factors” in the Form 10-K. The Company's management believes the assumptions underlying the Company’s financial statements and accompanying notes are reasonable. However, the Company’s financial statements and accompanying notes may not be an indication of the Company's financial condition and results of operations in the future.

OVERVIEW OF THE COMPANY

Verano, one of the U.S. cannabis industry’s leading companies based on historical revenue, geographical scope and brand performance, is a vertically integrated, multi-state operator embracing a mission of saying Yes to plant progress and the bold exploration of cannabis. An operator of licensed cannabis cultivation, processing, wholesale distribution and retail facilities, our goal is the ongoing development of communal wellness by providing responsible access to regulated medical and adult-use cannabis products to discerning customers. As of August 5, 2024 through our subsidiaries and affiliates we operate businesses in 13 states, including 142 retail dispensaries and 13 production facilities with over 1,000,000 square feet of cultivation capacity, not including any facilities that may be acquired pursuant to the Transactions. We produce a wide variety of high quality cannabis products sold under our portfolio of consumer brands, including Encore™, Avexia™, MÜV™, Savvy™, BITS™ and Verano™. We also design, build and operate branded retail environments including Zen Leaf™ and MÜV™ dispensaries that deliver a cannabis shopping experience in both medical and adult-use markets, including through Cabbage Club, an annual membership program offering exclusive benefits for cannabis consumers.

Notwithstanding the permissive regulatory environment of medical, and in some cases, also adult-use (i.e., recreational) cannabis, at the state level, it remains illegal under U.S. federal law to cultivate, manufacture, distribute, sell or possess cannabis in the U.S. Because federal law prohibits transporting any federally restricted substance across state lines, cannabis cannot be transported across state lines. As a result of current federal law prohibitions, the U.S. cannabis industry is conducted on a state-by-state basis. To date, in the U.S. 38 states plus the District of Columbia and the U.S. territories of Puerto Rico, Guam, the Commonwealth of Northern Marina Islands, and the U.S. Virgin Islands have authorized comprehensive medical cannabis programs, 24 states plus the District of Columbia and the U.S. territories of Guam, the Commonwealth of Northern Mariana Islands, and the U.S. Virgin Islands have authorized comprehensive programs for medical and adult-use (i.e. recreational) cannabis, and 7 states allow the use of low tetrahydrocannabinol and high cannabidiol products for specified medical uses. Verano operates within states where cannabis use, medical or both medical and adult-use, has been approved by state and local regulatory bodies. Strict compliance with state and local laws with respect to cannabis may neither absolve the Company of liability under U.S. federal law, nor may it provide a defense to any federal proceeding which may be brought against the Company or any of its subsidiaries.

Our strategy is to vertically integrate as a single cohesive company in multiple states through the consolidation of seed-to-sale cultivating, manufacturing, distributing, and dispensing cannabis brands and products at scale. Our cultivation, processing and wholesale distribution of cannabis consumer packaged goods are designed to support our national retail dispensary chains, and to develop and foster long-term wholesale supply relationships with third-party retail dispensary operators. Our strategy includes geographic diversity by establishing a footprint to enable us to adapt to changes in both industry and market conditions.

SELECTED RESULTS OF OPERATIONS

The following presents selected financial data derived from the (i) Unaudited Interim Condensed Consolidated Financial Statements for the three and six months ended June 30, 2024 and 2023 and (ii) the Condensed Consolidated Balance Sheets as of June 30, 2024 and December 31, 2023, and should be read in conjunction with the Unaudited Interim Condensed Consolidated Financial Statements and accompanying notes presented in Item 1 of this Form 10-Q. The selected Unaudited Interim Condensed Consolidated financial information below may not be indicative of the Company's future performance.

Three Months Ended June 30, 2024, as Compared to Three Months Ended June 30, 2023

($ in thousands)

Revenues, net of discounts

Revenues, net of discounts, for the three months ended June 30, 2024 was $222,390, a decrease of $(11,725) or (5.0)%, compared to revenue of $234,115 for the three months ended June 30, 2023. The decrease in revenue was driven primarily by expected declines in New Jersey retail as dispensaries continue to open across the state partially offset by increases in Maryland retail and wholesale in relation to the adult-use program launch in July 2023, and new Zen Leaf™ store openings in the Connecticut market during the third and fourth quarters of 2023. During the three months ended June 30, 2024, the Company opened four new stores, three in Florida and one in Connecticut. Additionally, consistent with other multi-state cannabis operators, the Company has seen increased competition and promotional activity in select retail markets, specifically in New Jersey and Illinois. Retail revenue for the three months ended June 30, 2024 was approximately 64.0% of total revenue compared to 68.3% of total revenue for the three months ended June 30, 2023, in each case, excluding intersegment eliminations. Cultivation (wholesale) revenues increased due to increased third-party wholesale sales, mainly in the New Jersey and Maryland markets, due to growing wholesale accounts and a burgeoning adult-use program, respectively, when compared to the three months ended June 30, 2023. Cultivation (wholesale) revenue for the three months ended June 30, 2024 was 36.0% of total revenue compared to 31.7% of total revenue for the three months ended June 30, 2023, in each case, excluding intersegment eliminations.

Gross Profit

Gross profit for the three months ended June 30, 2024 was $114,340, representing a gross margin on the sale of cannabis, cannabis extractions, edibles and related accessories of 51.4%. This is compared to gross profit for the three months ended June 30, 2023 of $115,191, which represented a 49.2% gross margin on the sale of cannabis, cannabis extractions, edibles and related accessories. The decrease in gross profit during the three months ended June 30, 2024 compared to the three months ended June 30, 2023, was due to increased competition and modest pricing pressure in the retail markets partially offset by higher third-party wholesale sales of Verano products.

Net Loss

Net Loss attributable to the Company for the three months ended June 30, 2024 was $(21,764), an increase of $8,703, compared to a net loss of $(13,061) for the three months ended June 30, 2023. The increase in net loss was driven by a loss on debt extinguishment attributable to the Permitted Partial Optional Prepayment under the 2022 Credit Agreement and a slight increase in selling, general and administrative expenses ("SG&A") for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The change in net loss was also a result of increased provision for income taxes for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

($ in thousands)

Cost of Goods Sold, net

Cost of goods sold, net includes the costs directly attributable to cultivating and processing cannabis and for retail purchases of finished goods, such as flower, edibles, and concentrates. Cost of goods sold, net for the three months ended June 30, 2024 was $108,050, a decrease of $(10,874) or (9.1)%, as compared to the three months ended June 30, 2023. The decrease was attributable to lower top-line revenue due to increased competition and modest pricing pressure in select retail markets, partially offset by increased third-party wholesale sales of Verano products.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2024 were $87,074, an increase of $2,414 or 2.9%, compared to SG&A expenses of $84,660 for the three months ended June 30, 2023. SG&A expenses as a percentage of revenue was 39.2% and 36.2% for the three months ended June 30, 2024, and June 30, 2023, respectively. The increase was primarily due to a $2,858 increase in salaries and benefits, due to increased headcounts related to new store openings during the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Other Income (Expense), net

Other income (expense), net for the three months ended June 30, 2024, was $(18,500), an increase of $2,688 as compared to the three months ended June 30, 2023. The other income (expense), net increase was mainly due to a loss on debt extinguishment attributable to the Permitted Partial Optional Prepayment under the 2022 Credit Agreement.

Provision for Income Taxes

Income tax expense is recognized based on the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end. Income tax expense for the three months ended June 30, 2024, was $30,530, an increase of $2,851 or 10.3% when compared to the three months ended June 30, 2023.

Six Months Ended June 30, 2024, as Compared to Six Months Ended June 30, 2023

($ in thousands)

Revenues, net of discounts

Revenues, net of discounts, for the six months ended June 30, 2024 was $443,696, a decrease of $(17,479) or (3.8)%, compared to revenue of $461,175 for the six months ended June 30, 2023. The decrease in revenue was driven primarily by expected declines in New Jersey retail as dispensaries continue to open across the state partially offset by increases in Maryland retail and wholesale in relation to the adult-use program launch in July 2023, and new Zen Leaf™ store openings in the Connecticut market during the third and fourth quarters of 2023. During the six months ended June 30, 2024, the Company opened six new stores, one in Connecticut, four in Florida and one in Pennsylvania. Additionally, consistent with other multi-state cannabis operators, the Company has seen increased competition and promotional activity in select retail markets, specifically in New Jersey and Illinois. Retail revenue for the six months ended June 30, 2024 was approximately 65.1% of total revenue compared to 69.0% of total revenue for the six months ended June 30, 2023, in each case, excluding intersegment eliminations. Increased cultivation (wholesale) revenues were driven by third-party wholesale sales in the New Jersey market and increased adult-use third-party wholesale sales in the Maryland market, both, of which attributed to increased production output and sales of cannabis flower and cannabis related products when compared to the three months ended June 30, 2023. Cultivation (wholesale) revenue for the six months ended June 30, 2024 was 34.9% of total revenue compared to 31.0% of total revenue for the six months ended June 30, 2023, in each case, excluding intersegment eliminations.

Gross Profit

Gross profit for the six months ended June 30, 2024 was $227,300, representing a gross margin on the sale of cannabis, cannabis extractions, edibles and related accessories of 51.2%. This is compared to gross profit for the six months ended June 30, 2023 of $224,376, which represented a 48.7% gross margin on the sale of cannabis, cannabis extractions, edibles and related accessories. The increase in gross profit during the six months ended June 30, 2024 was attributable to higher third-party wholesale sales of Verano products, which was partially offset by continued competition and pricing pressure in the retail markets.

Net Loss

Net loss attributable to the Company for the six months ended June 30, 2024 was $(26,586), an increase of $4,288, compared to a net loss of $(22,298) for the six months ended June 30, 2023. The increase in net loss was driven by an increase in selling, general and administrative expenses and a loss on debt extinguishment attributable to the Permitted Partial Optional Prepayment under the 2022 Credit Agreement for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

($ in thousands)

Cost of Goods Sold, net

Cost of goods sold, net, includes the costs directly attributable to cultivating and processing cannabis and for retail purchases of finished goods, such as flower, edibles, and concentrates. Cost of goods sold, net, for the six months ended June 30, 2024 was $216,396, a decrease of $(20,403) or (8.6)%, as compared to the six months ended June 30, 2023. The decrease was primarily driven by decreased top-line revenue within the retail markets due to expected declines in New Jersey retail as dispensaries continue to open across the state, partially offset by increased wholesale sales of Verano products to third-parties in select markets, specifically in the New Jersey adult-use market.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses for the six months ended June 30, 2024 were $177,363, an increase of $17,455 or 10.9%, compared to SG&A expenses of $159,908 for the six months ended June 30, 2023. SG&A expenses as a percentage of revenue was 40.0% and 34.7% for the six months ended June 30, 2024, and June 30, 2023, respectively. The increase was primarily due to a $9,263 increase in salaries and benefits due to increased headcounts, and a $6,176 increase in general and administrative expenses primarily driven by enhancements in processes and technology, during the six months ended June 30, 2024 compared to the three months ended June 30, 2023. Additionally, SG&A expenses for the six months ended June 30, 2024 included higher stock based compensation expense compared to the six months ended June 30, 2023, driven by a prior period expense acceleration benefit during the six months ended June 30, 2023 and lower award grants during the six months ended June 30, 2023.

Other Income (Expense), net

Other income (expense), net for the six months ended June 30, 2024, was $(34,516), a change of $(4,010) as compared to the six months ended June 30, 2023. The other income (expense), net change was mainly due to a loss on debt extinguishment attributable to the Permitted Partial Optional Prepayment under the 2022 Credit Agreement and the Company's contributions to Florida's Smart & Safe adult-use legalization campaign.

Provision for Income Taxes

Income tax expense is recognized based on the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year-end. Income tax expense for the six months ended June 30, 2024, was $(42,007), a decrease of $13,992 or 25.0% primarily due to impacts of prior period return to provision adjustments and a decrease in pre-tax earnings when compared to the six months ended June 30, 2023.

Results of Operations by Segment

The Company has two reportable segments: (i) cultivation (wholesale) and (ii) retail. Due to the vertically integrated nature of its business, the Company reviews its revenue at the cultivation (wholesale) and retail levels while reviewing its operating results on a consolidated basis.

The following tables summarize revenues, net of discounts, by segment for the three and six months ended June 30, 2024 and 2023:

($ in thousands)

Revenues, net of discounts, for the cultivation (wholesale) segment were $92,473 for the three months ended June 30, 2024, an increase of $5,863 or 6.8%, compared to the three months ended June 30, 2023, in each case, excluding intersegment eliminations. The increase in cultivation (wholesale) revenues, net of discounts, was primarily driven by increased third party wholesale sales due to the increased third party dispensaries in the New Jersey and Illinois markets.

Revenues, net of discounts, for the retail segment were $164,683 for the three months ended June 30, 2024, a decrease of $(21,675) or (11.6)%, compared to the three months ended June 30, 2023, in each case, excluding intersegment eliminations. Top contributors to retail sales growth were in the Maryland and Connecticut markets due to a burgeoning adult-use market and new store openings, respectively. The decrease in retail revenues, net of discounts was primarily driven by increased competition in both the New Jersey and Illinois markets which contributed to the year over year revenue decrease.

($ in thousands)

Revenues, net of discounts, for the cultivation (wholesale) segment were $178,379 for the six months ended June 30, 2024, an increase of $11,502 or 6.9%, compared to the six months ended June 30, 2023, in each case, excluding intersegment eliminations. The increase in cultivation (wholesale) revenues, net of discounts, was primarily driven by increased third-party wholesale sales in the Illinois and New Jersey markets coupled with a burgeoning adult-use third-party wholesale sales in the Maryland market, both of which attributed to increased production output of cannabis flower and cannabis related products.

Revenues, net of discounts, for the retail segment were $333,271 for the six months ended June 30, 2024, a decrease of $(37,329) or (10.1)%, compared to the six months ended June 30, 2023, in each case, excluding intersegment eliminations. Top contributors to retail sales were mainly in the Maryland market, due to the adult-use program launch in July 2023 and in the Connecticut market due to new store openings in the second half of 2023. The overall decrease in retail revenues, net of discounts, was primarily driven by increased competition and promotional activity in select retail markets, specifically in New Jersey and Illinois. Additionally, modest pricing pressure contributed to the decrease in revenues, net of discounts, when comparing the six months ended June 30, 2024 to the six months ended June 30, 2023.

Drivers of Operational Performance

Revenue

The Company derives its revenue from both its cultivation (wholesale) business in which it cultivates, produces and sells cannabis products to third-party retail customers, and its retail business, in which it directly sells cannabis products to retail patients and consumers. For the three months ended June 30, 2024, approximately 36.0% of the Company’s revenue was generated from the cultivation (wholesale) business, excluding intersegment eliminations, and approximately 64.0% from the retail business, excluding intersegment eliminations. For the six months ended June 30, 2024, approximately 34.9% of revenue was generated from the cultivation (wholesale) business and approximately 65.1% from the retail business, excluding intersegment eliminations.

Gross Profit

Gross profit is revenue less cost of goods sold, net. Cost of goods sold, net includes the costs directly attributable to product sales and includes amounts paid for finished goods, such as flower, edibles, and concentrates, as well as packaging and other supplies, fees for services and processing, rent, utilities, and related costs. Cannabis costs are affected by various state regulations that limits the sourcing and procurement of cannabis products, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes. Gross profit margin measures the Company’s gross profit as a percentage of revenue.

The Company’s expansion strategy and revenue growth have taken priority and will continue to do so for the foreseeable future as it expands its footprint, by exploring new markets and opening or acquiring new dispensary locations, and scales production within current markets. In the core markets in which the Company is already operational and, as the state markets mature, the Company anticipates that there will be pressure on margins in the cultivation (wholesale) and retail channels. The Company’s current production capacity has not been fully realized and it is expected that price compression at the cultivation (wholesale) level, will be offset by operational optimization. As a result, the Company expects overall consolidated gross profit margins to gradually increase in the future.

Total Expenses

Total expenses, other than the cost of goods sold, consist of selling costs to support customer relationships and to deliver product to the Company’s retail stores. It also includes a significant investment in the corporate infrastructure required to support ongoing business.

Selling costs generally correlate to revenue. As a percentage of sales, selling costs are expected to increase slightly in currently operational markets (Arizona, Arkansas, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, New Jersey, Ohio, Pennsylvania, and West Virginia) as facility and market expansion occurs. The increase is expected to be driven primarily by the growth of the Company’s retail and cultivation (wholesale) channels and the ramp up from new retail openings.

SG&A expenses also include costs incurred at the Company’s corporate offices, primarily related to back-office personnel costs, including salaries, incentive compensation, benefits, stock-based compensation and professional service costs. Going forward, SG&A expenses are expected to continue in line with the Company’s expansion plans. Furthermore, the Company expects to continue to incur acquisition and transaction costs related to these expansion plans and anticipates stock compensation expenses related to recruiting and hiring talent, along with legal and professional fees associated with being a public-reporting company and publicly traded in Canada and a public-reporting company in the U.S.

Provision for Income Taxes

The Company is subject to income taxes in the jurisdictions in which it operates and, consequently, income tax expense is a function of the allocation of taxable income by jurisdiction and the various activities that impact the timing of taxable events. As the Company operates in the cannabis industry, it is subject to the limits of Section 280E of the Code under which the Company is only allowed to deduct expenses directly related to the sale of products. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under Section 280E of the Code and a higher effective tax rate than most industries.

During the second quarter of 2023, Connecticut, Illinois, and New Jersey enacted tax legislation to exempt, or decouple, from Section 280E of the Code, all of which became retroactively effective as of January 1, 2023. The Company has significant operations in these states and is now permitted to deduct ordinary and necessary cannabis business expenses in these states.

LIQUIDITY, FINANCING ACTIVITIES AND CAPITAL RESOURCES

As of June 30, 2024 and December 31, 2023, the Company had total current liabilities of $360,591 and $412,188, respectively. As of June 30, 2024 and December 31, 2023, the Company had cash and cash equivalents of $130,052 and $174,760, respectively, to meet its current obligations. The Company had working capital deficit of $(3,028) as of June 30, 2024, an increase of working capital of $14,964 as compared to December 31, 2023. This increase in working capital was primarily driven by an increase in inventory of $13,593 and a decrease in accounts payable of $6,078 partially offset by an increase of income taxes payable of $2,771, during the six months ended June 30, 2024.

The Company is an early-stage growth company, generating cash from revenues and deploying its capital to acquire and develop assets capable of producing additional revenues and earnings over both the immediate and long term. Capital is primarily being utilized for capital expenditures, facility improvements, strategic investment opportunities, product development and marketing, as well as customer, supplier, and investor and industry relations. The Company takes a cautious approach in allocating its capital to maximize its returns while ensuring appropriate liquidity. While inflation and higher interest rates have not yet materially impacted the Company’s business, results of operations or financial statements, given current inflation and the uncertainty of the future economic environment, the Company has taken additional measures in monitoring and deploying its capital to minimize the negative impact on its operations and expansion plans.

Liquidity Requirements

Our short-term liquidity requirements consist primarily of funds necessary to pay for our acquisitions, to repay borrowings, maintain our operations and other general business needs. We believe that internally generated funds and other sources of liquidity discussed below will be sufficient to meet working capital needs, capital expenditures, payments of income tax payables and other business requirements for at least the next 12 months. We believe we will meet known or reasonably likely future cash requirements through the combination of cash generated from operating activities, available cash balances and available borrowings. If these sources of liquidity need to be augmented, additional cash requirements would likely be financed through the issuance of equity securities or additional borrowings; however, there can be no assurances that we will be able to obtain additional equity financing or debt financing on acceptable terms in the future.

Our long-term liquidity requirements consist primarily of completing additional acquisitions, scheduled debt payments, future payments of income tax payables, maintaining and expanding our operations and other general business needs. We expect to meet our long-term liquidity requirements through various sources of capital, which may include future debt or equity issuances, net cash provided by operations and other secured and unsecured borrowings. We believe that the foregoing sources of capital will provide sufficient funds for our operations, anticipated expansion and scheduled debt payments for the long-term. Our ability to fund our operating needs will depend on our future ability to continue to generate positive cash flow from operations and our ability to obtain debt or equity financing on acceptable terms.

Credit Facility

On October 27, 2022, Verano and certain of its subsidiaries and affiliates from time-to-time party thereto (collectively, the “Borrowers”), entered into a Credit Agreement (the “2022 Credit Agreement”) with Chicago Atlantic Admin, LLC (“Chicago Atlantic”), as administrative agent for the lenders, and the lenders from time-to-time party thereto (the “Lenders”), pursuant to which the Lenders advanced the Borrowers a $350,000 senior secured term loan, all of which was used to repay the principal indebtedness outstanding under the Company's previous senior secured term loan credit facility. In connection with such repayment, such previous credit facility was terminated and is no longer in force or effect.

The 2022 Credit Agreement provides the Borrowers with the right, subject to conditions, to request an additional incremental term loan in the aggregate principal amount of up to $100,000; provided that the Lenders elect to fund such incremental term loan. Beginning in October 2023, the loan requires scheduled amortization payments of $350 per month and the remaining principal balance is due in full on October 30, 2026.

The 2022 Credit Agreement also provides the Borrowers with the right to (a) incur up to $120,000 of additional indebtedness from third-party lenders secured by real estate excluded as collateral under the 2022 Credit Agreement, (b) incur additional mortgage financing from third-party lenders secured by real estate acquired after the closing date, and (c) upon the SAFE Banking Act or similar legislation making banking services available to U.S. cannabis companies being passed by the United States Congress, incur up to $50,000 pursuant to a revolving credit facility from third-party lenders that is pari passu or subordinated to the 2022 Credit Agreement obligations, each of which are subject to customary conditions.

The obligations under the 2022 Credit Agreement are secured by substantially all of the assets of the Borrowers, excluding vehicles, specified parcels of real estate and other customary exclusions.

The 2022 Credit Agreement provides for a floating annual interest rate equal to the prime rate then in effect plus 6.50%, which rate may be increased by 3.00% upon an event of default that is not a material event of default or 6.00% upon a material event of default.

At any time, the Company may voluntarily prepay up to $100,000 of the principal balance, subject to a one-time $1,000 prepayment premium upon the first prepayment, and may prepay the remaining outstanding principal balance for a prepayment premium at varying rates based on the timing of any subsequent prepayments. The Borrowers may not voluntarily prepay more than $100,000 of the principal balance without prepaying the entire outstanding principal balance of the loan.

The 2022 Credit Agreement includes customary representations and warranties and covenants and customary events of default, including, without limitation, payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to material indebtedness, and events of bankruptcy and insolvency.

The 2022 Credit Agreement also includes customary negative covenants limiting the Borrowers’ ability to incur additional indebtedness and grant liens that are not otherwise permitted, and the ability to enter into or consummate acquisitions or dispositions that are not otherwise permitted, among others. Additionally, the 2022 Credit Agreement requires the Borrowers to meet certain financial tests regarding minimum cash balances, minimum levels of Adjusted EBITDA (as defined in the 2022 Credit Agreement) and a minimum fixed charge coverage ratio.

As of June 30, 2024, the Company was in compliance with such covenants.

Permitted Partial Optional Prepayment and Lien Release

On April 30, 2024, the Company, made a Permitted Partial Optional Prepayment (as defined in the 2022 Credit Agreement) in the amount of $50,000 pursuant to the 2022 Credit Agreement and paid $1,000 prepayment premium in connection therewith.

In connection with such Permitted Partial Optional Prepayment, Chicago Atlantic and certain Lenders agreed to (a) release certain Borrowers from their obligations under, and as parties to, the 2022 Credit Agreement and related agreements (the “Released Borrowers”) and (b) release all liens over the Released Borrowers’ property, including real estate, held by Chicago Atlantic for the benefit of the Lenders, in each case, pursuant to a limited consent and waiver, dated as of April 29, 2024, by and among the Borrowers, certain of the Lenders party thereto and Chicago Atlantic.

Tax Liabilities

The Company has U.S. income tax payable liabilities. These income tax payable liabilities will require payment from our liquidity sources, and we believe we have sufficient liquidity for both short-term and long-term payments of our income tax payable liabilities and in addition to our other obligations.

Sources and Uses of Cash

Cash Provided by (Used in) Operating Activities, Investing and Financing Activities

Net cash provided by (used in) operating, investing, and financing activities for the six months ended June 30, 2024 and 2023 were as follows:

Cash flows from Operating Activities. During the six months ended June 30, 2024 and 2023, the Company had net cash inflows of $38,962 and $40,740, respectively. The $(1,778) decrease was mainly driven by an increase in inventory due to increased third party wholesales in select markets during the six months ended June 30, 2024 when compared to the six months ended June 30, 2023 .

Cash Flows from Investing Activities. During the six months ended June 30, 2024 and 2023, the Company had net cash outflows of $(28,215) and $(14,369), respectively. The $(13,846) decrease in net cash outflows during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 is primarily driven by cash outflows related to the purchases of property, plant and equipment of $(28,215) during the six months ended June 30, 2024, compared to purchases of property, plant and equipment of $(16,541) during the six months ended June 30, 2023.

Cash Flows from Financing Activities. During the six months ended June 30, 2024 and 2023, the Company had net cash outflows of $(55,470) and $(8,643), respectively. The $(46,827) decrease in net cash outflows during the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was largely attributable to the Permitted Partial Optional Prepayment under the 2022 Credit Agreement during the six months ended June 30, 2024.

The Company has updated its capital expenditures guidance to a range of $90,000 - $130,000 for the year-ended December 31, 2024. The Company expects to strategically invest ahead of possible new adult-use and medical program launches, depending upon certain regulatory changes, and expanding current cultivation and processing capacity in existing markets.

Changes in or Adoption of Accounting Practices

Refer to the discussion of recently adopted/issued accounting pronouncements under Part I, Item 1, Notes to Unaudited Interim Condensed Consolidated Financial Statements, Note 1 - Overview and Basis of Presentation.

Critical Accounting Policies and Significant Judgements and Estimates

There were no material changes to our critical accounting policies and estimates from the information provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the Form 10-K.

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (who is our principal executive officer) and Chief Financial Officer (who is our principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures, as of June 30, 2024, the end of the period covered by this Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Form 10-Q, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures due to the material weaknesses in internal control over financial reporting identified as of December 31, 2023 and as described in Item 9A. Controls and Procedures in the Form 10-K. We believe, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls systems are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud or error, if any, within a company have been detected.

Changes in Internal Control over Financial Reporting

We previously identified and disclosed material weaknesses in internal control over financial reporting as described in Item 9A. Controls and Procedures in the Form 10-K. These material weaknesses are currently in the process of being remediated, as of June 30, 2024. Other than the previously identified and disclosed plans to remediate the material weaknesses in internal control over financial reporting as described in Item 9A. Controls and Procedures in the Form 10-K, there have not been any changes in our internal control over financial reporting during the quarter ended June 30, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part I, Item 1A. “Risk Factors” in our Form 10-K includes a discussion of our risk factors. There have been no material changes from the risk factors described in the Form 10-K. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future SEC filings.