Verano Holdings Corp. [VRNOF] Filings

10-Q 1 vrnof-20220930.htm 10-Q vrnof-20220930

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2022


o			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 000-56342

VERANO HOLDINGS CORP.

(Exact name of registrant as specified in its charter)


British Columbia, Canada									98-1583243
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

415 North Dearborn Street, 4th Floor, Chicago, Illinois									60654
(Address of Principal Executive Offices)									(Zip Code)

Registrant's telephone number, including area code: (312) 265 0730

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

Title of each class

Trading Symbol

Name of each exchange on which registered

N/A

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 o No x

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “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

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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. x

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

The registrant had outstanding 324,317,749 Class A Subordinate Voting Shares and 133,823 Class B Proportionate Voting Shares for a total of 337,700,057 Class A Subordinate Voting Shares on an as converted basis as of November 11, 2022.

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TABLE OF CONTENTS


			Pages

Part I - Financial Information			1
	Item 1.	Condensed Consolidated Balance Sheets	1
		Unaudited Interim Condensed Consolidated Statements of Operations	2
		Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders' Equity	3
		Unaudited Interim Condensed Consolidated Statements of Cash Flows	5
		Notes to Unaudited Interim Condensed Consolidated Financial Statements	7
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	40
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
	Item 4.	Controls and Procedures	53

Part II - Other Information			55
	Item 1.	Legal Proceedings	55
	Item 1A.	Risk Factors	55
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
	Item 3.	Defaults Upon Senior Securities	56
	Item 4.	Mine Safety Disclosures	56
	Item 5.	Other Information	56
	Item 6.	Exhibits	57
Signatures			58

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


VERANO HOLDINGS CORP. Condensed Consolidated Balance Sheets ($ in Thousands)


	September 30, 2022		December 31, 2021
	(Unaudited)		(As Restated)
ASSETS
Current Assets:
Cash and Cash Equivalents	$	76,418	$	99,118
Accounts Receivable, net	15,201		17,410
Notes Receivable	—		285
Inventory	168,142		140,703
Prepaid Expenses and Other Current Assets	35,309		19,528

Total Current Assets	295,070		277,044

Property, Plant and Equipment, net	533,753		452,232
Right of Use Assets, net	77,507		61,346
Intangible Assets, net	1,326,601		1,379,913
Goodwill	380,408		368,130
Investment in Associates	7,043		7,491
Deposits and Other Assets	2,645		2,499

TOTAL ASSETS	$	2,623,027	$	2,548,655

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES
Current Liabilities:
Accounts Payable	$	52,205	$	45,172
Accrued Liabilities	32,054		42,149
Income Tax Payable	222,323		154,512
Current Portion of Lease Liabilities	8,532		6,563
Current Portion of Notes Payable	15,344		13,771
Acquisition Consideration Payable	53,739		208,349

Total Current Liabilities	384,197		470,516
Long-Term Liabilities:
Deferred Revenue	215		1,183
Notes Payable, net of Current Portion	376,791		276,154
Lease Liabilities, net of Current Portion	71,811		56,812
Deferred Income Taxes	249,719		262,184

Total Long-Term Liabilities	698,536		596,333

TOTAL LIABILITIES	$	1,082,733	$	1,066,849

SHAREHOLDERS’ EQUITY	1,540,294		1,480,530
NON-CONTROLLING INTEREST	—		1,276

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,623,027	$	2,548,655

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

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VERANO HOLDINGS CORP. Unaudited Interim Condensed Consolidated Statements of Operations ($ in Thousands except share and per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenues, net of Discounts	$	227,588	$	206,469	$	653,485	$	526,430
Cost of Goods Sold, net	104,594		108,268		333,759		304,729

Gross Profit	122,994		98,201		319,726		221,701

Selling, General, and Administrative Expenses	85,710		76,477		275,531		189,155

Income (Loss) from Investments in Associates	(209)		1,289		1,651		2,737

Income from Operations	37,075		23,013		45,846		35,283

Other Income (Expense):
Gain (loss) on Disposal of Property, Plant and Equipment	1,443		(9)		251		(438)
Gain on Deconsolidation	75		—		9,560		—
Gain on Previously Held Equity Interest	175		—		14,103		—
Interest Expense, net	(11,785)		(8,113)		(34,082)		(15,314)
Other Income (Expense), net	(595)		233		17,557		(764)

Total Other Income (Expense)	(10,687)		(7,889)		7,389		(16,516)

Net Income Before Provision for Income Taxes and Non-Controlling Interest	26,388		15,124		53,235		18,767

Provision For Income Taxes	(69,381)		(27,086)		(105,998)		(66,939)

Net Loss Before Non-Controlling Interest	(42,993)		(11,962)		(52,763)		(48,172)

Net Income Attributable to Non-Controlling Interest	—		551		291		1,915
Net Loss Attributable to Verano Holdings Corp.	$	(42,993)	$	(12,513)	$	(53,054)	$	(50,087)

Net Loss per share – basic	$	(0.13)	$	(0.04)	$	(0.16)	$	(0.18)
Net Loss per share – diluted	$	(0.13)	$	(0.04)	$	(0.16)	$	(0.18)

Basic – weighted average shares outstanding	332,872,464		313,674,044		329,240,200		281,961,659
Diluted – weighted average shares outstanding	332,872,464		313,674,044		329,240,200		281,961,659

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

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VERANO HOLDINGS CORP. Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity ($ in Thousands)


	LLC Membership Units	SVS Shares (as converted)	Share Capital		Accumulated Earnings (Deficit)		Non-Controlling Interest		Total
Balance as of July 1, 2021	—	307,223,181	$	1,253,867	$	(28,327)	$	7,501	$	1,233,041

Share-based compensation	—	932,525	13,826		—		—		13,826

Issuance of shares in conjunction with acquisitions	—	7,043,645	111,268		—		—		111,268

Purchase of Non-controlling interest	—	—	505		(6,975)		(5,795)		(12,265)

Distributions to minority holders	—	—	—		—		(1,375)		(1,375)

Net income (loss)	—	—	—		(12,513)		551		(11,962)

Balance as of September 30, 2021	—	315,199,351	$	1,379,466	$	(47,815)	$	882	$	1,332,533

Balance as of January 1, 2021	279,900,000	—	$	137,914	$	9,247	$	6,237	$	153,398

RTO-related issuances, net	—	—	652,217		—		—		652,217

Issuance of Pubco shares in redemption of membership units	(279,900,000)	279,900,000	—		—		—		—

Reverse takeover (“RTO Financing”), net	—	10,100,000	95,420		—		—		95,420

Purchase of Non-controlling interest	—	—	505		(6,975)		(5,795)		(12,265)

Distributions to minority holders	—	—	—		—		(1,475)		(1,475)

Share-based compensation	—	932,525	34,923		—		—		34,923

Issuance of shares in conjunction with acquisitions	—	20,653,051	381,302		—		—		381,302

Warrants issued and exercised	—	3,510,000	75,100		—		—		75,100

Contingent consideration & other adjustments to purchase accounting	—	103,775	2,085		—		—		2,085

Net income (loss)	—	—	—		(50,087)		1,915		(48,172)

Balance as of September 30, 2021	—	315,199,351	$	1,379,466	$	(47,815)	$	882	$	1,332,533

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

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VERANO HOLDINGS CORP. Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ Equity (Continued) ($ in Thousands)


	LLC Membership Units	SVS Shares (as converted)	Share Capital		Accumulated Other Comprehensive Income		Accumulated Earnings (Deficit)		Non-Controlling Interest		Total
Balance as of July 1, 2022	—	330,818,664	$	1,614,021	$	—	$	(65,296)	$	—	$	1,548,725

Share-based compensation	—	1,815,430	12,399		—		—		—		12,399

Issuance of shares in conjunction with acquisitions	—	1,714,358	12,356		—		—		—		12,356

Foreign Currency Translation Adjustment	—	—	—		103		—		—		103

Contingent consideration & other adjustments to purchase accounting	—	1,813,770	9,704		—		—		—		9,704

Net loss	—	—	—		—		(42,993)		—		(42,993)

Balance as of September 30, 2022	—	336,162,222	$	1,648,480	$	103	$	(108,289)	$	—	$	1,540,294

Balance as of January 1, 2022 (As Restated)	—	324,312,662	$	1,535,765	$	—	$	(55,235)	$	1,276	$	1,481,806

Share-based compensation	—	2,613,337	36,664		—		—		—		36,664

Issuance of shares in conjunction with acquisitions	—	3,925,683	31,116		—		—		—		31,116

Non-controlling interest adjustment for change in ownership	—	—	—		—		—		(1,567)		(1,567)

Foreign Currency Translation Adjustment	—	—	—		103		—		—		103

Contingent consideration & other adjustments to purchase accounting	—	5,310,540	44,935		—		—		—		44,935

Net income (loss)	—	—	—		—		(53,054)		291		(52,763)

Balance as of September 30, 2022	—	336,162,222	$	1,648,480	$	103	$	(108,289)	$	—	$	1,540,294

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

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VERANO HOLDINGS CORP. Unaudited Interim Condensed Consolidated Statements of Cash Flows ($ in Thousands)


	Nine Months Ended September 30,
	2022		2021
CASH FLOW FROM OPERATING ACTIVITIES
Net loss attributable to Verano Holdings Corp. and Subsidiaries	$	(53,054)	$	(50,087)
Net income attributable to non-controlling interest	291		1,915
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	106,230		65,620
Right of use assets amortization	6,465		3,643
Non-cash interest expense	2,183		5,082
Non-cash interest income	—		(145)
Non-cash inventory step-up expense on acquisitions	6,818		80,907
(Gain) Loss on disposal of property, plant and equipment	(251)		438
Gain on deconsolidation	(9,560)		—
Gain on investments in associates	(14,103)		(1,475)
Bad debt expense	152		85
Amortization of debt issuance costs	5,039		1,248
Unrealized gain on foreign currency translation	(26)		—
Unrealized loss on marketable securities	1,781		—
Income from underlying investees	(101)		(1,408)
Stock earnout for acquisitions	—		2,084
Increase (decrease) in fair value of contingent consideration	(13,925)		1,212
Stock based compensation	34,225		31,722
Changes in operating assets and liabilities:
Accounts receivable	2,056		(14,263)
Inventory	(28,997)		(49,175)
Prepaid expenses and other current assets	(13,306)		(1,546)
Deposits and other assets	(299)		(1,147)
Accounts payable	6,152		(541)
Accrued liabilities	(17,356)		(8,851)
Lease liabilities	(5,634)		(2,514)
Income tax payable	65,701		57,723
Deferred taxes	(14,199)		—
Other, net	(971)		(662)
NET CASH PROVIDED BY OPERATING ACTIVITIES	65,311		119,865

CASH FLOW FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment	(109,720)		(91,952)
Proceeds from disposal of assets	6,006		896
Distributions to minority members	—		(1,475)
Purchases of intangible assets	—		(8,374)
Purchase of non-controlling interest	—		(7,840)
Acquisition of business, net of cash acquired	(101,396)		(217,372)
Proceeds from sale of deconsolidation and investment in associates	19,826		—
Purchase of interest in investment in associates	—		(3,350)
Dividend received from investments in associates	—		10,275
Proceeds from note receivable	—		4,215
Other, net	—		103
NET CASH USED IN INVESTING ACTIVITIES	(185,284)		(314,874)

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

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VERANO HOLDINGS CORP. Unaudited Interim Condensed Consolidated Statements of Cash Flows (Continued) ($ in Thousands)


	Nine Months Ended September 30,
	2022		2021

CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable	$	122,057	$	100,000
Principal repayments of notes payable	(21,901)		(9,843)
Debt issuance costs paid	(2,986)		(5,132)
Proceeds received from RTO Financing, net	—		75,420
Cash received from warrant private placement	—		75,100

NET CASH PROVIDED BY FINANCING ACTIVITIES	97,170		235,545

Effects of exchange rate fluctuations on cash and cash equivalents	103		—
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(22,700)		40,536

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	99,118		16,402

CASH AND CASH EQUIVALENTS, END OF PERIOD	$	76,418	$	56,938


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Interest paid, net	$	31,899	$	10,378

NONCASH INVESTING AND FINANCING ACTIVITIES

Accrued capital expenditures	$	5,875	$	7,928

Issuance of shares under business combinations	$	76,010	$	1,007,322

Acquisitions
Tangible and intangible assets acquired, net of cash	$	35,713	$	1,428,910
Liabilities assumed	(10,616)		(302,437)
Acquisition consideration payable	64,021		(1,208,143)
Goodwill	12,278		299,042
	$	101,396	$	217,372

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

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VERANO HOLDINGS CORP. Notes to Unaudited Interim Condensed Consolidated Financial Statements ($ in Thousands except shares and per share amounts)


1.OVERVIEW AND BASIS OF PRESENTATION

(a)Description of Business

Unless otherwise stated or the context requires otherwise, references herein to the "Company,” “Verano,” "we," "us," and "our" are intended to mean Verano Holdings Corp. and its direct and indirect subsidiaries, licensees, and controlled and managed entities.

The Company is a vertically integrated cannabis operator that focuses on limited-licensed markets in the United States. As a vertically integrated provider, the Company owns, operates, manages, controls, and/or has licensing, consulting or other commercial agreements with cultivation, processing, and retail licensees across 14 state markets (Arizona, Arkansas, California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Nevada, New Jersey, Ohio, Pennsylvania, and West Virginia).

In addition to the states listed above, the Company also conducts pre-licensing activities in other markets. In these markets, the Company has either applied for licenses, or plans on applying for licenses, but does not currently own any cultivation, processing, or retail licenses.

On February 11, 2021, the Company resulted from a reverse takeover transaction as further described in Note 3. Thereafter, the Company’s Class A Subordinate Voting Shares (the “Subordinate Voting Shares”) were listed on the Canadian Securities Exchange (the “CSE”) under ticker symbol “VRNO” and subsequently began to be quoted in the United States on the OTCQX marketplace operated by the OTC Market Group, under the ticker symbol “VRNOF”.

The Company’s corporate headquarters is located at 415 North Dearborn St., 4th Floor, Chicago, Illinois 60654.

(b)Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, certain information and disclosures required by GAAP for annual financial statements have been omitted. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Unless otherwise indicated, all references to “$” or “US$” in this document refer to United States dollars, and all references to “C$” refer to Canadian dollars. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company's restated audited consolidated financial statements and notes thereto for as of and for the year ended December 31, 2021, included in the Company’s Amendment No. 2 to Form 10 filed with the SEC on August 19, 2022 (the "2021 Annual Audited Financials"), which amended the Company's registration statement on Form 10 initially filed with the SEC on April 26, 2022, as further amended on June 17, 2022 and September 8, 2022 (as amended through September 8, 2022, the "Form 10"). The accompanying unaudited interim condensed consolidated financial statements include the accounts of Verano Holdings, Corp. and its direct and indirect subsidiaries as well as the accounts of any entities over which the Company has a controlling financial interest in accordance with Accounting Standards Codification ("ASC") 810 Consolidation. The preparation of the Company’s unaudited interim condensed consolidated financial statements requires management to make estimates and assumptions that impact the reported amounts of assets, liabilities, revenue and expenses and the disclosure of assets and liabilities in such financial statements and in the accompanying notes. Actual results may differ materially from these estimates. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the 2022 full year or any future periods. The accompanying condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited consolidated balance sheet as of December 31, 2021 contained in the Form 10.

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VERANO HOLDINGS CORP. Notes to Unaudited Interim Condensed Consolidated Financial Statements ($ in Thousands except shares and per share amounts)

1.OVERVIEW AND BASIS OF PRESENTATION (Continued)

(c)Restatement of Previously Issued Consolidated Financial Statements

The notes included herein should be read in conjunction with the Company’s 2021 Annual Audited Consolidated Financial Statements. As described in the Form 10, the Company restated it's previously issued consolidated financial statements for each of the quarterly and year-to-date periods ended March 31, 2022, December 31, 2021, and March 31, 2021 (collectively, as the "Restatements"). Amounts as of or for the period ended December 31, 2021 depicted in these interim unaudited condensed consolidated financial statements as "As Restated" include the impact of the restatement included in the Form 10. As a result of the error related to stock-based compensation, the Company increased Inventories by $3,069 as of and for the year ended December 31, 2021. As a result of such understated stock-based compensation expense, the Company’s tax expense was overstated with corresponding adjustments to Income Tax Payable of $662 and a decrease of Deferred Income Taxes of ($800) as of and for the year ended December 31, 2021. As a result of the error related to stock-based compensation as of and for the quarter ended March 31, 2022, the Company increased Inventories by $3,898, Cost of Goods Sold, net by $1,052, and Salaries and Benefits expense by $9,572. As a result of the error related to stock-based compensation as of and for the quarter ended March 31, 2021, the Company increased Salaries and Benefits expense by $5,692. As a result of overstatement of tax expense due to a clerical error, the Company’s tax expense was overstated by $20,274 with corresponding adjustments to Income Tax Payable of ($23,071) and an increase to Deferred Income Taxes of $2,659 as of and for the quarter ended March 31, 2022. There was no net cash impact to the audited consolidated financial statements for the year ended December 31, 2021 and no net cash impact to the unaudited interim condensed consolidated financial statements for the quarters ended March 31, 2022 and 2021, for these restatement items. The Company’s accounting for distributions from a consolidated entity was corrected in the Restatements to reduce Investment in Associates and Non-controlling Interest Equity by ($1,675) for the year ended December 31, 2021, and ($100) for the quarter ended March 31, 2021. Also, the Investment in Associates was corrected to account for distributions in excess of investment resulting in an increase of Equity Income of $1,537 and $1,638 at, December 31, 2021 and March 31, 2022, respectively, with a reduction in Disposition of Investments of $3,176 at March 31, 2022. Additionally, The Company determined that it had information after March 31, 2022 but before the March 31, 2022 financials were publicly filed regarding the Connecticut Pharmaceutical Solutions, Inc. and The Healing Center, LLC acquisition earnouts, as described in Note 8 - Transactions, below. As a result, the Company recognized an aggregate $4,760 reduction in these expected acquisition earnouts which was recorded in the quarter ended March 31, 2022 to reflect the subsequent information indicating a lower liability. For additional information regarding the Restatements, please refer to the Form 10.

(d)Basis of Consolidation

The condensed consolidated financial statements have been prepared in accordance with GAAP and include the accounts of the Company and its subsidiaries, as well as the accounts of any entities over which the Company has a controlling financial interest in accordance with ASC 810 Consolidation. All transactions and balances between these entities have been eliminated upon consolidation.

(d)Significant Accounting Policies

There have been no changes to the Company’s significant accounting policies as described in Note 2 to the 2021 Annual Audited Financials, included in the Form 10.

(e)Earnings (Loss) per Share

Basic earnings (loss) per share is calculated using the treasury stock method, by dividing the net earnings (losses) attributable to shareholders by the weighted average number of shares (including the Company's Class B Proportionate Voting Shares (the "Proportionate Voting Shares") on an as converted to Subordinate Voting Shares basis of 100 Subordinate Voting Shares to one Proportionate Voting Share) outstanding during each of the periods presented. Contingently issuable shares (including shares held in escrow) are not considered outstanding shares and

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VERANO HOLDINGS CORP. Notes to Unaudited Interim Condensed Consolidated Financial Statements ($ in Thousands except shares and per share amounts)

1.OVERVIEW AND BASIS OF PRESENTATION (Continued)

consequently are not included in the earnings (loss) per share calculations. Diluted income per share is calculated by adjusting the weighted average number of shares outstanding to assume conversion of all dilutive potential shares.

To determine diluted income per share, the Company assumes that any proceeds from the exercise of dilutive share options would be used to repurchase shares at the average market price during the period. The diluted income per share calculation excludes any potential conversion of share options and convertible debt, if any, that would increase earnings per share or decrease loss per share. No potentially dilutive share equivalents were included in the computation of diluted loss per share for the three and nine months ended September 30, 2022 and 2021 because their impact would have been anti-dilutive.

(f)Recently Issued Accounting Standards

The Company reviews recently issued accounting standards on a quarterly basis and has determined there are no standards yet to be adopted which are relevant to the Company’s business for disclosure.

(g)Coronavirus Pandemic

In March 2020, the World Health Organization categorized coronavirus disease 2019 (together with its variants, “COVID-19”) as a pandemic. COVID-19 has spread throughout the U.S. and other countries across the world. Although the duration and severity of its effects are currently unknown, the Company continues to assess the potential impact on the Company and evaluate actions to strengthen its financial position and support the continuity of its business and operations in response to the effects of COVID-19.

While the Company believes that its revenue, gross profit and operating income were not adversely impacted by COVID-19 during the three and nine months ended September 30, 2022, the uncertain nature of the spread of variants of COVID-19 could alter the Company’s financial results and business operations, including as a result of any lockdowns mandated by governmental authorities and the potential quarantine of the Company’s employees or of its supply chain partners’ employees.

The Company’s unaudited interim condensed consolidated financial statements presented herein reflect estimates and assumptions made by management taking into account, among other matters, the impact of COVID-19. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of such financial statements and reported amounts of revenue and expenses during the periods presented. Such estimates and assumptions affect, among other things, the Company’s goodwill; long-lived assets and intangible assets; operating lease right of use assets and operating lease liabilities; valuation of deferred income taxes; the allowance for doubtful accounts; assessment of the Company’s lease and non-lease contract expenses; and measurement of compensation cost for bonus and other compensation plans.


2.REVERSE TAKEOVER TRANSACTION (“RTO”)

On December 14, 2020, Verano Holdings, LLC, a Delaware limited liability company and currently a subsidiary of the Company ("Verano LLC"), Majesta Minerals, Inc., an Alberta corporation (the “Public Corporation”), 1276268 B.C. Ltd., a British Columbia corporation (“Verano FinCo”), 1277233 B.C. Ltd, a British Columbia corporation, and 1278655 B.C. Ltd., a British Columbia corporation (“Majesta SubCo”), entered into an arrangement agreement (as amended January 26, 2021, the “Definitive Agreement”), pursuant to which the Company resulted from the reverse takeover transaction contemplated thereby (the “RTO”).

In accordance with the plan of arrangement forming part of the Definitive Agreement (the “Plan of Arrangement”), the Public Corporation changed its name to “Verano Holdings Corp.” and completed a consolidation of its common shares on the basis of 100,000 issued and outstanding common shares on a post-consolidation basis.

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VERANO HOLDINGS CORP. Notes to Unaudited Interim Condensed Consolidated Financial Statements ($ in Thousands except shares and per share amounts)

2.REVERSE TAKEOVER TRANSACTION (“RTO”) (Continued)

In accordance with the terms of the Plan of Arrangement, 10,000,000 subscription receipts (the “Subscription Receipts”) were issued on January 21, 2021, at a price per Subscription Receipt of $101, for aggregate gross proceeds of $100,000 (the “RTO Financing”). As part of the RTO Financing, the Company issued a total of 10,000,000 Subordinate Voting Shares to the purchasers of the Subscription Receipts, issued 578,354 Subordinate Voting Shares and paid $4,580 in transactions costs to the offering agents as a broker fee, for a net RTO Financing amount of $95,420.

The Public Corporation reorganized its capital structure by altering its notice of articles and articles to (i) attach special rights and restrictions to its common shares, (ii) change the identifying name of its common shares to “Class A Subordinate Voting Shares” and (iii) create a new class of shares identified as "Class B Proportionate Voting Shares". Pursuant to the Plan of Arrangement, thereafter Verano FinCo amalgamated with Majesta SubCo. Majesta SubCo subsequently was liquidated, and the net proceeds of the RTO Financing were transferred to the Company, as the resulting corporation in the RTO.

The members of Verano LLC, and owners of certain of its subsidiaries, through a series of transactions, exchanged their ownership interests in Verano LLC and such subsidiaries for 96,892,040 Subordinate Voting Shares and 1,172,382 Proportionate Voting Shares. In connection with the Company’s acquisitions of Alternative Medical Enterprises, LLC, Plants of Ruskin GPS, LLC, and RVC 360, LLC (collectively, the “AME Parties”), that occurred concurrently with the RTO, the members of the AME Parties, through a series of transactions, exchanged their membership interests in the AME Parties for 18,092,987 Subordinate Voting Shares and 470,984 Proportionate Voting Shares. In addition, upon the consummation of the acquisitions the members of the AME Parties received cash consideration of $20,000, which was funded with proceeds from the RTO Financing and were entitled to receive an additional $15,000 in future cash installments, all of which have been paid in full. Refer to Note 8 - Transactions, below for additional details of the acquisitions of the AME Parties and related transactions.

In accordance with ASC 805, Business Combinations, the substance of the RTO transactions is a reverse takeover of a nonoperating company. The RTO transactions do not constitute a business combination because Majesta SubCo does not meet the definition of a business under the standard. As a result, the RTO transactions are accounted for as a capital transaction with Verano LLC being identified as the acquirer and the equity consideration being measured at fair value. The resulting consolidated statement of financial position of the Company is presented as a continuance of Verano LLC and the comparative figures presented in the consolidated financial statements for dates and periods prior to the RTO are those of Verano LLC.

ASC 505-50, Equity-Based Payments to Non-Employees, applies to transactions where an entity grants equity instruments and cannot identify specifically some or all of the goods or services received in return. Because the Company issued shares with a value in excess of the assets received, the difference is recognized in RTO-related issuance cost through equity. The amount assigned to the transaction cost of $198 is the difference between the fair value of the consideration and the net identifiable assets of Majesta SubCo acquired by the Company.


1 Such amounts not in Thousands

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VERANO HOLDINGS CORP. Notes to Unaudited Interim Condensed Consolidated Financial Statements ($ in Thousands except shares and per share amounts)


3.INVENTORY

The Company’s inventory consists of the following as of September 30, 2022 and December 31, 2021:


	September 30, 2022		December 31, 2021
			(As Restated)
Raw Materials	$	6,702	$	5,767
Work in Process	123,603		96,367
Finished Goods	37,837		38,569

Total Inventory	$	168,142	$	140,703


4.PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment and related accumulated depreciation consists of the following as of September 30, 2022 and December 31, 2021:


	September 30, 2022		December 31, 2021

Land	$	31,243	$	29,399
Buildings and Improvements	184,556		126,020
Furniture and Fixtures	18,068		13,259
Computer Equipment and Software	23,035		14,078
Leasehold Improvements	207,262		182,514
Tools and Equipment	86,933		65,774
Vehicles	4,836		3,229
Assets Under Construction (1)	53,813		64,107

Total Property, Plant and Equipment	609,746		498,380
Less: Accumulated Depreciation	(75,993)		(46,148)

Property, Plant and Equipment, Net	$	533,753	$	452,232

(1)Assets under construction represent construction in progress related to facilities not yet completed or otherwise not placed in service.

For the three months ended September 30, 2022 and September 30, 2021, depreciation expense included in costs of goods sold totaled $8,504 and $5,770, respectively. For the three months ended September 30, 2022 and September 30, 2021, depreciation expense included in selling, general, and administrative expense totaled $2,782 and $1,932, respectively. For the nine months ended September 30, 2022 and September 30, 2021, depreciation expense included in costs of goods sold totaled $22,871 and $14,575, respectively. For the nine months ended September 30, 2022 and September 30, 2021, depreciation expense included in selling, general, and administrative expense totaled $8,502 and $5,066, respectively.

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VERANO HOLDINGS CORP. Notes to Unaudited Interim Condensed Consolidated Financial Statements ($ in Thousands except shares and per share amounts)


5.INTANGIBLE ASSETS AND GOODWILL

Intangible assets are recorded at cost less accumulated amortization and impairment losses, if any. Intangible assets acquired in a business combination are measured at fair value as of the acquisition date. Amortization of definite life intangible assets is provided on a straight-line basis over their estimated useful lives. The estimated useful lives, residual values, and amortization methods for intangible assets are reviewed by the Company at each year end, and any changes in estimates are accounted for prospectively.

As of September 30, 2022, intangible assets consisted of the following:


	Licenses		Tradenames		Technology		Total
Cost
Balance as of January 1, 2022	$	1,386,131	$	54,166	$	11,603	$	1,451,900
Purchases	—		—		—		—
Additions from business combination	21,545		—		—		21,545
Adjustments to purchase price allocation	—		—		—		—
Disposals	—		—		—		—
Balance as of September 30, 2022	$	1,407,676	$	54,166	$	11,603	$	1,473,445

Accumulated Amortization
Balance as of January 1, 2022	66,703		4,158		1,126		71,987
Amortization	69,869		4,065		923		74,857
Balance as of September 30, 2022	$	136,572	$	8,223	$	2,049	$	146,844

Net Book Value
Balance as of January 1, 2022	1,319,428		50,008		10,477		1,379,913
Balance as of September 30, 2022	$	1,271,104	$	45,943	$	9,554	$	1,326,601

Amortization periods of assets with finite lives are based on management’s estimates as of the date of acquisition.

The following table outlines the estimated annual amortization expense related to intangible assets as of September 30, 2022:


Year Ending December 31:	Estimated Amortization
2022 (Remaining)	$	25,125
2023	100,499
2024	100,499
2025	100,499
2026	99,772
Thereafter	900,207
	$	1,326,601

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VERANO HOLDINGS CORP. Notes to Unaudited Interim Condensed Consolidated Financial Statements ($ in Thousands except shares and per share amounts)

5.INTANGIBLE ASSETS AND GOODWILL (Continued)

The changes in the carrying amount of goodwill, by reportable segment, for the nine months ended September 30, 2022 were as follows:


	January 1, 2022		Impairment		Adjustments to purchase price allocation		Acquisitions		September 30, 2022
Cultivation	$	91,116	$	—	$	1,050	$	—	$	92,166
Retail	277,014		—		912		10,316		288,242
Total	$	368,130	$	—	$	1,962	$	10,316	$	380,408

During the quarter ended March 31, 2022, the Company recorded measurement period adjustments in connection with the December 28, 2021 acquisition of Connecticut Pharmaceutical Solutions, Inc. The net impact led to an increase of $1,050 to goodwill. The Company obtained additional information about the facts and circumstances that existed at the time of the acquisition that resulted in changes in the provisional amounts recognized for inventory, income taxes and accrued payables.

During the quarter ended September 30, 2022, the Company recorded a purchase price adjustment for the December 20, 2021 acquisition of Caring Nature, LLC. The purchase price adjustment was an increase to consideration transferred and was reflected as an increase of $56 to goodwill.

During the quarter ended September 30, 2022, the Company recorded measurement period adjustments in connection with the March 11, 2022 acquisition of 420 Capital Management, LLC ("Greengate"). The net impact led to an increase of $856 to goodwill. The Company obtained additional information about the facts and circumstances that existed at the time of the acquisition that resulted in changes in the provisional amounts recognized for cash and accounts payable.


6.EARNINGS (LOSSES) PER SHARE

The Company presents basic earnings (losses) per share. Basic earnings (losses) per share is calculated by dividing the earnings (loss) attributable to shareholders by the weighted average number of Subordinate Voting Shares (with outstanding Proportionate Voting Shares accounted for on an as converted to Subordinate Voting Shares basis) outstanding during the periods presented.

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VERANO HOLDINGS CORP. Notes to Unaudited Interim Condensed Consolidated Financial Statements ($ in Thousands except shares and per share amounts)

6.EARNINGS (LOSSES) PER SHARE (Continued)

The computations of net earnings (loss) per share on a basic basis, including reconciliations of the numerators and denominators, for the three and nine months ended September 30, 2022 and September 30, 2021 were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator
Net Loss attributable to Verano Holdings Corp.	$	(42,993)	$	(12,513)	$	(53,054)	$	(50,087)

Denominator
Basic
Pre-RTO weighted-average shares outstanding	—		—		—		158,203,932
Post-RTO weighted-average shares outstanding	—		313,674,044		—		303,832,637
Weighted-average shares outstanding – basic	332,872,464		313,674,044		329,240,200		281,961,659

Diluted
Pre-RTO weighted-average shares outstanding	—