UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended ~~September 30, 2022~~March 31, 2023


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

For the transition period from to

Commission File Number: 000-56225

GOODNESS GROWTH HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


British Columbia, Canada		82-3835655
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

207 South 9^th Street, Minneapolis, MN		55402
(Address of principal executive offices)		(Zip Code)


	(612) 999-1606
	(Registrant’s telephone number, including area code)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None	None	None

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

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

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

Large accelerated filer	◻	Accelerated filer	◻
Non-accelerated filer	þ	Smaller reporting company	☑
		Emerging growth company	☑

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

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

As of ~~November~~May 11, ~~2022,~~2023, the registrant had the following number of shares of each of its classes of registered securities outstanding: Subordinate Voting Shares – 86,721,030; Multiple Voting Shares – 348,642; and Super Voting Shares – 65,411.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

GOODNESS GROWTH HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In U.S Dollars, unaudited and condensed)


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Assets
Current assets:
Cash	$	21,842,076	$	15,155,279	$	10,345,599	$	15,149,333
Accounts receivable, net of allowance for doubtful accounts of $480,979 and $572,080, respectively		5,911,049		4,502,469
Accounts receivable, net of allowance for doubtful accounts of $473,856 and $453,860, respectively						4,261,624		4,286,072
Inventory		19,114,627		20,422,061		21,852,027		20,508,023
Prepayments and other current assets		3,161,855		1,560,113		2,030,630		2,544,532
Assets Held for Sale		3,834,850		—		77,067,479		4,240,781
Total current assets		53,864,457		41,639,922		115,557,359		46,728,741
Property and equipment, net		91,246,127		99,488,559		25,750,814		89,606,932
Operating lease, right-of-use asset		7,482,661		8,510,499		2,789,741		6,110,787
Notes receivable, long-term		3,750,000		3,750,000		3,750,000		3,750,000
Intangible assets, net		8,936,713		10,184,289		8,617,180		8,776,946
Goodwill		183,836		183,836		183,836		183,836
Deposits		2,178,445		1,718,206		593,812		2,312,161
Deferred tax assets		5,680,000		1,495,000		1,390,000		1,687,000
Total assets	$	173,322,239	$	166,970,311	$	158,632,742	$	159,156,403
Liabilities
Current liabilities
Accounts Payable and Accrued liabilities	$	17,243,353	$	14,805,473	$	15,595,086	$	14,928,780
Long-Term debt, current portion		6,013,875		—		3,050,000		11,780,000
Right of use liability		1,713,292		1,600,931		1,004,046		1,680,294
Liabilities held for sale		1,376,184		—		75,525,255		1,319,847
Total current liabilities		26,346,704		16,406,404		95,174,387		29,708,921
Right-of-use liability		80,884,574		80,228,097		10,370,395		79,757,994
Long-Term debt, net		49,614,909		27,329,907		55,155,615		46,248,604
Total liabilities	$	156,846,187	$	123,964,408	$	160,700,397	$	155,715,519

Commitments and contingencies (refer to Note 16)

Stockholders’ equity
Subordinate Voting Shares ($- par value, unlimited shares authorized; 86,046,830 shares issued and outstanding)		—		—
Multiple Voting Shares ($- par value, unlimited shares authorized; 355,384 shares issued and outstanding)		—		—
Stockholders’ equity (deficiency)
Subordinate Voting Shares ($- par value, unlimited shares authorized; 86,721,030 shares issued and outstanding)						—		—
Multiple Voting Shares ($- par value, unlimited shares authorized; 348,642 shares issued and outstanding)						—		—
Super Voting Shares ($- par value; unlimited shares authorized; 65,411 shares issued and outstanding, respectively)		—		—		—		—
Additional Paid in Capital		181,073,217		178,429,422		184,219,278		181,321,847
Accumulated deficit		(164,597,165)		(135,423,519)		(186,286,933)		(177,880,963)
Total stockholders' equity	$	16,476,052	$	43,005,903
Total liabilities and stockholders' equity	$	173,322,239	$	166,970,311
Total stockholders' equity (deficiency)					$	(2,067,655)	$	3,440,884
Total liabilities and stockholders' equity (deficiency)					$	158,632,742	$	159,156,403

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

GOODNESS GROWTH HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF NET LOSS AND COMPREHENSIVE LOSS

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Revenue	$	18,854,101	$	13,369,432	$	55,582,821	$	40,790,221	$	19,088,423	$	15,638,572
Cost of sales
Product costs		9,186,241		7,903,444		29,532,469		22,682,503		9,578,211		9,682,977
Inventory valuation adjustments		131,000		351,000		3,657,788		464,000		(10,000)		3,466,917
Gross profit		9,536,860		5,114,988		22,392,564		17,643,718		9,520,212		2,488,678
Operating expenses:
Selling, general and administrative		8,489,728		8,106,187		26,393,136		24,441,860		7,156,835		9,277,969
Stock-based compensation expenses		896,081		835,122		2,636,594		4,289,820		1,675,594		642,506
Depreciation		167,940		98,098		487,164		515,907		159,511		156,096
Amortization		172,267		206,442		516,800		619,327		159,766		172,267
Total operating expenses		9,726,016		9,245,849		30,033,694		29,866,914		9,151,706		10,248,838

Income (loss) from operations		(189,156)		(4,130,861)		(7,641,130)		(12,223,196)		368,506		(7,760,160)

Other income (expense):
Impairment of long-lived assets		(2,108,703)		—		(7,476,618)		—		—		(5,313,176)
Loss on sale of property and equipment		7,583		—		(3,347)		—
Gain on disposal of assets		—		—		168,359		437,107		—		168,359
Interest expenses, net		(5,573,263)		(2,254,553)		(15,472,885)		(6,037,057)		(7,134,789)		(4,601,799)
Other income (expenses)		79,750		75,018		1,196,975		33,631		22,313		1,199,994
Other income (expenses), net		(7,594,633)		(2,179,535)		(21,587,516)		(5,566,319)		(7,112,476)		(8,546,622)

Loss before income taxes		(7,783,789)		(6,310,396)		(29,228,646)		(17,789,515)		(6,743,970)		(16,306,782)

Current income tax expenses		(1,790,000)		(530,000)		(4,130,000)		(3,150,000)		(1,725,000)		(1,375,000)
Deferred income tax recoveries		1,150,000		(30,000)		4,185,000		180,000		63,000		3,115,000
Net loss and comprehensive loss		(8,423,789)		(6,870,396)		(29,173,646)		(20,759,515)		(8,405,970)		(14,566,782)
Net loss per share - basic and diluted	$	(0.07)	$	(0.05)	$	(0.23)	$	(0.17)	$	(0.07)	$	(0.11)
Weighted average shares used in computation of net loss per share - basic & diluted		128,120,949		126,363,104		128,114,570		122,704,872		128,126,330		128,111,328

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

GOODNESS GROWTH HOLDINGS, INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)

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


	Common Stock															Common Stock
	SVS			MVS			Super Voting Shares							Total		SVS			MVS			Super Voting Shares							Total
										Additional Paid-		Accumulated		Stockholders'											Additional Paid-		Accumulated		Stockholders'
	Shares	Amount		Shares	Amount		Shares	Amount		in Capital		Deficit		Equity		Shares	Amount		Shares	Amount		Shares	Amount		in Capital		Deficit		Equity (deficiency)
Balance, January 1, 2021	51,062,559	$	—	554,127	$	—	65,411		—	$	164,079,614	$	(101,733,044)	$	62,346,570
Balance, January 1, 2022																81,298,228	$	—	402,720	$	—	65,411		—	$	178,429,422	$	(135,423,519)	$	43,005,903
Conversion of MVS shares	15,140,700		—	(151,408)		—	—		—		—		—		—	2,813,400		—	(28,134)		—	—		—		—		—		—
Shares issued in Nevada acquisition	1,050,000		—	—		—	—		—		1,385,239		—		1,385,239
Options exercised	3,989,344		—	—		—	—		—		1,152,596		—		1,152,596
Warrants exercised	7,110,481		—	—		—	—		—		—		—		—
Warrants issued in financing activities	—		—	—		—	—		—		5,395,759		—		5,395,759
Stock-based compensation	1,185,293		—	—		—	—		—		4,289,820		—		4,289,820	—		—	—		—	—		—		642,506		—		642,506
Net Loss	—		—	—		—	—		—		—		(20,759,515)		(20,759,515)	—		—	—		—	—		—		—		(14,566,782)		(14,566,782)
Balance at September 30, 2021	79,538,377	$	—	402,719	$	—	65,411	$	—	$	176,303,028	$	(122,492,559)	$	53,810,469
Balance at March 31, 2022																84,111,628	$	—	374,586	$	—	65,411	$	—	$	179,071,928	$	(149,990,301)	$	29,081,627

Balance, January 1, 2022	81,298,228	$	—	402,720	$	—	65,411	$	—	$	178,429,422	$	(135,423,519)	$	43,005,903
Conversion of MVS shares	4,733,600		—	(47,336)		—	—		—		—		—		—
Options exercised	15,002		—	—		—	—		—		7,201		—		7,201
Balance, January 1, 2023																86,721,030	$	—	348,642	$	—	65,411	$	—	$	181,321,847	$	(177,880,963)	$	3,440,884
Stock-based compensation	—		—	—		—	—		—		2,636,594		—		2,636,594	—		—	—		—	—		—		1,675,594		—		1,675,594
Obligation to issue shares																—		—	—		—	—		—		1,221,837		—		1,221,837
Net Loss	—		—	—		—	—		—		—		(29,173,646)		(29,173,646)	—		—	—		—	—		—		—		(8,405,970)		(8,405,970)
Balance at September 30, 2022	86,046,830	$	—	355,384	$	—	65,411	$	—	$	181,073,217	$	(164,597,165)	$	16,476,052
Balance at March 31, 2023																86,721,030	$	—	348,642	$	—	65,411	$	—	$	184,219,278	$	(186,286,933)	$	(2,067,655)

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

GOODNESS GROWTH HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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


	September 30,				March 31,
	2022		2021		2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(29,173,646)	$	(20,759,515)	$	(8,405,970)	$	(14,566,782)
Adjustments to reconcile net loss to net cash used in operating activities:
Inventory valuation adjustments		3,657,788		464,000		(10,000)		3,466,917
Depreciation		487,164		515,907		159,511		156,096
Depreciation capitalized into inventory		1,959,536		1,678,558		734,087		700,193
Non-cash operating lease expense		852,687		764,266		206,290		274,067
Amortization of intangible assets		516,800		619,327		159,766		172,267
Stock-based payments		2,636,594		4,289,820		1,675,594		642,506
Interest Expense		3,430,733		1,764,711		1,398,848		996,157
Impairment of long-lived assets		7,476,618		—		—		5,313,176
Deferred income tax		(4,185,000)		(180,000)		(63,000)		(3,115,000)
Accretion		3,407,030		310,704		394,573		1,384,812
Loss on Sale of Property and Equipment		3,347		—
Gain on disposal of OMS		—		(437,107)
Gain on disposal of royalty asset		(168,359)		—		—		(168,359)
Change in operating assets and liabilities:
Accounts Receivable		(1,408,580)		18,384		24,448		(1,764,878)
Prepaid expenses		(1,601,742)		(1,573,909)		513,902		(1,877,011)
Inventory		(2,205,236)		(7,765,288)		(1,230,547)		(1,255,162)
Accounts payable and accrued liabilities		2,360,044		(2,555,634)		666,307		2,880,051
Change in assets and liabilities held for sale		—		124,843		(18,767)		—
Net cash used in operating activities	$	(11,954,222)	$	(22,720,933)	$	(3,794,958)	$	(6,760,950)

CASH FLOWS FROM INVESTING ACTIVITIES:
PP&E Additions	$	(4,938,587)	$	(14,637,331)	$	(197,827)	$	(2,173,430)
Proceeds from sale of property, plant, and equipment		387,512		—
Proceeds from sale of royalty asset		236,635		—		—		236,635
Acquisition of MJ Distributing		—		(1,592,500)
Proceeds from sale of OMS net of cash		—		1,150,000
Deposits		(482,539)		67,841		(522,375)		(276,684)
Net cash provided by (used in) investing activities	$	(4,796,979)	$	(15,011,990)	$	(720,202)	$	(2,213,479)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt, net of issuance costs	$	24,868,143	$	23,162,526	$	—	$	2,884,581
Convertible debt payment		—		(900,000)
Proceeds from option exercises		7,201		1,152,596
Lease principal payments		(1,437,346)		(1,008,584)		(288,574)		(464,214)
Net cash provided by financing activities	$	23,437,998	$	22,406,538
Net cash provided by (used in) financing activities					$	(288,574)	$	2,420,367

Net change in cash and restricted cash	$	6,686,797	$	(15,326,385)
Net change in cash					$	(4,803,734)	$	(6,554,062)

Cash and restricted cash, beginning of period	$	15,155,279	$	27,105,680
Cash, beginning of year					$	15,149,333	$	15,155,279

Cash and restricted cash, end of period	$	21,842,076	$	11,779,295
Cash, end of year					$	10,345,599	$	8,601,217

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

GOODNESS GROWTH HOLDINGS, INC.

Notes to Unaudited Condensed Consolidated Financial Statements

1. Description of Business and Summary

Goodness Growth Holdings, Inc. (“Goodness Growth” or the “Company”) (formerly, Vireo Health International, Inc.) was incorporated under the Alberta Business Corporations Act on November 23, ~~2004.~~2004, as Dominion Energy, Inc.. Vireo Health, Inc., (“VHI”) was incorporated under the laws of the State of Delaware on December 28, 2017, with an effective date of January 1, 2018. Through a series of transactions known, colloquially, as a “reverse-triangular merger,” on March 18, 2019, VHI was acquired by a subsidiary of the Company, with the result that the former shareholder of VHI comprised over 99% of the shareholders of the Company. The Company was previously listed on the Canadian Securities Exchange (the “CSE”) under ticker symbol ~~“VREO”.~~“VREO.” On June 9, 2021, the Company changed its name to Goodness Growth Holdings, Inc. and its ticker symbol on the CSE to “GDNS.”

Goodness Growth is a ~~physician-led, science-focused organization that cultivates and/or manufactures pharmaceutical-grade~~ cannabis company whose mission is to provide safe access, quality products and ~~cannabis extracts.~~value to its customers while supporting its local communities through active participation and restorative justice programs. Goodness Growth operates cannabis cultivation, production, and dispensary facilities in Maryland, Minnesota, New Mexico, and New York, and formerly in Arizona and Ohio.

While marijuana and CBD-infused products are legal under the laws of ~~several~~many U.S. states (with vastly differing restrictions), the United States Federal Controlled Substances Act classifies all “marijuana” as a Schedule I drug. Under U.S. federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the United States, and a lack of safety for the use of the drug under medical supervision. Recently some federal officials have attempted to distinguish between medical cannabis use as necessary, but recreational use as “still a violation of federal law.” At the present time, the distinction between “medical marijuana” and “recreational marijuana” does not exist under U.S. federal law.

On January 31, 2022, the Company entered into an Arrangement Agreement (the ~~“Arrangement Agreement”~~“Arrangement Agreement”) with Verano Holdings Corp. (“Verano”), pursuant to which Verano was to ~~acquire~~have acquired all of the issued and outstanding shares of Goodness Growth pursuant to a plan of arrangement (the ~~“Plan~~“Plan of ~~Arrangement”~~Arrangement”) under the Business Corporations Act (British Columbia) (the “Arrangement”). Subject to the terms and conditions set forth in the Arrangement Agreement and the Plan of Arrangement, holders of Goodness Growth Shares ~~would~~were to receive 0.22652 of a subordinate voting share of Verano (each a “Verano Subordinate Voting Share”), subject to adjustment as described ~~below~~in the Arrangement Agreement (the “Exchange Ratio”), for each Subordinate Voting Share held, and 22.652 Verano Subordinate Voting Shares for each Multiple Voting Share and Super Voting Share held, immediately prior to the effective time of the Arrangement.

On October 13, 2022, Goodness Growth received a notice of purported termination of the Arrangement Agreement (the “Notice”) from Verano. The Notice asserted certain breaches of the Arrangement Agreement, including claims the Company’s public filings and communications with respect to its business and ongoing operations were misleading and that the Company breached its representations to Verano under the Arrangement Agreement. Verano also claimed, as a result of such breaches, it is entitled to payment of ~~the~~a $14,875,000 termination fee and its transaction expenses. Goodness Growth denies all of Verano’s allegations and affirmatively ~~states~~asserts that it has complied with its obligations under the Arrangement Agreement, and ~~will~~with its disclosure obligations under US and Canadian law, in all material respects at all times. The Company believes that Verano ~~has~~had no factual or legal basis to justify or support ~~its~~ purported ~~grounds for~~ termination of the Arrangement Agreement, which the Company determined to treat as a repudiation of the Arrangement Agreement.

On October 21, 2022, Goodness Growth commenced an action in the Supreme Court of British Columbia against Verano after Verano ~~wrongfully~~ repudiated the Arrangement Agreement. The Company is seeking damages, costs and interest, based on Verano's breach of contract and of its duty of good faith and honest performance. On November 14, 2022, Verano filed counterclaims against the Company for the termination fee and transaction expenses described above. Due to uncertainties inherent in litigation, it is not possible for Goodness Growth to predict the timing or final outcome of the legal proceedings against Verano or to determine the amount of damages, if any, that may be awarded.

~~concern is dependent on its future profitability and implementation of the aforementioned plan. The Company may not be successful in these efforts.~~

2. Summary of Significant Accounting Policies

Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, ~~2021,~~2022, filed with the United States Securities and Exchange Commission (“SEC”) on March ~~15, 2022~~31, 2023 (the "Annual Financial Statements"). There have been no material changes to the Company’s significant accounting policies.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements reflect the accounts of the Company. The information included in these statements should be read in conjunction with the Annual Financial Statements. The unaudited condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S.~~GAAP~~” GAAP”) and pursuant to the rules and regulations of the SEC. In the opinion of management, the financial data presented includes all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. Results of interim periods should not be considered indicative of the results for the full year. These unaudited interim condensed consolidated financial statements include estimates and assumptions of management that affect the amounts reported in the unaudited condensed consolidated financial statements. Actual results could differ from these estimates.

~~Revision of Previously Issued Financial Statements~~

During the year ended December 31, 2021, management identified an error related to the accounting treatment of warrants with a Canadian dollar exercise price issued in connection with the Credit Facility. The Company initially recorded these Canadian denominated warrants as a derivative liability subject to revaluation at each period end, when they should have received equity treatment. Additionally, the Company identified errors related to the valuation of stock issued in the acquisition of MJ Distributing, and stock issued to our former Executive Chairman, Bruce Linton. In both instances the stock issued carried certain lock up provisions. The Company initially recorded the equity value of the stock issued at market value on the date of issuance, rather than applying a discount for lack of marketability to account for the lock up provisions.

To correct the immaterial misstatements for the three and nine month periods ended September 30, 2021, the Company elected to revise its previously issued interim unaudited condensed consolidated statements of net loss and comprehensive loss, stockholders’ equity, and cash flows. ~~The Company will present the revision of its previously issued interim unaudited condensed consolidated financial statements in connection with the future filing of its Quarterly Reports on Form 10-Q.~~

~~The impact of the revisions on the Company’s interim unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2021 is reflected in the following table:~~

Statement of Net Loss and Comprehensive Loss for the nine months ended September 30, 2021 (unaudited)

As Previously Reported

Adjustment

As Revised
Operating expenses:

Stock-based compensation expenses

$
4,557,777

$
(267,957)

$
4,289,820
Total operating expenses

30,134,871

(267,957)

29,866,914

Loss from operations

(12,491,153)

267,957

(12,223,196)

Other income (expense):

Derivative gain (loss)

2,317,065

(2,317,065)

—
Other income (expenses), net

(3,249,254)

(2,317,065)

(5,566,319)

Loss before income taxes

(15,740,407)

(2,049,108)

(17,789,515)

Net income (loss) and comprehensive income (loss)

$
(18,710,407)

$
(2,049,108)

$
(20,759,515)

Statement of Net Loss and Comprehensive Loss for the three months ended September 30, 2021 (unaudited)

As Previously Reported

Adjustment

As Revised
Other income (expense):

Derivative gain (loss)

$
627,165

$
(627,165)

$
—
Other income (expenses), net

(1,552,370)

(627,165)

(2,179,535)

Loss before income taxes

(5,683,231)

(627,165)

(6,310,396)

Net income (loss) and comprehensive income (loss)

$
(6,243,231)

$
(627,165)

$
(6,870,396)

Consolidated Statement of Changes in Stockholders' Equity as of September 30, 2021 (unaudited)

As Previously Reported

Adjustment

As Revised
Shares issued in Nevada acquisition

$
1,564,500

$
(179,261)

$
1,385,239
Stock-based compensation

4,557,777

(267,957)

4,289,820
Warrants issued in financing activities

—

5,395,759

5,395,759
Net Loss

(18,710,407)

(2,049,108)

(20,759,515)
Balance at September 30, 2021

$
50,911,036

$
2,899,433

$
53,810,469

Consolidated Statement of Cash Flows for the nine months ended September 30, 2021 (unaudited)

As Previously Reported

Adjustment

As Revised
CASH FLOWS FROM OPERATING ACTIVITIES

Net loss

$
(18,710,407)

$
(2,049,108)

$
(20,759,515)
Derivative gain

(2,317,065)

2,317,065

—
Share-based payments

4,557,777

(267,957)

4,289,820

Basis of consolidation

These unaudited condensed consolidated financial statements include the accounts of the following entities wholly owned, or effectively controlled by the Company during the period ended ~~September 30, 2022:~~March 31, 2023:


Name of entity		Place of incorporation
Vireo Health, Inc.		Delaware, USA
Vireo Health of New York, LLC		New York, USA
Minnesota Medical Solutions, LLC		Minnesota, USA
MaryMed, LLC		Maryland, USA
Vireo of Charm City, LLC		Maryland, USA
1776 Hemp, LLC		Delaware, USA
Vireo Health of Massachusetts, LLC		Delaware, USA
Mayflower Botanicals, Inc.		Massachusetts, USA
Elephant Head Farm, LLC		Arizona, USA
EHF Cultivation Management, LLC		Arizona, USA
Retail Management Associates, LLC		Arizona, USA
Arizona Natural Remedies, Inc.		Arizona, USA
Vireo Health of New Mexico, LLC		Delaware, USA
Red Barn Growers, Inc.		New Mexico, USA
Resurgent Biosciences, Inc.		Delaware, USA
Vireo Health of Puerto Rico, LLC		Delaware, USA
Vireo Health de Puerto Rico, Inc.		Puerto Rico
XAAS Agro, Inc.		Puerto Rico
Vireo Health of Nevada 1, LLC		Nevada, USA
Verdant Grove, Inc.		Massachusetts, USA

The entities listed above are wholly owned or effectively controlled by the Company and have been formed or acquired to support the intended operations of the Company, and all intercompany transactions and balances have been eliminated in the Company's unaudited condensed consolidated financial statements.

Recently adopted accounting pronouncements

In ~~November~~October of 2021 FASB issued ASU ~~2021 -10 - Government Assistance~~2021-08 Business Combinations (Topic ~~832)~~805): ~~Disclosures by Business Entities about Government Assistance.~~Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The update is intended to ~~increase~~improve the ~~transparency of government assistance including the disclosure of the types of assistance, an entity’s~~ accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the ~~assistance,~~recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the ~~effect of the assistance on an entity’s financial statements. The Company adopted Topic 832 on January 1, 2022.~~acquirer. The adoption of the standard on January 1, 2023, did not have a material impact on the Company's results of operations or cash flows.

Net loss per share

Basic net loss per share is computed by dividing reported net loss by the weighted average number of common shares outstanding for the reported period. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock of the Company during the reporting period. Diluted net loss per share is computed by dividing net loss by the sum of the weighted average number of common shares and the number of potential dilutive common share equivalents outstanding during the period. Potential dilutive common share equivalents consist of the incremental common shares issuable upon the exercise of vested share options and the incremental shares issuable upon conversion of the convertible notes. Potential dilutive common share equivalents consist of stock options, warrants, and restricted stock units.

In computing diluted earnings per share, common share equivalents are not considered in periods in which a net loss is reported, as the inclusion of the common share equivalents would be anti-dilutive. The Company recorded a net loss for the three ~~and nine~~ month periods ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ presented in these financial statements, and as such there is no difference between the Company’s basic and diluted net loss per share for these periods.

The anti-dilutive shares outstanding for the ~~nine~~three month period ending ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ were as follows:


	September 30,		March 31,
	2022	2021	2023	2022
Stock options	26,121,908	23,610,886	28,566,282	26,261,054
Warrants	3,037,649	4,395,949	3,187,649	4,226,449
RSUs	1,094,200	—	3,102,765	1,094,200
Total	30,253,757	28,006,835	34,856,696	31,581,703

Revenue Recognition

The Company’s primary source of revenue is from wholesale of cannabis products to dispensary locations and direct retail sales to eligible customers at the Company-owned dispensaries. Substantially all of the Company’s retail revenue is from the direct sale of cannabis products to medical customers.

The following table represents the Company’s disaggregated revenue by source:


	Nine Months Ended September 30,				Three Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Retail	$	45,842,941	$	33,247,058	$	16,389,226	$	11,562,440	$	16,471,799	$	12,412,223
Wholesale		9,739,880		7,543,163		2,464,875		1,806,992		2,616,624		3,226,349
Total	$	55,582,821	$	40,790,221	$	18,854,101	$	13,369,432	$	19,088,423	$	15,638,572

New accounting pronouncements not yet adopted

In October of 2021 FASB issued ASU 2021-08 Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The update is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency related to the recognition of an acquired contract liability and payment terms and their effect on subsequent revenue recognized by the acquirer. The required date of adoption is January 1, 2023, and the Company is evaluating potential future impacts on the Company’s financial statements.None.

3. Business Combinations and Dispositions

Dispositions

~~On March 31, 2021, the Company sold all of the assets and liabilities of its affiliated company, Ohio Medical Solutions, Inc. (“~~~~OMS~~~~”) to Ayr Strategies Inc. (“~~~~Ayr~~”) for consideration of $1,150,000. As part of this transaction, the Company transferred assets and liabilities with a net book value of $712,894. Consideration received exceeded OMS’s net assets at the time of sale, resulting in a gain of $437,107 which was recorded in the unaudited condensed consolidated statement of loss and comprehensive loss for the nine months ended September 30, 2021.

On March 31, 2022, the Company sold the rights to a 10% royalty on future net revenues generated by High Gardens, Inc., a former subsidiary of the Company that was divested in 2020, for cash consideration of $236,635. The carrying value of the intangible royalty asset prior to disposition was $68,276, resulting in a gain of $168,359 which was recorded in the unaudited condensed consolidated statement of loss and comprehensive loss for the ~~nine~~three months ended ~~September 30,~~March 31, 2022.

~~Asset Acquisitions~~

~~Acquisition of MJ Distributing C201, LLC and MJ Distributing P132, LLC~~

~~On April 10, 2019, the Company entered into a definitive agreement to acquire 100% of the membership interests in MJ Distributing C201, LLC and MJ Distributing P132, LLC (“~~~~MJ Distributing~~”) which currently hold licenses to cultivate and distribute, respectively, medical and adult-use cannabis in the state of Nevada. The purpose of this acquisition was to acquire a medical marijuana license in the state of Nevada. The acquisition was financed with cash on hand and stock.

The acquisition of MJ Distributing was completed on January 5, 2021. As part of the closing of the acquisition the restricted cash of $1,592,500 was transferred to the sellers, the convertible notes in escrow were cancelled, and the Company issued 1,050,000 subordinate voting shares to the sellers. Management determined the total consideration paid of $1,592,500 in restricted cash, $1,385,239 associated with the fair value of the subordinate voting shares issued, and $28,136 of deferred acquisition costs, was equal to the fair value of the intangible asset acquired, or $3,005,875. The related operating results are included in the accompanying consolidated statements of operations, changes in shareholders’ equity, and statement of cash flows commencing from the date of acquisition.

Assets Held for Sale

As of ~~September 30, 2022~~March 31, 2023 the Company identified property, equipment, and lease assets and liabilities associated with the businesses in ~~Maryland, Arizona,~~New York, Nevada, Puerto Rico, and Massachusetts with carrying amounts that are expected to be recovered principally through sale or disposal rather than through continuing ~~use.~~use such that the Company can better manage working capital and generate more favorable future cash flows. The sale of these assets and liabilities is highly probable, they can be sold in their immediate condition, and the sales are expected to occur within the next twelve months. As such, these assets and liabilities have been classified as “held for sale.” The carrying value of these net assets exceeded fair value less expected cost to sell, and as such, the Company recorded an impairment loss of $2,108,703 for the three months ended September 30, 2022, and $7,476,618 for the nine months ended September 30, 2022. Assets and liabilities held for sale are as follows:


Assets held for sale
Property and equipment	$	2,944,678	$	69,431,818
Intangible assets		662,499		662,501
Operating lease, right-of-use asset		205,372		3,508,869
Deferred Tax Assets				360,000
Deposits		22,301		3,104,291
Total assets held for sale	$	3,834,850	$	77,067,479

Liabilities held for sale
Right of Use Liability	$	1,376,184	$	75,525,255
Total liabilities held for sale	$	1,376,184	$	75,525,255

4. Fair Value Measurements

The Company complies with ASC 820, Fair Value Measurements, for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and includes situations where there is little, if any, market activity for the asset or liability.

The following tables present information about the Company’s assets that are measured at fair value on a recurring basis as of September 30, 2022, and December 31, 2021, indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

Quoted prices in

Other

Significant

active markets for

observable

unobservable

identical assets

inputs

inputs


(Level 1)

(Level 2)

(Level 3)

Total
September 30, 2022








Cash

$
21,842,076

$
—

$
—

$
21,842,076
Total assets

$
21,842,076

$
—

$
—

$
21,842,076

December 31, 2021

Cash

$
15,155,279

$
—

$
—

$
15,155,279
Total assets

$
15,155,279

$
—

$
—

$
15,155,279

Items measured at fair value on a non-recurring basis

The Company’s non-financial assets, such as prepayments and other current assets, long lived assets, including property and equipment, goodwill, and intangible assets, are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized. ~~In connection with an evaluation~~No indicators of ~~such non-financial assets during the nine months ended September 30, 2022, the carrying values~~impairment existed as of ~~property~~March 31, 2023, and ~~equipment were concluded to exceed their fair values. As a result, the Company recorded~~therefore no impairment charges ~~that incorporates fair value measurements based on Level 2 inputs (Note 8).~~ were recorded.

The carrying value of the Company’s accounts receivable, accounts payable, and accrued liabilities approximate their fair value due to their short-term nature, and the carrying value of notes receivable and long-term debt approximates fair value as they bear a market rate of interest.

5. Accounts Receivable

Trade receivables are comprised of the following items:


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Trade receivable	$	2,007,914	$	1,251,699	$	1,424,499	$	1,421,027
Tax withholding receivable		3,044,032		3,208,270		2,755,396		2,755,396
Other		859,103		42,500		81,729		109,649
Total	$	5,911,049	$	4,502,469	$	4,261,624	$	4,286,072

Included in the trade receivables, net balance at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, is an allowance for doubtful accounts of ~~$124,505~~$189,695 and ~~$215,606,~~$169,699 respectively. Included in the tax withholding receivable, net balance at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 is an allowance for doubtful accounts of $356,474. Other receivables, as of September 30, 2022, primarily consists of deferred financing costs paid in connection with the Credit Facility (Note 13), but subject to reimbursement by Verano per the terms of the Arrangement Agreement.$284,161.

6. Inventory

Inventory is comprised of the following items:


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Work-in-progress	$	14,352,153	$	15,167,522	$	15,223,386	$	14,209,695
Finished goods		4,100,000		4,580,158		5,942,832		5,506,760
Other		662,474		674,381		685,809		791,568
Total	$	19,114,627	$	20,422,061	$	21,852,027	$	20,508,023

Inventory is written down for any obsolescence, spoilage and excess inventory or when the net realizable value of inventory is less than the carrying value. Inventory valuation adjustments included in cost of sales on the statements of net loss and comprehensive loss is comprised of the following:


	Three Months Ended September 30,				Nine Months Ended September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Work-in-progress	$	87,300	$	278,000	$	3,412,243	$	278,000	$	15,072	$	3,280,291
Finished goods		43,700		73,000		210,167		186,000		(25,072)		151,248
Other		—		—		35,378		—		—		35,378
Total	$	131,000	$	351,000	$	3,657,788	$	464,000	$	(10,000)	$	3,466,917

7. Prepayments and other current assets

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


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Prepaid Insurance	$	2,412,882	$	838,612	$	1,396,168	$	1,894,385
Other Prepaid Expenses		748,973		721,501		634,462		650,147
Total	$	3,161,855	$	1,560,113	$	2,030,630	$	2,544,532

8. Property and Equipment, Net

Property and equipment, net consisted of the following:


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Land	$	56,702	$	1,366,650	$	863,105	$	863,105
Buildings and leasehold improvements		17,687,985		15,529,928		16,001,232		17,567,628
Furniture and equipment		9,166,698		7,962,363		7,941,975		9,709,714
Software		221,540		221,540		202,815		221,540
Vehicles		640,135		513,135		241,864		646,257
Construction-in-progress		2,641,160		10,510,166		245,684		794,958
Right of use asset under finance lease		69,892,379		71,078,655		7,938,137		69,892,379
		100,306,599		107,182,437		33,434,812		99,695,581
Less: accumulated depreciation		(9,060,472)		(7,693,878)		(7,683,998)		(10,088,649)
Total	$	91,246,127	$	99,488,559	$	25,750,814	$	89,606,932

For the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ total depreciation on property and equipment was ~~$2,446,700~~$893,598 and ~~$2,194,465,~~$856,289, respectively. For the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ accumulated amortization of the right of use asset under finance lease amounted to ~~$3,121,441~~$1,934,235 and ~~$2,258,732,~~$2,736,162, respectively. The right of use asset under

finance lease of ~~$69,892,379~~$7,938,137 consists of leased processing and cultivation premises. The Company capitalized into inventory ~~$1,959,536~~$734,087 and ~~$1,678,558~~$700,193 relating to depreciation associated with manufacturing equipment and production facilities for the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ respectively. The capitalized depreciation costs associated are added to inventory and expensed through Cost of Sales Product Cost on the unaudited condensed consolidated statements of net loss and comprehensive loss.

As of ~~September 30, 2022,~~March 31, 2023, in conjunction with the Company’s held for sale assessment and disposal of certain long-lived assets, the Company evaluated whether property and equipment showed any indicators of impairment, and it was determined that the recoverable amount of certain net assets ~~were below~~was above book value. As a result, the Company recorded an impairment charge of ~~$7,476,618 (2021~~$0 (2022 - ~~$0)~~$5,313,176) on property and equipment, net.

9. Leases

Components of lease expenses are listed below:


	September 30,		September 30,		March 31,		March 31,
	2022		2021		2023		2022
Finance lease cost
Amortization of ROU assets	$	824,401	$	692,686	$	270,935	$	274,800
Interest on lease liabilities		7,976,015		2,631,030		2,725,966		2,627,559
Operating lease expense		1,938,797		1,946,009
Total lease expenses	$	10,739,213	$	5,269,725
Operating lease costs						590,920		647,217
Total lease costs					$	3,587,821	$	3,549,576

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


	Operating Leases		Finance Leases				Operating Leases		Finance Leases
	September 30, 2022		September 30, 2022		Total		March 31, 2023		March 31, 2023		Total
2022	$	642,885	$	2,245,507	$	2,888,392
2023		2,518,169		10,492,227		13,010,396	$	1,890,250	$	8,388,953	$	10,279,203
2024		2,243,050		10,597,822		12,840,872		2,243,050		11,063,698		13,306,748
2025		2,030,129		10,683,979		12,714,108		2,030,129		11,164,577		13,194,706
2026		1,609,276		11,001,044		12,610,320		1,609,276		11,496,826		13,106,102
2027								1,384,646		11,839,086		13,223,732
Thereafter		2,656,286		206,379,022		209,035,308		1,271,640		185,973,220		187,244,860
Total minimum lease payments	$	11,699,795	$	251,399,601	$	263,099,396	$	10,428,991	$	239,926,360	$	250,355,351
Less discount to net present value		(3,746,966)		(175,378,380)		(179,125,346)		(3,077,902)		(160,377,753)		(163,455,655)
Less liabilities held for sale		(228,449)		(1,147,735)		(1,376,184)		(4,527,158)		(70,998,097)		(75,525,255)
Present value of lease liability	$	7,724,380	$	74,873,486	$	82,597,866	$	2,823,931	$	8,550,510	$	11,374,441

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

On February 24, 2023, the Company signed the fourth amendment to the existing lease agreements for the cultivation and processing facilities in New York. The amendment provides for additional tenant improvements of $4,000,000 and increases base rent by $50,000 a month.

Supplemental cash flow information related to leases:


	September 30,				March 31,
	2022		2021		2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Lease principal payments	$	1,437,346	$	1,008,584	$	288,574	$	464,214
Non-cash additions to ROU assets		—		59,665,237		4,054,328		—
Amortization of operating leases		997,804		934,934		309,747		323,090

Other information about lease amounts recognized in the financial statements:


	September 30,				March 31,
	2022		2021		2023		2022
Weighted-average remaining lease term (years) – operating leases	5.05		5.85		4.67		5.42
Weighted-average remaining lease term (years) – finance leases	18.89		19.85		17.57		19.25
Weighted-average discount rate – operating leases	15.00	%	15.00	%	15.00	%	15.00	%
Weighted-average discount rate – finance leases	15.25	%	15.33	%	15.33	%	15.29	%

10. Goodwill

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


Goodwill - January 1, 2021	$	3,132,491
Goodwill - January 1, 2022			$	183,836
Impairment				—
Dispositions		(2,948,655)		—
Goodwill - December 31, 2021 and September 30, 2022	$	183,836
Goodwill - December 31, 2022 and March 31, 2023			$	183,836

Goodwill is tested for impairment annually or more frequently if indicators of impairment exist or if a decision is made to dispose of business. The valuation date for the Company’s annual impairment testing is December 31. On this date the Company performed a Step 1 goodwill impairment analysis. No indicators of impairment exists as of ~~September 30, 2022.~~March 31, 2023.

11. Intangibles

Intangible assets are comprised of the following items:


	Licenses		Royalty Asset		Total		Licenses		Royalty Asset		Total
Balance December 31, 2020	$	8,341,142	$	68,276	$	8,409,418
Additions		10,190,458		—		10,190,458
Balance December 31, 2021							$	10,116,013	$	68,276	$	10,184,289
Divestitures		(5,492,890)		—		(5,492,890)		—		(68,276)		(68,276)
Amortization		(817,215)		—		(817,215)		(662,501)		—		(662,501)
Impairment		(2,105,483)				(2,105,483)
Balance, December 31, 2021	$	10,116,012	$	68,276	$	10,184,288
Divestitures (Note 3)		—		(68,276)		(68,276)
Transfer to held for sale (Note 3)		(662,499)		—		(662,499)		(676,566)		—		(676,566)
Balance, December 31, 2022							$	8,776,946	$	—	$	8,776,946
Amortization		(516,800)		—		(516,800)		(159,766)		—		(159,766)
Balance, September 30, 2022	$	8,936,713	$	—	$	8,936,713
Balance, March 31, 2023							$	8,617,180	$	—	$	8,617,180

Amortization expense for intangibles was ~~$172,267~~$159,766 and ~~$516,800~~$172,267 during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~respectively, and $206,442 and $619,327 during the three and nine months ending September 30, 2021,~~ respectively. Amortization expense is recorded in operating expenses on the unaudited condensed consolidated statements of net loss and comprehensive loss.

The Company estimates that amortization expense will be $639,069 per year for the next five fiscal years.

12. Accounts Payable and Accrued Liabilities

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


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Accounts payable – trade	$	2,803,350	$	1,490,286	$	1,603,923	$	1,905,008
Accrued Expenses		7,374,855		7,708,883		5,308,483		6,172,924
Taxes payable		6,417,940		5,196,677		7,972,563		6,166,145
Contract liability		647,208		409,627		710,117		684,703
Total accounts payable and accrued liabilities	$	17,243,353	$	14,805,473	$	15,595,086	$	14,928,780

13. Long-Term Debt

During ~~the year ended December 31,~~ 2017 the Company signed a promissory note payable in the amount of $1,010,000. The note bears interest at a rate of 15% per annum with interest payments required on a monthly basis. ~~Effective November 13,~~In 2019 the Company’s promissory note payable in the amount of $1,010,000 was modified to increase the amount payable to $~~1,110,000~~1,110,000. The Company has paid off 60,000 in principal, and ~~extend~~ the ~~maturity date to~~ remaining $1,050,000 principal balance is due on December 31, ~~2021. On December 28, 2021, the Company’s promissory note payable in the amount of $1,110,000~~ ~~was modified to extend the maturity date to~~ ~~December 31, 2023, and the Company paid off $60,000~~ ~~in principal.~~

~~On March 25, 2021, the Company entered into a credit agreement for a senior secured delayed draw term loan with an aggregate principal amount of up to $46,000,000 (the “~~~~Credit Facility~~”), and executed a draw of $26,000,000 in principal. Net of fees and closing costs of $1,971,705, the Company received $24,028,295 of the first tranche on March 25, 2021. Additionally, the Company incurred fees and closing costs of $1,083,422 which were paid in cash. The unpaid principal amounts outstanding under the Credit Facility bear interest at a rate of (a) 13.625% per annum payable monthly in cash, and (b) 2.75% per annum paid in kind interest payable monthly. The Credit Facility matures on March 31, 2024.

On March 25, 2021, in connection with closing the Credit Facility, Goodness Growth issued (a) five year warrants to the agent and each lender to purchase an aggregate of 2,803,984 subordinate voting shares at an exercise price of C$3.50 per share, and (b) a five year warrant to the broker to purchase 233,665 subordinate voting shares at an exercise price of C$3.50 per share. Each warrant provides customary anti-dilution provisions. The fair value of these warrants at the time of issuance was $5,395,759 which is treated as a deferred financing cost.

On November 18, 2021, the Company and lenders amended the Credit Facility to provide for an additional loan of $4,200,000 with a cash interest rate of 15% per annum and PIK interest of 2% per annum and no warrants were issued in connection with this loan. Cash received net of $156,900 in financing costs was $4,043,100. Obligations under the Credit Facility are secured by substantially all the assets of the Company.

On January 31, 2022, Goodness Growth and certain of its subsidiaries, as borrowers (collectively, “Borrowers”), entered into a Third Amendment to the Credit Facility (the “Third Amendment”) providing for additional delayed draw term loans of up to $55 million (the “Delayed Draw Loans”). Subject to certain conditions to be satisfied prior to the initial funding thereunder, Goodness Growth may borrow a portion of the $55 million for working capital and other general corporate purposes and may borrow the remainder for other specific purposes, including relating to its ongoing expansion in New York. The Delayed Draw Loans have a maturity date of April 30, 2023 with an option to extend another 12 months for an additional fee of $1,375,000. The cash interest rate on the Delayed Draw Loans under the Third Amendment is equal to the U.S. prime rate plus 10.375%, with a minimum required rate of 13.375% per annum, in addition to paid-in-kind interest of 2.75% per annum. Pursuant to the Arrangement Agreement, Verano will reimburse Goodness Growth for all interest expenses related to the Third Amendment in excess of 10% per annum through the purported termination of the Arrangement Agreement on October 13, 2022.

During the nine months ended September 30, 2022, the Company drew $27,075,000 in principal debt from the Delayed Draw Loans. Proceeds received, net of deferred financing fees of $2,206,857 were $24,868,143. The Company is to be reimbursed by Verano for $1,190,863 of these deferred financing fees pursuant to the Arrangement Agreement, and still2023.

1613

expects to collect despite the purported termination of the Arrangement Agreement (Note 1). These fees are included as other income in the unaudited statement of loss and comprehensive loss for the nine months ended September 30, 2022, and to the extent these fees have not been reimbursed, they are included in our other receivables balance (Note 5).

~~Unless otherwise specified, all deferred financing costs are treated as a contra-liability, to be netted against the outstanding loan balance and amortized over the remaining life of the loan.~~

On November 19, 2021, the Company signed a promissory note payable in the amount of $2,000,000 in connection with the acquisition of Charm City Medicus, LLC. The note bears an interest rate of 8% per annum with interest payments due on the last day of each calendar quarter. The maturity date of the note is November 19, 2023, and the note is secured by 25% of the membership interests in Vireo Health of Charm City, LLC.

On March 25, 2021, the Company entered into a credit agreement for a senior secured delayed draw term loan with an aggregate principal amount of up to $46,000,000 (the “Credit Facility”), and executed a draw of $26,000,000 in principal. The unpaid principal amounts outstanding under the Credit Facility bear interest at a rate of (a) the U.S. prime rate plus 10.375%, payable monthly in cash, and (b) 2.75% per annum paid in kind interest payable monthly. The Credit Facility matures on March 31, 2024.

On November 18, 2021, the Company and lenders amended the Credit Facility to provide for an additional loan of $4,200,000 with a cash interest rate of 15% per annum and PIK interest of 2% per annum. Obligations under the Credit Facility are secured by substantially all the assets of the Company.

On January 31, 2022, Goodness Growth and certain of its subsidiaries, as borrowers (collectively, “Borrowers”), entered into a Third Amendment to the Credit Facility (the “Third Amendment”) providing for additional delayed draw term loans of up to $55 million (the “Delayed Draw Loans”). The cash interest rate on the Delayed Draw Loans under the Third Amendment is equal to the U.S. prime rate plus 10.375%, with a minimum required rate of 13.375% per annum, in addition to paid-in-kind interest of 2.75% per annum.

On March 31, 2023, the Company executed a fifth amendment to its credit facility with its senior secured lender, Chicago Atlantic Admin, LLC (the "Agent"), an affiliate of Green Ivy Capital, and a group of lenders. The amended credit facility extends the maturity date on its Delayed Draw Loans to April 30, 2024, through the issuance of 13,017,624 Subordinate Voting Shares in lieu of a cash extension fee. These 13,017,624 shares were valued at $1,221,837 on March 31, 2023, and considered a deferred financing cost. An additional 1,982,376 Subordinate Voting Shares are issuable at the discretion of the Agent. It also provides the Company with reduced cash outlays by eliminating required amortization of the loan, and requires the Company to divest certain assets to improve its liquidity position and financial performance. The Company has the potential to extend the maturity date on its Delayed Draw Loans up to January 31, 2026 with the satisfaction of certain financial performance-related conditions.

Unless otherwise specified, all deferred financing costs are treated as a contra-liability, to be netted against the outstanding loan balance and amortized over the remaining life of the loan.

The following table shows a summary of the Company’s long-term debt:


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Beginning of year	$	27,329,907	$	1,110,000	$	58,028,604	$	27,329,907
Proceeds		27,075,000		30,200,000		—		28,000,000
Note payable issued in Charm City acquisition		—		2,000,000
Deferred financing costs		(2,206,857)		(8,607,786)		(1,221,837)		(2,236,919)
PIK interest		894,088		564,151		400,233		1,300,245
Amortization of deferred financing costs		2,536,646		2,123,542		998,615		3,635,371
Principal payments		—		(60,000)
End of period		55,628,784		27,329,907		58,205,615		58,028,604
Less: Current portion		6,013,875		—		3,050,000		11,780,000
Total long-term debt	$	49,614,909	$	27,329,907	$	55,155,615	$	46,248,604

As of March 31, 2023, stated maturities of long-term debt were as follows:


2023	$	3,050,000
2024		55,155,615
Thereafter		—
Total	$	58,205,615

14. Stockholders’ Equity

The Company’s certificate of incorporation authorized the Company to issue the following classes of shares with the following par value and voting rights as of ~~September 30, 2022.~~March 31, 2023. The liquidation and dividend rights are identical among shares equally in the Company’s earnings and losses on an as converted basis.


	Par Value	Authorized	Voting Rights
Subordinate Voting Share (“SVS”)	—	Unlimited	1 vote for each share
Multiple Voting Share (“MVS”)	—	Unlimited	100 votes for each share
Super Voting Share	—	Unlimited	1,000 votes for each share

Subordinate Voting Shares

Holders of Subordinate Voting Shares are entitled to one vote in respect of each Subordinate Voting Share held.

Multiple Voting Shares

Holders of Multiple Voting Shares are entitled to one hundred votes for each Multiple Voting Share held.

Multiple Voting Shares each have the restricted right to convert to one hundred Subordinate Voting Shares subject to adjustments for certain customary corporate changes.

Super Voting Shares

Holders of Super Voting Shares are entitled to one thousand votes per Super Voting Share. Each Super Voting share is convertible into one Multiple Voting Share.

Shares Issued

During the ~~nine~~three months ended ~~September 30,~~March 31, 2022, ~~47,336~~28,134 Multiple Voting Shares were redeemed for ~~4,733,600~~2,813,400 Subordinate Voting Shares.

~~During the nine months ended September 30, 2021, 151,408 Multiple Voting Shares were redeemed for 15,140,700 Subordinate Voting Shares.~~

~~During the nine months ended September 30, 2022, employee stock options were redeemed for 15,002 Subordinate Voting Shares. Proceeds from these transactions were $7,201.~~

~~During the nine months ended September 30, 2021, employee stock options were redeemed for 3,989,344 Subordinate Voting Shares. Proceeds from these transactions were $1,152,596.~~

On June 4, 2021, the Company issued 295,774 shares with a fair value of $604,876 to a third party for ongoing corporate advisory services. The fair value of the issued shares was recorded to stock-based compensation expense in the unaudited condensed consolidated statements of net loss and comprehensive loss for the nine month period ended September 30, 2021.

On March 31, 2021, as part of a settlement and release of claims regarding a dispute over certain post-termination terms under his employment agreement, the Company issued 7,110,481 subordinate voting shares to its former Executive Chairman, Bruce Linton, upon a cashless exercise of 10 million warrants that had an exercise price of $1.02 per share and issued him 889,519 subordinate voting shares with a fair value of $1,441,183 pursuant to an exemption from registration under the Securities Act. The fair value of the 889,519 subordinate voting shares issued of $1,441,183 was recorded as stock-based compensation expense in the unaudited condensed consolidated statements of net loss and comprehensive loss for the nine months ended September 30, 2021. The Company did not receive any proceeds in connection with the warrant exercise or issuance of shares. The shares issued pursuant to the warrant exercise are free of trading restrictions; the additional 889,519 shares were subject to a holding period which expired on August 1, 2021. He was previously issued 15,000,000 warrants under his employment agreement and as part of the settlement, he surrendered all right, title, and interest in the remaining 5,000,000 warrants for cancellation.

15. Stock-Based Compensation

Stock Options

In January 2019, the Company adopted the 2019 Equity Incentive Plan under which the Company may grant incentive stock option, restricted shares, restricted share units, or other awards. Under the terms of the plan, a total of ten percent of the number of shares outstanding assuming conversion of all super voting shares and multiple voting shares to subordinate voting shares are permitted to be issued. The exercise price for incentive stock options issued under the plan will be set by

the committee but will not be less 100% of the fair market value of the Company’s shares on the date of grant. Incentive stock options have a maximum term of 10 years from the date of grant. The incentive stock options vest at the discretion of the Board.

Options granted under the equity incentive plan were valued using the Black-Scholes option pricing model with the following weighted average assumptions:


		March 31,		March 31,
		2023		2022
Risk-Free Interest Rate		3.84	%	2.04	%
Weighted Average Exercise Price	$	0.28	$	1.77
Expected Life of Options (years)		5.85		2.50
Expected Annualized Volatility		100.00	%	55.00	%
Expected Forfeiture Rate		N/A		N/A
Expected Dividend Yield		N/A		N/A

Stock option activity for the three months ended March 31, 2023 and for the year ended December 31, 2022 is presented below:


		Weighted Average		Weighted Avg.
	Number of Shares	Exercise Price		Remaining Life
Balance, December 31, 2021	23,226,338	$	0.56	6.02
Forfeitures	(7,504,677)		0.59	—
Exercised	(15,002)		0.48	—
Granted	7,840,899		0.90	—
Balance, December 31, 2022	23,547,558	$	0.66	7.30
Forfeitures	(2,442,385)		0.93	—
Granted	7,461,109		0.28	6.03
Options Outstanding at March 31, 2023	28,566,282	$	0.54	6.70

Options Exercisable at March 31, 2023	20,545,749	$	0.42	5.82

During the three months ended March 31, 2023 and 2022, the Company recognized $1,399,258 and $590,600 in stock-based compensation relating to stock options, respectively. As of March 31, 2023, the total unrecognized compensation costs related to unvested stock options awards granted was $1,189,326. In addition, the weighted average period over which the unrecognized compensation expense is expected to be recognized is approximately 2.3 years. The total intrinsic value of stock options outstanding and exercisable as of March 31, 2023, was $0.

The Company does not estimate forfeiture rates when calculating compensation expense. The Company records forfeitures as they occur.

Warrants

Subordinate Voting Share (SVS) warrants entitle the holder to purchase one subordinate voting share of the Company. Multiple Voting Share (MVS) warrants entitle the holder to purchase one multiple voting share of the Company.

1816

~~Options granted under the equity incentive plan were valued using the Black-Scholes option pricing model with the following weighted average assumptions:~~

September 30,

September 30,


2022

2021

Risk-Free Interest Rate

2.04
%
1.25
%
Weighted Average Exercise Price
$
1.77
$
2.32

Expected Life of Options (years)

2.50

7.00

Expected Annualized Volatility

55.00
%
100.00
%
Expected Forfeiture Rate

N/A

N/A

Expected Dividend Yield

N/A

N/A

~~Stock option activity for the nine months ended September 30, 2022 and for the year ended December 31, 2021 is presented below:~~

Weighted Average

Weighted Avg.

Number of Shares

Exercise Price

Remaining Life
Balance, December 31, 2020

26,924,858

$
0.47

7.00
Forfeitures

(106,934)

1.23

—
Exercised

(4,289,392)

0.28

—
Granted

697,806

2.32

—
Balance, December 31, 2021

23,226,338

$
0.56

6.02
Forfeitures

(313,547)

0.56

—
Exercised

(15,002)

0.48

—
Granted

3,224,119

1.77

—
Options Outstanding at September 30, 2022

26,121,908

$
0.71

5.78

Options Exercisable at September 30, 2022

19,620,397

$
0.46

4.80

During the nine months ended September 30, 2022 and 2021, the Company recognized $1,993,908 and $2,243,761 in stock-based compensation relating to stock options, respectively. During the three months ended September 30, 2022 and 2021, the Company recognized $600,191 and $835,122 in stock-based compensation relating to stock options, respectively. As of September 30, 2022, the total unrecognized compensation costs related to unvested stock options awards granted was $2,444,354. In addition, the weighted average period over which the unrecognized compensation expense is expected to be recognized is approximately 2.5 years. The total intrinsic value of stock options outstanding and exercisable as of September 30, 2022, was $10,554,188 and $10,282,418, respectively.

~~The Company does not estimate forfeiture rates when calculating compensation expense. The Company records forfeitures as they occur.~~

~~Warrants~~

~~Warrants issued were valued using the Black-Scholes option pricing model with the following assumptions:~~

September 30,

September 30,

SVS Warrants Denominated in C$

2022

2021

Risk-Free Interest Rate

N/A

0.83
%
Expected Life of Options (years)

N/A

5.00

Expected Annualized Volatility

N/A

100.00
%
Expected Forfeiture Rate

N/A

N/A

Expected Dividend Yield

N/A

N/A

A summary of the warrants outstanding is as follows:

Number of

Weighted Average

Weighted Average
SVS Warrants

Warrants

Exercise Price

Remaining Life
Warrants outstanding at December 31, 2020

15,763,111

$
2.39

0.42
Exercised

(7,110,481)

1.02

0.19
Expired

(763,111)

4.25

—
Forfeited

(7,889,519)

3.44

0.19
Warrants outstanding at December 31, 2021 and September 30, 2022

—

$
—

—

Warrants exercisable at December 31, 2021 and September 30, 2022

—

$
—

—


	Number of	Weighted Average		Weighted Average
SVS Warrants	Warrants	Exercise Price		Remaining Life
Warrants outstanding at December 31, 2021	—	$	—	—
Granted	150,000		1.49	2.00
Warrants outstanding at December 31, 2022	150,000	$	1.49	2.00
Granted	—		—	—
Warrants outstanding at March 31, 2023	150,000	$	1.49	1.75

Warrants exercisable at March 31, 2023	150,000	$	1.49	1.75


	Number of	Weighted Average		Weighted Average	Number of	Weighted Average		Weighted Average
SVS Warrants Denominated in C$	Warrants	Exercise Price		Remaining Life	Warrants	Exercise Price		Remaining Life
Warrants outstanding at December 31, 2020	—	$	—	—
Granted	3,037,649		3.50	—
Warrants outstanding at December 31, 2021	3,037,649	$	3.50	4.23	3,037,649	$	3.50	4.23
Granted	—		—	—	—		-	—
Warrants outstanding at September 30, 2022	3,037,649	$	3.50	3.74
Warrants outstanding at December 31, 2022					3,037,649	$	3.50	3.23
Granted					—		—	—
Warrants outstanding at March 31, 2023					3,037,649	$	3.50	2.98

Warrants exercisable at September 30, 2022	3,037,649	$	3.50	3.74
Warrants exercisable at March 31, 2023					3,037,649	$	3.50	2.98


	Number of	Weighted Average		Weighted Average	Number of	Weighted Average		Weighted Average
MVS Warrants	Warrants	Exercise Price		Remaining Life	Warrants	Exercise Price		Remaining Life
Warrants outstanding at December 31, 2020	13,583	$	194.66	1.64
Issued	—		—	—
Warrants outstanding at December 31, 2021	13,583	$	194.66	0.64	13,583	$	194.66	0.64
Expired	(13,583)		194.66	—	(13,583)		194.66	—
Warrants outstanding at September 30, 2022	—	$	—	—
Warrants outstanding at December 31, 2022 and March 31, 2023					—		—	—

Warrants exercisable at September 30, 2022	—	$	—	—
Warrants exercisable at March 31, 2023					—	$	—	—

During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ $0 in stock-based compensation expense was recorded in connection with the SVS compensation warrants and $0 in stock-based compensation was recorded in connection with the MVS warrants.

RSUs

The expense associated with RSUs is based on closing share price of the Company’s ~~common stock~~subordinate voting shares on the business day immediately preceding the grant date, adjusted for the absence of future dividends and is amortized on a straight-line basis over the periods during which the restrictions lapse. The Company currently has RSUs that vest over a three year period. The awards are generally subject to forfeiture in the event of termination of employment. During the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 the Company recognized ~~$295,890~~$276,336 and ~~$642,686,~~$51,906, respectively, in stock-based compensation expense related to RSUs.

A summary of RSUs is as follows:


		Grant Date			Weighted Avg.
	Number of Shares	Fair Value		Number of Shares	Fair Value
Balance, December 31, 2021	—	$	—	—	$	—
Granted	1,094,200		1.77
Balance, September 30, 2022	1,094,200	$	1.77
Granted on March 15, 2022				1,094,200		1.81
Granted on December 15, 2022				2,127,477		0.29
Balance, December 31, 2022				3,221,677		0.81
Forfeitures				(118,912)		0.71
Balance, March 31, 2023				3,102,765	$	0.81

Vested at March 31, 2023				260,269	$	1.81

16. Commitments and Contingencies

Legal proceedings

Schneyer

On February 25, 2019, Dr. Mark Schneyer (“Schneyer”) filed a lawsuit in Minnesota District Court, Fourth District (the “Court”), on his own behalf and, derivatively, on behalf of Dorchester Capital, LLC, naming Vireo Health, Inc. (“Vireo U.S.”), Dorchester Management, LLC (“Dorchester Management”), and Dorchester Capital, LLC (“Capital”), as defendants. The essence of the claims made by Schneyer is Vireo U.S. paid an inadequate price for MaryMed, LLC (“MaryMed”), which it purchased it from Capital in 2018, and that the consideration given – shares of preferred stock in Vireo U.S. – was distributed inappropriately by Capital at the direction of Dorchester Management (the managing member of Capital). Schneyer, who is a Class B member of Capital, ~~is seeking~~sought unspecified damages in excess of $50,000 and other relief. Dorchester Management, LLC is an affiliated entity to Vireo U.S. and was previously used as a management company over Dorchester Capital, LLC. It no longer has active operations following Vireo Health, Inc.’s acquisition of MaryMed, LLC in 2018. It is owned and controlled by Kyle E. Kingsley and Amber H. Shimpa, executive officers and directors of Vireo U.S. and the Company.

Simultaneously with the complaint, Schneyer filed a motion seeking a temporary restraining order (“TRO”) to prevent the “further transfer” of MaryMed which would, Schneyer claimed, occur if Vireo U.S.’s RTO transactions were allowed to occur. The Court held a hearing on the motion for TRO on March 5, 2019 and denied the motion on the same day.

Weeks prior to commencement of the litigation, Dorchester Management had appointed a special litigation committee (“SLC”) on behalf of Capital to investigate the consideration provided by Vireo U.S. for the purchase of MaryMed and assess any potential claims Capital may have as a result of the transaction. The SLC, a retired judge who engaged another retired judge as legal counsel to the SLC, was appointed in accordance with Minnesota law, issued a report on May 1, 2021, recommending, among other things, that certain claims be permitted to proceed (the “Remaining Derivative Claims”) and other claims not be permitted to proceed by the Court (the “Rejected Derivative Claims”).

On July 7, 2021, Schneyer filed a Second Amended Complaint asserting direct claims on behalf of himself and the Remaining Derivative Claims on behalf of Capital and some Rejected Derivative Claims on behalf of Capital. Under Delaware law, Capital has a right to control the litigation of the Remaining Derivative Claims, the Rejected Derivative Claims, and any other derivative allegations that may be asserted on behalf of Capital. On August 17, 2021, Management exercised this right for Capital and appointed a second independent special litigation committee (the “Second SLC”), a partner at an international law firm, to manage the litigation of the claims raised in Schneyer’s Second Amended Complaint. On August 31, 2021, Capital filed a complaint at the Second SLC’s direction alleging the Remaining Derivative Claims and the Rejected Derivative Claims. Schneyer opposed the appointment of the Second SLC.

On December 9, 2021, the Court dismissed Schneyer’s claim for rescissory damages and the Remaining Derivative Claim alleging fraud. The Court also ruled that the Remaining Derivative Claims should be pursued by the Second SLC. Finally, the Court also denied Schneyer’s request to seek punitive damages.

On February 22, 2022, the Minnesota Court of Appeals denied the immediate review of the December 9, 2021 order.

On June 20,2022 the Court issued an order amending and realigning the complaint brought by Capital for the Remaining Derivative Claims. The order also denied Vireo U.S.’’s and Dorchester Management’s motion to dismiss the Remaining Derivative Claims brought by Capital.

Following this order, the litigation ~~will~~was permitted to proceed with Schneyer’s three direct contract claims against Vireo U.S and a direct fraud claim against Management and Vireo U.S. on an individual basis, as well as the Remaining Derivative Claims brought by Capital.

While Vireo U.S. ~~believes~~continues to believe that Schneyer’s claims lack merit, ~~and expects~~it agreed to ~~be vindicated in the SLC process or, in the alternative, prevail in~~settle the litigation ifin April 2023 to avoid the expense, distraction and ~~when it proceeds. However, should Vireo U.S. not ultimately prevail, it is not possible to estimate~~risk of the ~~amount or range of potential loss, if any.~~pre-trial and trial processes. Entering into this settlement in no way changes the defendants’ position that they did nothing wrong and that the claims were baseless.

Verano

On January 31, 2022, the Company entered into the Arrangement Agreement with Verano, pursuant to which Verano was to acquire all of the issued and outstanding shares of Goodness Growth pursuant to a Plan of Arrangement. Subject to the terms and conditions set forth in the Arrangement Agreement and the Plan of Arrangement, holders of Goodness Growth Shares would receive 0.22652 of a Verano Subordinate Voting Share, subject to adjustment as described below, for each Subordinate Voting Share held, and 22.652 Verano Subordinate Voting Shares for each Multiple Voting Share and Super Voting Share held, immediately prior to the effective time of the Arrangement.

On October 13, 2022, Goodness Growth received a notice of purported termination of the Arrangement Agreement (the “Notice”) from Verano. The Notice asserted certain breaches of the Arrangement Agreement, including claims the Company’s public filings and communications with respect to its business and ongoing operations were misleading and that the Company breached its representations to Verano under the Arrangement Agreement. Verano also claimed, as a result of such breaches, it is entitled to payment of ~~the~~a $14,875,000 termination fee and its transaction expenses. Goodness Growth denies all of Verano’s allegations and affirmatively ~~states~~asserts that it has complied with its obligations under the Arrangement Agreement, and ~~will~~with its disclosure obligations under US and Canadian law, in all material respects at all times. The Company believes that Verano has no factual or legal basis to justify or support its purported ~~grounds for~~ termination of the Arrangement Agreement, which the Company determined to treat as a repudiation of the Arrangement Agreement.

On October 21, 2022, Goodness Growth commenced an action in the Supreme Court of British Columbia against Verano after Verano wrongfully repudiated the Arrangement Agreement. The Company is seeking damages, costs and interest, based on Verano's breach of contract and of its duty of good faith and honest performance. On November 14, 2022, Verano filed counterclaims against the Company for the termination fee and transaction expenses described above. Due to uncertainties inherent in litigation, it is not possible for Goodness Growth to predict the timing or final outcome of the legal proceedings against Verano or to determine the amount of damages, if any, that may be awarded.

Lease commitments

The Company leases various facilities, under non-cancelable finance and operating leases, which expire at various dates through ~~June 2085.~~September 2041.

17. Selling, General and Administrative Expenses

Selling, general and administrative expenses are comprised of the following items:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Salaries and benefits	$	4,256,955	$	4,123,658	$	12,923,832	$	11,421,306	$	3,797,410	$	4,312,246
Professional fees		1,627,328		744,833		4,259,724		2,686,891		890,167		1,879,751
Insurance expenses		469,774		629,905		2,493,670		1,947,254		635,439		779,997
Marketing		292,276		545,746		826,624		1,758,602		225,113		358,760
Other expenses		1,843,395		2,062,045		5,889,286		6,627,807		1,608,706		1,947,215
Total	$	8,489,728	$	8,106,187	$	26,393,136	$	24,441,860	$	7,156,835	$	9,277,969

18. Supplemental Cash Flow Information⁽¹⁾


	Nine Months Ended September 30,				March 31,		March 31,
	2022		2021		2023		2022
Cash paid for interest	$	10,844,910	$	5,688,369	$	5,731,120	$	3,059,277
Cash paid for income taxes		3,000,000		5,634,500		—		—
Change in construction accrued expenses		77,836		(1,418,281)
Non-cash investing
Acquisition of Nevada through issuance of SVS		—		1,385,239
Acquisition of Nevada through restricted cash and deferred acquisition costs		—		1,620,636

(1)

For supplemental cash flow information related to leases, refer to Note 9.

19. Financial Instruments

Credit risk

Credit risk is the risk of loss associated with counterparty’s inability to fulfill its payment obligations. The Company’s credit risk is primarily attributable to cash, accounts receivable, and notes receivable. A small portion of cash is held on hand, from which management believes the risk of loss is remote. Receivables relate primarily to wholesale sales. The Company does not have significant credit risk with respect to customers. The Company’s maximum credit risk exposure is equivalent to the carrying value of these instruments. The Company has been granted licenses pursuant to the laws of the states of Arizona, Maryland, Massachusetts, Minnesota, Nevada, New Mexico, New York, and Puerto Rico with respect to cultivating, processing, and/or distributing marijuana. Presently, this industry is illegal under United States federal law. The Company has adhered, and intends to continue to adhere, strictly to the applicable state statutes in its operations.

Liquidity risk

The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due. As of ~~September 30, 2022,~~March 31, 2023, the Company’s financial liabilities consist of accounts payable and accrued liabilities, and debt. The Company manages liquidity risk by reviewing its capital requirements on an ongoing basis. Historically, the Company’s main source of funding has been additional funding from shareholders and debt financing. The Company’s access to financing is always uncertain. There can be no assurance of continued access to significant equity or debt financing.

Legal Risk

Goodness Growth operates in the United States. The U.S. federal government regulates drugs through the Controlled Substances Act (21 U.S.C. § 811), which places controlled substances, including cannabis, in a schedule. Cannabis is classified as a Schedule I drug. Under U.S. federal law, a Schedule I drug or substance has a high potential for abuse, no accepted medical use in the U.S., and a lack of accepted safety for the use of the drug under medical supervision. The U.S.

Food and Drug Administration has not approved marijuana as a safe and effective drug for any indication. In the U.S. marijuana is largely regulated at the state level. State laws regulating cannabis are in direct conflict with the federal Controlled Substances Act, which makes cannabis use and possession federally illegal.

Foreign currency risk

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign currency rates. Given the Company’s financial transactions are rarely denominated in a foreign currency, there is minimal foreign currency risk exposure.

Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company currently carries variable interest-bearing debt subject to fluctuations in the United States Prime rate. A change of 100 basis points in interest rates during the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, would have resulted in a corresponding change in the statement of loss and comprehensive loss of ~~$301,548.~~$137,825.

20. Related Party Transactions

As of ~~September 30, 2022,~~March 31, 2023, and December 31, ~~2021,~~2022, there were ~~$10,000~~$0 and ~~$98,750~~$1,613 due to related parties, respectively.

For the ~~nine~~three months ended ~~September 30,~~March 31, 2023, and 2022, ~~and 2021,~~ the Company paid a related party (Bengal Impact Partners, of which Joshua Rosen, who is the Company’s interim Chief Executive Officer and a member of the Company’s Board of Directors, is a managing partner) ~~$90,000~~$1,613 and $20,000, respectively, for ~~ongoing~~ corporate advisory services.

Certain directors and officers of the Company (Kyle Kingsley, Amber Shimpa, and Stephen Dahmer) owned OMS, which was sold on March 31, 2021 (Note 3). None of the proceeds received from this transaction were paid to the aforementioned directors and officers, rather, they were owed and paid to the Company.

21. Subsequent Events

~~In October of 2022,~~On April 18, 2023, the Schneyer litigation (Note 16) was settled.

On April 28, 2023 the Company ~~drew~~closed on a $2.0 million tranche of a new convertible debt facility which enables the Company to access up to $10.0 million in aggregate principal amount of convertible notes (the “Convertible Notes”). The convertible facility has a term of three years, with an ~~additional $925,000 in net proceeds from~~interest rate of 12.0 percent, including 6.0 percent cash and 6.0 percent paid-in-kind. The initial tranche's principal amount of Convertible Notes outstanding, plus all paid-in-kind interest and all other accrued but unpaid interest thereunder, is convertible into Subordinate Voting Shares of the ~~Delayed Draw Loans.~~

~~On October 13, 2022, Verano delivered~~Company at the option of the holders at any time by written notice to the Company, ~~purporting~~at a conversion price equal to ~~terminate~~U.S. $0.145. For each future tranche advanced, the ~~Arrangement Agreement.~~principal amount of Convertible Notes outstanding, plus all paid-in-kind interest and all other accrued but unpaid interest thereunder, is convertible into Subordinate Voting Shares of the Company at the option of the holders at any time by written notice to the Company, at a conversion price equal to the lesser of U.S. $0.145 or a 20.0 percent premium over the 30-day volume weighted average price of the Company’s Subordinate Voting Shares calculated on the day prior to the date on which each tranche is advanced, if permitted by the Canadian Securities Exchange. The lenders also have the right to advance any remaining undrawn funds on the convertible loan facility to the Company at any time. Finally, in connection with this financing, the Company issued 6,250,000 Warrants (the “Warrants”) to purchase Subordinate Voting Shares of the Company to the lenders. The Warrants have a term of five years with a strike price equal to U.S. $0.145. The Company ~~believes that Verano has no legal basis~~does not expect to terminate the Arrangement Agreement, and that Verano has committed various material breaches of the Arrangement Agreement. On October 21, 2022, the Company commenced an action in the Supreme Court of British Columbia against Verano, seeking damages for the wrongful termination. Verano’s repudiation of the Arrangement Agreement has been acknowledged by Goodness, and the Transaction will not proceed (Note 1).issue any additional warrants related to this convertible loan facility.

2421

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with the financial information and the notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q, including information with respect to our outlook, plans and strategy for our business and ~~related~~potential financing, includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or “forward-looking information” within the meaning of Canadian securities laws. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “remain,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “will,” “would,” “should,” “potential,” “intention,” “strategy,” “strategic,” “approach,” “subject to,” “possible,” “pending,” “if,” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements and forward-looking information are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements or forward-looking information. Factors that could cause or contribute to such differences include, but are not limited to, those identified in this Quarterly Report on Form 10-Q and those discussed in the section titled “Risk Factors” set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 and in our other SEC and Canadian public filings. Such forward-looking statements reflect our beliefs and opinions on the relevant subject based on information available to us as of the date of this report, and while we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements. You should not rely upon forward-looking statements or forward-looking information as predictions of future events. Furthermore, such forward-looking statements or forward-looking information speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements or forward-looking information to reflect events or circumstances after the date of such statements.

Amounts are presented in United States dollars, except as otherwise indicated.

Overview of the Company

Goodness Growth is a ~~physician-led, science-focused~~cannabis company whose mission is to provide safe access, quality products and ~~IP developer focused on building long-term, sustainable~~ value ~~by bringing~~to its customers while supporting its local communities through active participation and restorative justice programs. The Company is evolving with the ~~best~~industry and is in the midst of ~~medicine, science,~~a transformation to being significantly more customer-centric across its operations, which include cultivation, manufacturing, wholesale and ~~engineering to the cannabis industry.~~retail business lines. With our core operations strategically located in four limited-license markets through our state-licensed subsidiaries, we cultivate and manufacture cannabis products and distribute these products through our growing network of Green Goods^® and other retail dispensaries we own or operate as well as to third-party dispensaries in the markets in which our subsidiaries hold operating licenses.

In addition to developing and maintaining cannabis businesses in our core limited-license jurisdictions, our team of scientists, engineers and attorneys also are focused on driving innovation and securing meaningful and protectable intellectual property. We believe this dual-path approach to long-term value creation enhances the potential for shareholder returns.

Our wholly-owned subsidiary Resurgent Biosciences, Inc. is a non-plant-touching entity that was formed with the intent of commercializing our intellectual property portfolio. This portfolio includes two patents for harm reduction in tobacco products as well as many other patent-pending opportunities that we believe could have potential to create additional value for shareholders through partnerships or other strategic alternatives.

While we are not currently focused on substantial capital investment or expansion outside of our core markets, we do own or effectively control additional non-core medical cannabis licenses or operations that may present opportunities in the future.

~~On January 31, 2022, we entered into an Arrangement Agreement (the “~~~~Arrangement Agreement~~~~”) with Verano Holdings Corp. (“~~~~Verano~~~~”), pursuant to which Verano was to acquire all of the issued and outstanding shares of Goodness~~

~~Growth pursuant to a plan of arrangement (~~~~the “Plan of Arrangement~~~~”) under the Business Corporations Act (British Columbia) (the “~~~~Arrangement~~”). Subject to the terms and conditions set forth in the Arrangement Agreement and the Plan of Arrangement, holders of Goodness Growth Shares was to receive 0.22652 of a subordinate voting share of Verano (each a “~~Verano Subordinate Voting Share~~”), subject to adjustment as described below, for each Subordinate Voting Share held, and 22.652 Verano Subordinate Voting Shares for each Multiple Voting Share and Super Voting Share held, immediately prior to the effective time of the Arrangement.

~~On October 13, 2022, we received a notice of purported termination of the Arrangement Agreement (the “~~~~Notice~~”) from Verano. The Notice asserted certain breaches of the Arrangement Agreement, including claims our public filings and communications with respect to our business and ongoing operations were misleading and that we breached our representations to Verano under the Arrangement Agreement. Verano also claimed, as a result of such breaches, it is entitled to payment of the $14,875,000 termination fee and its transaction expenses. We deny all of Verano’s allegations and have complied with our obligations under the Arrangement Agreement in all material respects at all times. Verano has no factual or legal basis to justify or support its purported grounds for termination of the Arrangement Agreement.

On October 21, 2022, we commenced an action in the Supreme Court of British Columbia against Verano seeking damages after Verano wrongfully terminated the Arrangement Agreement. We are seeking damages, costs and interest, based on Verano's breach of contract and of its duty of good faith and honest performance. Due to uncertainties inherent in litigation, it is not possible to predict the timing or final outcome of the legal proceedings against Verano or to determine the amount of damages, if any, that may be awarded.

The termination of the Arrangement Agreement gives rise to substantial doubt about the Company’s ability to meet its obligations over the next twelve months. Company management is working with the Company’s lenders, counsel, and other applicable parties to implement a plan to effectively mitigate the conditions giving rise to substantial doubt. Elements of this plan may include, but are not limited to, asset sales, debt restructuring, and capital raises. ~~While~~The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the ~~risk~~realization of ~~substantial doubt~~assets and the satisfaction of liabilities in the normal course of business. However, the Company’s continuance as going concern is ~~not effectively mitigated as~~dependent on its future profitability and implementation of the ~~reporting date, the~~aforementioned plan. The Company ~~expects to mitigate this risk before the Annual Report on Form 10-K for the fiscal year ended December 31, 2022 is issued.~~may not be successful in these efforts.

~~COVID-19~~22

Since being declared a global pandemic on March 11, 2020, the spread of COVID-19 has severely impacted many local economies around the globe. Due to COVID-19, governments have imposed restrictions on travel and business operations, temporarily closed businesses, and implemented quarantines and shelter-in-place orders. Consequently, the COVID-19 pandemic has negatively impacted global economic activity, caused significant volatility and disruption in global financial markets, and generally introduced significant uncertainty and unpredictability throughout the world. Governments and central banks have responded with monetary and fiscal interventions to stabilize economic conditions.

The duration and impact of the COVID-19 pandemic, as well as the effectiveness of government and central bank responses, remains unclear at this time. During 2021 and thus far in 2022, our revenue, gross profit and operating income were not negatively impacted by COVID-19 and we generally maintained the consistency of our operations. However, the uncertain nature of the spread of COVID-19 may impact its business operations for reasons including the potential quarantine of our employees or those of our supply chain partners.

Three months ended ~~September 30, 2022,~~March 31, 2023, Compared to Three months ended ~~September 30, 2021~~March 31, 2022

Revenue

We derived our revenue from cultivating, processing, and distributing cannabis products through our eighteen dispensaries in four states and our wholesale sales to third parties in four states. For the three months ended ~~September 30, 2022, 87%~~March 31, 2023, 86% of our revenue was generated from retail dispensaries and ~~13%~~14% from wholesale business. For the three months ended ~~September 30, 2021, 86%~~March 31, 2022, 79% of our revenue was generated from retail business and ~~14%~~21% from wholesale business.

For the three months ended ~~September 30, 2022,~~March 31, 2023, Minnesota operations contributed approximately ~~54%~~56% of revenues, New York contributed ~~20%, New Mexico contributed 9%, and Maryland contributed 17%. For the three months ended~~

~~September 30, 2021, Minnesota operations contributed approximately 41% of revenues, New York contributed 24%, Arizona contributed 12%~~18%, New Mexico contributed 6%, and Maryland contributed ~~17%~~20%. For the three months ended March 31, 2022, Minnesota operations contributed approximately 45% of revenues, New York contributed 22%, Arizona contributed 6%, New Mexico contributed 6%, and Maryland contributed 21%.

Revenue for the three-months ended ~~September 30, 2022~~March 31, 2023 was ~~$18,854,101,~~$19,088,423, an increase of ~~$5,484,669~~$3,449,851 or ~~41%~~22% compared to revenue of ~~$13,369,432~~$15,638,572 for the three-months ended ~~September 30, 2021.~~March 31, 2022. The increase is primarily attributable to increased revenue contributions from the retail business in Minnesota ~~Maryland, and New Mexico,~~ partially offset by the lack of ~~third quarter 2022 retail revenues in~~ Arizona ~~which was divested in the fourth quarter of 2021. Key~~wholesale revenue. The key revenue ~~drivers are~~driver is the increased patient demand in Minnesota driven by the addition of cannabis flower to the Minnesota medical program in March of ~~2022, and the commencement of recreational marijuana sales in New Mexico on April 1,~~ 2022.

Retail revenue for the three months ended ~~September 30, 2022~~March 31, 2023 was ~~$16,389,226~~$16,471,799 an increase of ~~$4,826,786~~$4,059,576 or ~~42%~~33% compared to retail revenue of ~~$11,562,440~~$12,412,223 for the three months ended ~~September 30, 2021~~March 31, 2022 primarily due to increased revenue contributions from ~~Minnesota and New Mexico.~~Minnesota.

Wholesale revenue for the three months ended ~~September 30, 2022~~March 31, 2023 was ~~$2,464,875, an increase~~$2,616,624, a decrease of ~~$657,883~~$609,725 compared to wholesale revenue of ~~$1,806,992~~$3,226,349 for the three months ended ~~Septemer 30, 2021.~~March 31, 2022. The ~~increase in revenue contributions~~decrease was primarily due to ~~increased~~the lack of Arizona wholesale ~~demand in New York.~~revenues.


	Three Months Ended								Three Months Ended
	September 30,								March 31,
	2022		2021		$Change		% Change		2023		2022		$Change		% Change
Retail:
MN	$	10,252,523	$	5,539,552	$	4,712,971	85	%	$	10,718,916	$	6,664,088	$	4,054,828	61	%
NY		2,541,913		2,789,985		(248,072)	(9)	%		2,361,942		2,858,893		(496,951)	(17)	%
AZ		—		1,326,357		(1,326,357)	(100)	%
NM		1,721,017		854,105		866,912	101	%		1,052,316		923,353		128,963	14	%
MD		1,873,773		1,052,441		821,332	78	%		2,338,625		1,965,889		372,736	19	%
Total Retail	$	16,389,226	$	11,562,440	$	4,826,786	42	%	$	16,471,799	$	12,412,223	$	4,059,576	33	%

Wholesale:
AZ	$	—	$	227,824	$	(227,824)	(100)	%	$	—	$	1,011,063	$	(1,011,063)	(100)	%
MD		1,333,864		1,172,961		160,903	14	%		1,563,875		1,262,588		301,287	24	%
NY		1,131,011		406,207		724,804	178	%		1,052,749		509,238		543,511	107	%
MN		—		—		—	—	%		—		443,460		(443,460)	—	%
Total Wholesale	$	2,464,875	$	1,806,992	$	657,883	36	%	$	2,616,624	$	3,226,349	$	(609,725)	(19)	%

Total Revenue	$	18,854,101	$	13,369,432	$	5,484,669	41	%	$	19,088,423	$	15,638,572	$	3,449,851	22	%
AZ	$	—	$	(1,554,181)	$	1,554,181	(100)	%	$	—	$	(1,011,063)	$	1,011,063	(100)	%
Total Revenue excluding AZ	$	18,854,101	$	11,815,251	$	7,038,850	60	%	$	19,088,423	$	14,627,509	$	4,460,914	30	%
N.M. Not Meaningful

Cost of Goods Sold and Gross Profit

Gross profit reflects total net revenue less cost of goods sold. Cost of goods sold represents the costs attributable to producing bulk materials and finished goods, which includes direct materials, labor, and certain indirect costs such as depreciation, insurance and utilities. Cannabis costs are affected by various state regulations that limit the sourcing and procurement of cannabis product, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes.

Cost of goods sold are determined from costs related to the cultivation and processing of cannabis and cannabis-derived products as well as the cost of finished goods inventory purchased from third parties.

Cost of goods sold for the three months ended ~~September 30, 2022~~March 31, 2023 was ~~$9,317,241, an increase~~$9,568,211, a decrease of ~~$1,062,797~~$3,581,683 compared to the three months ended ~~September 30, 2021~~March 31, 2022 of ~~$8,254,444, driven by higher production volume and sales.~~$13,149,894.

Gross profit for the three months ended ~~September 30, 2022~~March 31, 2023 was ~~$9,536,860,~~$9,520,212, representing a gross margin of ~~51%~~50%. This is compared to gross profit for the three months ended ~~September 30, 2021~~March 31, 2022 of ~~$5,114,988~~$2,488,678 or a ~~38%~~16% gross margin. The increase in gross profit and margin was driven primarily by increased retail sales in ~~Minnesota.~~Minnesota and a $3,476,917 decrease in inventory valuation adjustments. The decrease in inventory valuation adjustments was driven by the lack of Arizona related inventory net realizable value write downs during the three months ended March 31, 2023.

Our current production capacity has not been fully realized and we expect future gross profits to increase with revenue growth reflective of higher demand, increased product output and new product development. However, we expect gradual price compression as markets mature that could place downward pressure on our retail and wholesale gross margins.

Total Expenses

Total expenses other than the cost of goods sold consist of selling costs to support customer relationships, marketing, and branding activities. It also includes a significant investment in the corporate infrastructure required to support ongoing business.

Selling costs generally correlate to revenue. In the short-term as a percentage of sales, we expect selling costs to remain relatively flat. However, as positive regulatory developments in our core markets occur, we expect selling costs as a percentage of sales to decrease via growth in our retail and wholesale channels.

General and administrative expenses also include costs incurred at the corporate offices, primarily related to personnel costs, including salaries, benefits, and other professional service costs, as well as corporate insurance, legal and professional fees associated with being a publicly traded company. We expect general and administrative expenses as a percentage of sales to decrease as we realize revenue growth organically and through positive regulatory developments in our core markets.

Total expenses for the three months ended ~~September 30, 2022~~March 31, 2023 were ~~$9,726,016 an increase~~$9,151,706 a decrease of ~~$480,167~~$1,097,132 compared to total expenses of ~~$9,245,849~~$10,248,838 for the three months ended ~~September 30, 2021.~~March 31, 2022. The ~~increase~~decrease in total expenses is primarily attributable to a decrease in salaries and wages and professional fees partially offset by an increase in ~~professional fees driven by the Arrangement Agreement.~~share based compensation expense.

Operating Income (Loss) before Income Taxes

Operating income (loss) before other income (expense) and provision for income taxes for the three months ended ~~September 30, 2022~~March 31, 2023 was ~~$(189,156) a decrease~~$368,506 an increase of ~~$3,941,705~~$8,128,666 compared to an operating loss of ($~~4,130,861)~~7,760,160) for the three months ended ~~September 30, 2021.~~March 31, 2022.

Total Other Income (Expense)

Total other expense for the three months ended ~~September 30, 2022~~March 31, 2023 was ~~$(7,594,633)~~$(7,112,476), a change of ~~$5,415,098~~$1,434,146 compared to other expense of ~~$(2,179,535)~~$(8,546,622) for the three months ended ~~September 30, 2021.~~March 31, 2022. This change is primarily attributable to ~~increased~~a decrease in impairment charges of $5,313,176 partially offset by an increase in interest expense of $2,532,990 driven by the Credit Facility.

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. For the three months ended ~~September 30, 2022,~~March 31, 2023, tax expense totaled ~~$640,000~~$1,662,000 compared to a tax ~~expense~~recoveries of ~~$560,000~~$1,740,000 for the three months ended ~~September 30, 2021.~~March 31, 2022. The increase in tax expense is primarily attributable to increased gross profit, ~~partially offset the recognition of deferred tax assets related to property, plant, and equipment impairments and state net operating loss carryforwards.~~

~~Nine months ended September 30, 2022 Compared to Nine months ended September 30, 2021~~

~~Revenue~~

We derived our revenue from cultivating, processing, and distributing cannabis products through our eighteen dispensaries in four states and our wholesale sales to third parties in five states. For the nine months ended September 30, 2022, 82% of the revenue was generated from retail business and 18% from wholesale business. For the nine months ended September 30, 2021, 82% of the revenue was generated from retail dispensaries and 18% from wholesale business.

For the nine months ended September 30, 2022, Minnesota operations contributed approximately 50% of revenues, New York contributed 19%, Arizona contributed 4%, New Mexico contributed 9%, and Maryland contributed 18%. For the nine months ended September 30, 2021, Minnesota operations contributed approximately 40% of revenues, New York contributed 26%, Arizona contributed 18%, New Mexico contributed 5%, and Maryland contributed 11%.

Revenue for the nine months ended September 30, 2022 was $55,582,821, an increase of $14,792,600 or 36% compared to revenue of $40,790,221 for the nine months ended September 30, 2021. The increase is primarily attributable to increased revenue contributions from the retail businesses in Minnesota, New Mexico, and Maryland, partially offset by the lack of Arizona retail revenues, which was divested in the fourth quarter of 2021. Key revenue drivers are the acquisition of the Charm City dispensary in Maryland in the fourth quarter of 2021, increased patient demand in Minnesota, which is the result of the addition of cannabis flower to the Minnesota medical program in March of 2022, and the and the commencement of recreational marijuana sales in New Mexico on April 1, 2022.

Retail revenue for the nine months ended September 30, 2022 was $45,842,941, an increase of $12,595,883 or 38% compared to retail revenue of $33,247,058 for the nine months ended September 30, 2021 primarily due to revenue contributions from Minnesota, New Mexico, and Maryland, partially offset by the lack of Arizona retail revenues.

Wholesale revenue for the nine months ended September 30, 2022 was $9,739,880, an increase of $2,196,717 compared to wholesale revenue of $7,543,163 for the nine months ended September 30, 2021. The increase in revenue contributions was primarily due to increased wholesale demand in Minnesota and Maryland, partially offset by the lack of revenues in Arizona.

Nine Months Ended

September 30,


2022

2021

$ Change

% Change

Retail:









MN

$
26,844,812

$
16,126,864

$
10,717,948

66
%
NY

8,193,540

8,579,124

(385,584)

(4)
%
AZ

—

4,388,668

(4,388,668)

(100)
%
NM

4,984,945

2,174,447

2,810,498

129
%
MD

5,819,644

1,977,955

3,841,689

194
%
Total Retail

$
45,842,941

$
33,247,058

$
12,595,883

38
%

Wholesale:









AZ

$
2,355,683

$
2,754,795

$
(399,112)

(14)
%
MD

4,162,287

2,571,051

1,591,236

62
%
NY

2,549,770

2,150,634

399,136

19
%
MN

672,140

—

672,140

100
%
OH

—

66,683

(66,683)

(100)
%
Total Wholesale

$
9,739,880

$
7,543,163

$
2,196,717

29
%

Total Revenue

$
55,582,821

$
40,790,221

$
14,792,600

36
%
AZ and OH Revenue

$
(2,355,683)

$
(7,210,146)

$
4,854,463

(67)
%
Total Revenue excluding AZ and OH

$
53,227,138

$
33,580,075

$
19,647,063

59
%
N.M. Not Meaningful

~~Cost of Goods Sold and Gross Profit~~

Cost of goods sold for the nine months ended September 30, 2022 was $33,190,257, an increase of $10,043,754 compared to the nine months ended September 30, 2021 of $23,146,503, driven by higher production volume and sales.

Gross profit for the nine months ended September 30, 2022 was $22,392,564, representing a gross margin of 40%. This is compared to gross profit for the nine months ended September 30, 2021 of $17,643,718 or a 43% gross margin. The decrease in margin was driven by an increase indecreased inventory valuation adjustments, of $3,193,788 compared to the nine months ended September 30, 2021. Excluding inventory valuation adjustments, margins were relatively flat. These inventory valuation adjustments were driven by substantial write downs of Arizona inventory to net realizable value.and decreased asset impairments.

~~Total Expenses~~

Total expenses for the nine months ended September 30, 2022 were $30,033,694, an increase of $166,780 compared to total expenses of $29,866,914 for the nine months ended September 30, 2021. The small increase in total expenses was attributable to an increase in professional fees related to the Arrangement Agreement offset by a decrease in stock-based compensation expenses.

~~Operating Loss before Income Taxes~~

Operating loss before other income (expense) and provision for income taxes for the nine months ended September 30, 2022 was $(7,641,130), a decrease of $4,582,066 compared to $(12,223,196) for the nine months ended September 30, 2021.

~~Total Other Expense~~

Total other expenses for the nine months ended September 30, 2022 were $21,587,516, an increase of $16,021,197 compared to $5,566,319 for the nine months ended September 30, 2021. This increase is primarily attributable to the loss on impairment of long-lived assets of $7,476,618 and increased interest expense driven by the Credit Facility.

~~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. For the nine months ended September 30, 2022, tax recoveries totaled $55,000 compared to a tax expense of $2,970,000 for the nine months ended September 30, 2021. The increase in tax recoveries is primarily attributable to the recognition of deferred tax assets related to property, plant, and equipment impairments and state net operating loss carryforwards.

NON-GAAP MEASURES

EBITDA ~~and Adjusted EBITDA are~~is a non-GAAP ~~measures and do~~measure that does not have standardized ~~definitions~~definition under GAAP. The following information provides reconciliations of the supplemental non-GAAP financial ~~measures~~measure presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. We have provided the non-GAAP financial ~~measures,~~measure, which ~~are~~is not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP. ~~These~~This supplemental non-GAAP financial ~~measures are~~measure is presented because management has evaluated the financial results both including and excluding the adjusted items and believes that the supplemental non-GAAP financial ~~measures~~measure presented provide additional perspective and insights when analyzing the core operating performance of the business. ~~These~~This supplemental non-GAAP

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~~supplemental non-GAAP~~ financial ~~measures~~measure 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.


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2022		2021		2022		2021		2023		2022
Net income (loss)	$	(8,423,789)	$	(6,870,396)	$	(29,173,646)	$	(20,759,515)	$	(8,405,970)	$	(14,566,782)
Interest expense, net		5,573,263		2,254,553		15,472,885		6,037,057		7,134,789		4,601,799
Income taxes		640,000		560,000		(55,000)		2,970,000		1,662,000		(1,740,000)
Depreciation & Amortization		340,207		304,540		1,003,964		1,135,234		319,277		328,363
Depreciation included in cost of goods sold		645,480		691,662		1,959,536		1,678,558		734,087		700,193
EBITDA (non-GAAP)	$	(1,224,839)	$	(3,059,641)	$	(10,792,261)	$	(8,938,666)	$	1,444,183	$	(10,676,427)
Inventory adjustment		131,000		351,000		3,657,788		464,000
Loss on impairment of long-lived assets		2,108,703		—		7,476,618		—
Stock-based compensation		896,081		835,122		2,636,594		4,289,820
Other income		—		—		(1,190,863)		—
Gain (loss) on disposal of assets		(7,583)		—		(165,012)		(437,107)
Adjusted EBITDA (non-GAAP)	$	1,903,362	$	(1,873,519)	$	1,622,864	$	(4,621,953)

Liquidity, Financing Activities During the Period, and Capital Resources

We are an early-stage growth company. We are generating cash from sales and deploying our capital reserves to acquire and develop assets capable of producing additional revenues and earnings over both the immediate and near term. Capital reserves are ~~being utilized for acquisitions in the medical and adult-use cannabis markets,~~ for capital expenditures and improvements in existing facilities, product development and marketing, ~~as well as~~ customer, supplier, investor, industry relations, and ~~industry relations.~~working capital.

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

Credit Facility

On ~~December 28,~~November 19, 2021, the ~~Company’s~~Company signed a promissory note payable in the amount of $~~1,110,000~~ ~~was modified to extend~~$2,000,000 in connection with the acquisition of Charm City Medicus, LLC. The note bears an interest rate of 8% per annum with interest payments due on the last day of each calendar quarter. The maturity date to ~~December 31,~~of the note is November 19, 2023,, and the ~~Company paid off $60,000~~note is secured by 25% of the membership interests in ~~principal.~~Vireo Health of Charm City, LLC.

On March 25, 2021, the Company entered into a credit agreement for a senior secured delayed draw term loan with an aggregate principal amount of up to $46,000,000 (the “Credit Facility”), and executed a draw of $26,000,000 in principal. Net of fees and closing costs of $1,971,705, the Company received $24,028,295 of the first tranche on March 25, 2021. Additionally, the Company incurred fees and closing costs of $1,083,422 which were paid in cash. The unpaid principal amounts outstanding under the Credit Facility bear interest at a rate of (a) ~~13.625% per annum~~the U.S. prime rate plus 10.375%, payable monthly in cash, and (b) 2.75% per annum paid in kind interest payable monthly. The Credit Facility matures on March 31, 2024.

On November 18, 2021, the Company and ~~lender~~lenders amended the Credit Facility to provide for an additional loan of $4,200,000 with a cash interest rate of 15% per annum and PIK interest of 2% ~~and no warrants were issued in connection~~

~~with this loan. Cash received net of $156,900 in financing costs was $4,043,100.~~per annum. Obligations under the Credit Facility are secured by substantially all the assets of the Company.

~~During the nine months ended September 30, 2022,~~On March 31, 2023, the Company ~~drew $27,075,000 in principal debt from~~executed a fifth amendment to its credit facility with its senior secured lender, Chicago Atlantic Admin, LLC (the "Agent"), an affiliate of Green Ivy Capital, and a group of lenders. The amended credit facility extends the maturity date on its Delayed Draw ~~Loans. Proceeds received, net~~Loans to April 30, 2024, through the issuance of 13,017,624 Subordinate

Voting Shares in lieu of a cash extension fee. These 13,017,624 shares were valued at $1,221,837 on March 31, 2023, and considered a deferred financing ~~fees~~cost. An additional 1,982,376 Subordinate Voting Shares are issuable at the discretion of ~~$2,206,857 were $24,868,143.~~the Agent. It also provides the Company with reduced cash outlays by eliminating required amortization of the loan, and requires the Company to divest certain assets to improve its liquidity position and financial performance. The Company ishas the potential to ~~be reimbursed by Verano for $1,190,863~~extend the maturity date on its Delayed Draw Loans up to January 31, 2026 with the satisfaction of these deferred financing fees pursuant to the Arrangement Agreement, and still expects to collect despite the purported termination of the Arrangment Agreement (Note 1). These fees are included as other income in the unaudited statement of loss and comprehensive loss for the nine months ended September 30, 2022, and to the extent these fees have not been reimbursed, they are included in our other receivables balance (Note 5).certain financial performance-related conditions.

Unless otherwise specified, all deferred financing costs are treated as a contra-liability, to be netted against the outstanding loan balance and amortized over the remaining life of the loan.

On November 19, 2021, we signed a promissory note payable in the amount of $2,000,000 in connection with the acquisition of Charm City Medicus, LLC (Note 3). The note bears an interest rate of 8% per annum with interest payments required due on the last day of each calendar quarter. The maturity date of the note is November 19, 2023, and the note is secured by 25% of the membership interests in Vireo Health of Charm City, LLC

Cash Used in Operating Activities

Net cash used in operating activities was ~~$12.0~~$3.8 million for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, a decrease of ~~$10.8~~$3.0 million as compared to $6.8 million for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The decrease is primarily attributed to more favorable changes in working capital ~~items.~~items, and increased gross profit.

Cash Used in Investing Activities

Net cash used in investing activities was ~~$4.8~~$0.7 million for the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, a decrease of $1.5 million compared to net cash used in investing activities of ~~$15.0~~$2.2 million for the ~~nine~~three months ended ~~September 30, 2021.~~March 31, 2022. The decrease is primarily attributable to decreased property, plant, and equipment additions relative to the prior year quarter.

Cash Provided (Used) by Financing Activities

Net cash used in financing activities was $0.3 million for the three months ended March 31, 2023, a change of $2.7 million as compared to $2.4 million provided by financing activities ~~was $23.4 million for~~in the ~~nine~~three months ended ~~September 30, 2022, an increase of $1.0 million as compared to the nine months ended September 30, 2021.~~March 31, 2022. The change was principally due to increased proceeds received from the Credit Facility in 2022 as compared to ~~2021.~~2023.

Lease Transactions

As of ~~September 30, 2022,~~March 31, 2023, we have entered into lease agreements for the use of buildings used in cultivation, production and/or sales of cannabis products in ~~Arizona,~~ Maryland, Minnesota, Nevada, New Mexico, New York, and Puerto Rico.

The lease agreements for all of the retail space used for our dispensary operations are with third-party landlords and remaining duration ranges from 1 to 6 years. These agreements are short-term facility leases that require us to make monthly rent payments as well as funding common area costs, utilities and maintenance. In some cases, we have received tenant improvement funds to assist in the buildout of the space to meet our operating needs. As of ~~September 30, 2022,~~March 31, 2023, we operated 18 retail locations secured under these agreements.

We have also entered into sale and leaseback arrangements for our cultivation and processing facilities in Minnesota and New York with a special-purpose real estate investment trust. These leases are long-term agreements that provide, among other things, funds to make certain improvements to the property that will significantly enhance production capacity and operational efficiency of the facility.

Excluding any contracts under one year in duration, the future minimum lease payments (principal and interest) on all our leases are as follows:


	Operating Leases		Finance Leases				Operating Leases		Finance Leases
	September 30, 2022		September 30, 2022		Total		March 31, 2023		March 31, 2023		Total
2022	$	642,885	$	2,245,507	$	2,888,392
2023		2,518,169		10,492,227		13,010,396	$	1,890,250	$	8,388,953	$	10,279,203
2024		2,243,050		10,597,822		12,840,872		2,243,050		11,063,698		13,306,748
2025		2,030,129		10,683,979		12,714,108		2,030,129		11,164,577		13,194,706
2026		1,609,276		11,001,044		12,610,320		1,609,276		11,496,826		13,106,102
2027								1,384,646		11,839,086		13,223,732
Thereafter		2,656,286		206,379,022		209,035,308		1,271,640		185,973,220		187,244,860
Total minimum lease payments	$	11,699,795	$	251,399,601	$	263,099,396	$	10,428,991	$	239,926,360	$	250,355,351
Less discount to net present value		(3,746,966)		(175,378,380)		(179,125,346)		(3,077,902)		(160,377,753)		(163,455,655)
Less liabilities held for sale		(228,449)		(1,147,735)		(1,376,184)		(4,527,158)		(70,998,097)		(75,525,255)
Present value of lease liability	$	7,724,380	$	74,873,486	$	82,597,866	$	2,823,931	$	8,550,510	$	11,374,441

ADDITIONAL INFORMATION

Outstanding Share Data

As of ~~November~~May 11, ~~2022,~~2023, we had 87,135,083 shares issued and outstanding, consisting of the following:

(a) Subordinate voting shares

86,721,030 shares issued and outstanding. The holders of subordinate voting shares are entitled to receive dividends which may be declared from time to time and are entitled to one vote per share at all shareholder meetings. All subordinate voting shares are ranked equally with regards to the Company’s residual assets. The Company is authorized to issue an unlimited number of no-par value subordinate voting shares.

(b) Multiple voting shares

348,642 shares issued and outstanding. The holders of multiple voting shares are entitled to one hundred votes per share at all shareholder meetings. Each multiple voting share is exchangeable for one hundred subordinate voting shares. The Company is authorized to issue an unlimited number of multiple voting shares.

(c) Super voting shares

65,411 shares issued and outstanding. The holders of super voting shares are entitled to one thousand votes per share at all shareholder meetings. Each super voting share is exchangeable for one hundred subordinate voting shares. The Company is authorized to issue an unlimited number of super voting shares.

Options, Warrants, and Convertible Promissory Notes

As of ~~September 30, 2022,~~March 31, 2023, we ~~have 26,121,908~~had 28,566,282 employee stock options outstanding, ~~1,094,200~~3,102,765 RSUs ~~as well as~~outstanding, 3,037,649 ~~SVS~~Subordinate Voting Share compensation warrants denominated in C$. related to financing activities, and 150,000 Subordinate Voting Share compensation warrants outstanding.

Off-Balance Sheet Arrangements

As of the date of this filing, we do not have any off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our results of operations or financial condition, including, and without limitation, such considerations as liquidity and capital resources.

Critical Accounting Policies

There have been 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 our 2021 Annual Report on Form 10-K for the year ended December 31, 2021.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosures about market risk have been omitted as permitted under rules applicable to smaller reporting companies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act) are designed to ensure that information required to be disclosed by us in reports we file or submit under the ~~Securities~~ Exchange Act ~~of 1934, as amended,~~ is recorded, processed, summarized and reported within the appropriate time periods, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely discussions regarding required disclosure.

~~During~~ We, under the ~~year ended December 31, 2021, we identified~~ ~~a material weakness in our internal control environment related to the accounting treatment~~supervisions of ~~warrants issued in connection~~and with the ~~Credit Facility, which~~participation of our management, including our Chief Executive Officer and Chief Financial Officer, have ~~a Canadian dollar exercise price. Management has an established process for appropriately accounting for infrequent~~evaluated the effectiveness of our disclosure controls and ~~unusual transactions. We believe~~procedures as of March 31, 2023 and, based on that this material weakness was a result of the misapplication of the GAAP accounting guidance. The material weakness did not result in any material misstatements to the issued financial statements. However, the previously released financial results for the three and nine months ended September 30, 2021 were restated in connection with the issuance of this Form 10-Q (Note 2).

Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include consultation with external GAAP accounting experts on non-recurring, significant, or unusual transactions. We believe that these actions will remediate the material weakness. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time and management hasevaluation, have concluded ~~through testing, that these controls are operating effectively. Sufficient time and testing has not yet occurred, but we expect~~ that the ~~remediation~~design and operation of ~~this material weakness will be completed prior to the end of 2022.~~

~~Management believes that~~ our ~~consolidated financial statements included in this Form 10-Q have been prepared in accordance with U.S. GAAP. Our CEO~~disclosure controls and CFO have certified that, based on their knowledge, the financial statements, and other financial information included in this Form 10-Q, fairly present in all material respects the financial condition, results of operations and cash flows of the Companyprocedures were effective as of and for, the periods presented in this Form 10-Q. However, solely due to the unremediated material weakness identified in the prior year, the Company’s management concluded that at September 30, 2022, the Company’s internal control over financial reporting was not effective.such date.

Changes in Internal Control over Financial Reporting

~~Except as noted in the preceding paragraphs,~~ ~~there~~There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act) during the three months ended March 31, ~~2022~~2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in various regulatory issues, claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material, adverse effect on our results of operations or financial condition.

Schneyer ~~Litigation~~

On February 22, 2022, the Minnesota Court of Appeals denied the immediate review of the December 9, 2021 order.

Verano ~~Litigation~~

On January 31, 2022, the Company entered into anthe Arrangement Agreement ~~(the “Arrangement Agreement”)~~ with Verano, ~~Holdings Corp. (“~~~~Verano~~~~”),~~ pursuant to which Verano was to ~~acquire~~have acquired all of the issued and outstanding shares of Goodness Growth pursuant to a ~~plan~~Plan of ~~arrangement (the “Plan of Arrangement”) under the Business Corporations Act (British Columbia) (the “~~~~Arrangement~~~~”).~~Arrangement. Subject to the terms and conditions set forth in the Arrangement Agreement and the Plan of Arrangement, holders of Goodness Growth Shares ~~would~~were to receive 0.22652 of a ~~subordinate voting share of Verano (each a “~~Verano Subordinate Voting Share,~~”),~~ subject to adjustment as described below, ~~(the “~~~~Exchange Ratio~~~~”),~~ for each Subordinate Voting Share held, and 22.652 Verano Subordinate Voting Shares for each Multiple Voting Share and Super Voting Share held, immediately prior to the effective time of the Arrangement.

times. The Company believes that Verano has no factual or legal basis to justify or support its purported ~~grounds for~~ termination of the Arrangement ~~Agreement.~~Agreement, which the Company has determined to treat as a repudiation.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

No unregistered sales of equity securities occurred during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023.

Item 6. Exhibits

Exhibit No.		Description of Exhibit

4.7		Form of Warrant to Purchase Subordinate Voting Shares of Goodness Growth Holdings, Inc.(issued in conjunction with Fifth Amendment to Credit Agreement and First Amendment to Security Agreement, dated March 31, 2023, by and among Goodness Growth Holdings, Inc., and certain of its subsidiaries, the persons from time-to-time parties thereto as guarantors, the lenders party thereto, and Chicago Atlantic Advisers, LLC, as administrative and collateral agent).

10.45		Fifth Amendment to Credit Agreement and First Amendment to Security Agreement, dated March 31, 2023, by and among Goodness Growth Holdings, Inc., and certain of its subsidiaries, the persons from time-to-time parties thereto as guarantors, the lenders party thereto, and Chicago Atlantic Advisers, LLC, as administrative and collateral agent.

31.1		Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer

31.2		Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer

32.1		Section 1350 certification, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		Includes the following financial and related information from Goodness Growth’s Quarterly Report on Form 10-Q as of and for the quarter ended ~~September 30, 2022,~~March 31, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Income, (3) the Consolidated Statements of Comprehensive Income, (4) the Consolidated Statements of Changes in Stockholders’ Equity, (5) the Consolidated Statements of Cash Flows, and (6) Notes to Consolidated Financial Statements.

104		The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL.

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SIGNATURES

Pursuant to requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	GOODNESS GROWTH HOLDINGS, INC. (Registrant)

Date: ~~November 14, 2022~~May 15, 2023	By:	/s/ ~~Kyle E. Kingsley~~Joshua Rosen
		Name:	~~Kyle E. Kingsley~~Joshua Rosen
		Title:	Interim Chief Executive Officer

Date: ~~November 14, 2022~~May 15, 2023	By:	/s/ John A. Heller
		Name:	John A. Heller
		Title:	Chief Financial Officer

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Statement of Net Loss and Comprehensive Loss for the nine months ended September 30, 2021 (unaudited)	As Previously Reported		Adjustment		As Revised
Operating expenses:
Stock-based compensation expenses	$	4,557,777	$	(267,957)	$	4,289,820
Total operating expenses		30,134,871		(267,957)		29,866,914

Loss from operations		(12,491,153)		267,957		(12,223,196)

Other income (expense):
Derivative gain (loss)		2,317,065		(2,317,065)		—
Other income (expenses), net		(3,249,254)		(2,317,065)		(5,566,319)

Loss before income taxes		(15,740,407)		(2,049,108)		(17,789,515)

Net income (loss) and comprehensive income (loss)	$	(18,710,407)	$	(2,049,108)	$	(20,759,515)

Statement of Net Loss and Comprehensive Loss for the three months ended September 30, 2021 (unaudited)	As Previously Reported		Adjustment		As Revised
Other income (expense):
Derivative gain (loss)	$	627,165	$	(627,165)	$	—
Other income (expenses), net		(1,552,370)		(627,165)		(2,179,535)

Loss before income taxes		(5,683,231)		(627,165)		(6,310,396)

Net income (loss) and comprehensive income (loss)	$	(6,243,231)	$	(627,165)	$	(6,870,396)

Consolidated Statement of Changes in Stockholders' Equity as of September 30, 2021 (unaudited)	As Previously Reported		Adjustment		As Revised
Shares issued in Nevada acquisition	$	1,564,500	$	(179,261)	$	1,385,239
Stock-based compensation		4,557,777		(267,957)		4,289,820
Warrants issued in financing activities		—		5,395,759		5,395,759
Net Loss		(18,710,407)		(2,049,108)		(20,759,515)
Balance at September 30, 2021	$	50,911,036	$	2,899,433	$	53,810,469

Consolidated Statement of Cash Flows for the nine months ended September 30, 2021 (unaudited)	As Previously Reported		Adjustment		As Revised
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(18,710,407)	$	(2,049,108)	$	(20,759,515)
Derivative gain		(2,317,065)		2,317,065		—
Share-based payments		4,557,777		(267,957)		4,289,820


	Quoted prices in		Other		Significant
	active markets for		observable		unobservable
	identical assets		inputs		inputs
	(Level 1)		(Level 2)		(Level 3)		Total
September 30, 2022
Cash	$	21,842,076	$	—	$	—	$	21,842,076
Total assets	$	21,842,076	$	—	$	—	$	21,842,076

December 31, 2021
Cash	$	15,155,279	$	—	$	—	$	15,155,279
Total assets	$	15,155,279	$	—	$	—	$	15,155,279