1 unchanged sentence
Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, and in Part II, “Item 1A.
−Removed: Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, which could materially affect our business, financial condition and/or results of operations.
−Removed: Except to the extent updated below or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors, there have been no material changes to the risk factors described in the “Risk Factors” sections in our Annual Report on Form 10-K for the year ended December 31, 2021 and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2022.
−Removed: The risks as updated below and as described in our Annual Report on Form 10-K and subsequent Quarterly Report on Form 10-Q are not the only risks facing our Company.
+Added: Risk Factors” in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022, which could materially affect our business, financial condition and/or results of operations.
+Added: Except to the extent updated below or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such risk factors, there have been no material changes to the risk factors described in the “Risk Factors” sections in our Annual Report on Form 10-K for the year ended December 31, 2021 and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022.
+Added: The risks as described in our Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q are not the only risks facing our Company.
Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or results of operations.
−Removed: Because we lease our properties to a limited number of tenants, and to the extent we depend on a limited number of tenants in the future, the inability of any single tenant to make its lease payments could adversely affect our business and our ability to make distributions to our stockholders.
−Removed: As of June 30, 2022, we owned 110 properties.
−Removed: Five of our tenants, PharmaCann Inc.
−Removed: (at eleven of our properties), Parallel (at four of our properties), Ascend (at four of our properties), Kings Garden (at six of our properties) and Trulieve (at six of our properties), represented approximately 14%, 10%, 9%, 8% and 7%, respectively, of our rental revenues (including tenant reimbursements) for the six months ended June 30, 2022.
−Removed: Lease payment defaults by any of our tenants or a significant decline in the value of any single property would materially adversely affect our business, financial position and results of operations, including our ability to make distributions to our stockholders.
−Removed: Our lack of diversification also increases the potential that a single underperforming investment or tenant could have a material adverse effect on our cash flows and the price we could realize from the sale of our properties.
−Removed: Any adverse change in the financial condition of any of our tenants, including but not limited to the state cannabis markets not developing and growing in ways that we or our tenants projected, or any adverse change in the political climate regarding cannabis where our properties are located, would subject us to a significant risk of loss.
−Removed: In addition, failure by any of our tenants to comply with the terms of its lease agreement with us could require us to find another lessee for the applicable property.
−Removed: We may experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing that property.
−Removed: Furthermore, we cannot assure you that we will be able to re-lease that property for the rent we currently receive, or at all, or that a lease termination would not result in our having to sell the property at a loss.
−Removed: The result of any of the foregoing risks could materially and adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.
−Removed: On July 13, 2022, Kings Garden defaulted on its obligations to pay rent at all of the properties it leases with us.
−Removed: See Part II, Item 1.
−Removed: Legal Proceedings and Note 12 “Subsequent Events” to our condensed consolidated financial statements included in this report for more information.
−Removed: Many of our existing tenants are, and we expect that many of our future tenants will be, companies with limited histories of operations and may be unable to pay rent with funds from operations or at all, which could adversely affect our cash available to make distributions to our stockholders or otherwise impair the value of our common stock.
−Removed: Single tenants currently occupy our properties generally, and we expect that single tenants will occupy our properties that we acquire in the future.
−Removed: Therefore, the success of our investments will be materially dependent on the financial stability of these tenants.
−Removed: We rely on our management team to perform due diligence investigations of our potential tenants, related guarantors and their properties, operations and prospects, of which there is generally little or no publicly available operating and financial information.
−Removed: We may not learn all of the material information we need to know regarding these businesses through our investigations, and these businesses are subject to numerous risks and uncertainties, including but not limited to regulatory risks and the rapidly evolving market dynamics of each state’s regulated cannabis program.
−Removed: As a result it is possible that we could enter into a sale-leaseback
−Removed: arrangement with tenants or otherwise lease properties to tenants that ultimately are unable to pay rent to us, which could adversely impact our cash available for distributions.
−Removed: Many of our existing tenants are, and we expect that many of our future tenants will be, companies with limited histories of operations that are not profitable when they enter triple-net leasing arrangements with us and therefore, may be unable to pay rent with funds from operations.
−Removed: Many of our current tenants are not profitable and have experienced losses since inception, or have been profitable for only a short period of time.
−Removed: As a result, many of our current tenants have made, and we expect that many of our future tenants will make, initial rent payments to us from proceeds from the sale of the property, in the case of sale-leaseback transactions, or other cash on hand, including cash received from debt financings.
−Removed: In addition, in general, our tenants are more vulnerable to adverse conditions resulting from federal and state regulations affecting their businesses or industries or other changes in the marketplace for their products, and have limited access to traditional forms of financing.
−Removed: For example, during the COVID-19 pandemic, our tenants were generally not able to access federal assistance programs that were available to companies in other industries, due to cannabis being a Schedule 1 controlled substance under the CSA.
−Removed: The success of our tenants will also heavily depend on the growth and development of the state markets in which the tenants operate, many of which have a very limited history or are still in the stages of establishing the regulatory framework.
−Removed: For example, in California, the illicit market for cannabis remains a much larger portion of overall sales in the state according to Global Go Analytics, and state and local authorities have assessed significant taxes on regulated cannabis products, both of which have had the impact of significantly limiting the growth and profitability for operators in the state’s regulated cannabis market.
−Removed: In recent months, pricing for regulated cannabis products has dropped significantly, driven in part by the lack of effective enforcement on the illicit market, while input costs, including labor, supplies and construction materials, have increased significantly as a result of the broader higher inflationary environment.
−Removed: In our evaluation of our existing leases with tenants at our properties, we determined to record associated revenue on a cash basis due to the uncertainty of collectability of lease payments from tenants due to the U.S.
−Removed: federal regulatory uncertainty surrounding the regulated cannabis industry and our tenants’ limited operating history (for more information, see Note 2 “Summary of Significant Accounting Policies and Procedures and Recent Accounting Pronouncements – Revenue Recognition” in our condensed consolidated financial statements included in this report).
−Removed: Some of our tenants may be subject to significant debt obligations and may rely on debt financing to make rent payments to us.
−Removed: Tenants that are subject to significant debt obligations may be unable to make their rent payments if there are adverse changes in their business plans or prospects, the regulatory environment in which they operate or in general economic conditions.
−Removed: In addition, the payment of rent and debt service may reduce the working capital available to tenants for the start-up phase of their business.
−Removed: Furthermore, we may be unable to monitor and evaluate tenant credit quality on an on-going basis.
−Removed: According to Viridian Capital Advisors, total equity and debt capital raising for public and private cannabis companies in North America decreased by approximately 64% year-to date through July 1, 2022 ($2.6 billion) versus the prior year’s period ($7.3 billion).
−Removed: In addition, debt issuance year-to-date through July 1, 2022 for cannabis companies represents the most significant percentage of capital raised of the comparable periods of the past four years according to Viridian Capital Advisors, as equity values of cannabis companies have declined significantly.
−Removed: Any lease payment defaults by a tenant could adversely affect our cash flows and cause us to reduce the amount of distributions to stockholders.
−Removed: In the event of a default by a tenant, we may also experience delays in enforcing our rights as landlord and may incur substantial costs in protecting our investment and re-leasing our property as operators of regulated cannabis cultivation and production facilities are generally subject to extensive state licensing requirements.
−Removed: Furthermore, we will not operate any of the facilities that we purchase.
−Removed: On July 13, 2022, Kings Garden, a tenant of ours at six properties that we own in southern California, defaulted on its obligations to pay rent.
−Removed: See Part II, Item 1.
−Removed: Legal Proceedings and Note 12 “Subsequent Events” to our condensed consolidated financial statements included in this report for more information.
−Removed: Our ability to grow our business depends on state laws pertaining to the cannabis industry.
−Removed: Continued development of the cannabis industry depends upon continued legislative authorization of cannabis at the state level.
−Removed: The status quo of, or progress in, the regulated cannabis industry is not assured and any number of factors could slow or halt further progress in this area.
−Removed: While there may be ample public support for legislative action permitting the cannabis operations, numerous factors impact the legislative process.
−Removed: For example, many states that voted to legalize medical and/or adult-use cannabis have seen
−Removed: significant delays in the drafting and implementation of industry regulations and issuance of licenses.
−Removed: In addition, burdensome regulation at the state level could slow or stop further development of the cannabis industry, such as limiting the medical conditions for which medical cannabis can be recommended by physicians for treatment, not strictly enforcing regulations for non-licensed cannabis operators, restricting the form in which medical cannabis can be consumed, imposing significant registration requirements on physicians and patients or imposing significant taxes on the growth, processing and/or retail sales of cannabis, which could have the impact of dampening growth of the cannabis industry and making it difficult for cannabis businesses, including our tenants, to operate profitably in those states.
−Removed: Any one of these factors could slow or halt additional legislative authorization of cannabis, which could harm our business prospects.
−Removed: For example, we believe that California’s taxation of regulated cannabis at local and state governmental levels and ineffective enforcement policy with respect to illicit cannabis sales have significantly limited the growth and profitability of operators in that state.
−Removed: Recently, many states have also experienced significant declines in unit pricing for regulated cannabis products, with that decline more pronounced in certain states than in others.
−Removed: For example, according to New Leaf Data Services, spot wholesale cannabis flower prices in California and Michigan have each declined more than 30% during the six months ended June 30, 2022.
−Removed: We face significant risks associated with the development and redevelopment of properties that we acquire.
−Removed: In many instances, we engage in development or redevelopment of properties that we acquire.
−Removed: Development and redevelopment activities entail risks that could adversely impact our financial condition and results of operations, including:
−Removed: ● construction costs, which may exceed our or our tenant’s original estimates due to increases in materials, labor or other costs, which could make the project less profitable for our tenant, require us or our tenant to commit additional funds to complete the project and adversely impact our tenant’s business and prospects as a result;
−Removed: ● permitting or construction delays, which may result in increased project costs, as well as deferred revenue and delayed commencement of operations by our tenant;
−Removed: ● unavailability of raw materials when needed, which may result in project delays, stoppages or interruptions, which could make the project less profitable;
−Removed: ● claims for warranty, product liability and construction defects after a property has been built;
−Removed: ● health and safety incidents and site accidents;
−Removed: ● poor performance or nonperformance by, or disputes with, any of our contractors, subcontractors or other third parties on whom we rely;
−Removed: ● a contractor, subcontractor or other third party on whom we rely files for bankruptcy or commits fraud before completing a project that we have funded in part or in full;
−Removed: ● unforeseen engineering, environmental or geological problems, which may result in delays or increased costs;
−Removed: ● changes in local zoning, permitting and other requirements which may impact the permitted use or scope of a project;
−Removed: ● labor stoppages, slowdowns or interruptions;
−Removed: ● liabilities, expenses or project delays, stoppages or interruptions as a result of challenges by third parties in legal proceedings;
−Removed: ● weather-related and geological interference, including hurricanes, landslides, earthquakes, floods, drought, wildfires and other events, which may result in delays or increased costs.
−Removed: The realization of any of the risks above or other delays in development and redevelopment activities at a property may also materially adversely impact our tenant’s ability to commence, continue or expand its operations, which may result in that tenant defaulting on its rent obligations to us.
−Removed: As of August 4, 2022, we had properties consisting of an aggregate of approximately 2.2 million rentable square feet under development or redevelopment, and we had committed to provide construction funding and fund tenant improvements at our properties in the future totaling up to approximately $209.6 million.
−Removed: Ongoing inflation for construction and labor costs, labor shortages and global supply chain issues, driven in part by the COVID-19 pandemic, geopolitical issues and the war in Ukraine, also continue to adversely impact costs and timing for completion of our development and redevelopment projects, which are resulting in cost overruns and delays in commencing operations on certain projects.
−Removed: The assets we acquire may be subject to impairment charges.
−Removed: We periodically evaluate the real estate investments we acquire and other assets for impairment indicators.
−Removed: The judgment regarding the existence of impairment indicators is based upon factors such as market conditions, tenant performance and legal structure.
−Removed: For example, the termination of a lease by a tenant may lead to an impairment charge.
−Removed: If we determine that an impairment has occurred, we would be required to make an adjustment to the net carrying value of the asset which could have an adverse effect on our results of operations in the period in which the impairment charge is recorded.
−Removed: On July 13, 2022, Kings Garden, a tenant of ours at six properties that we own in southern California, defaulted on its obligations to pay rent.
−Removed: See Part II, Item 1.
−Removed: Legal Proceedings and Note 12 “Subsequent Events” to our condensed consolidated financial statements included in this report for more information.
−Removed: While we have not determined that an impairment has occurred with respect to these properties, as we periodically evaluate these and other properties, we may be required to make an adjustment to the net carrying value of one or more of these properties in the future.
−Removed: Our growth depends on external sources of capital, which may not be available on favorable terms or at all.
−Removed: In addition, banks, financial institutions, and other capital market participants may be reluctant to enter into lending and other financing transactions with us because we acquire properties used in the cultivation and production of cannabis.
−Removed: If one or more of these sources of funding is unavailable to us, it could have a material adverse effect on our business, financial condition, liquidity and results of operations.
−Removed: We expect to acquire additional real estate assets, which we intend to finance primarily through newly issued equity or debt.
−Removed: We may not be in a position to take advantage of attractive investment opportunities for growth if we are unable, due to global or regional economic uncertainty, changes in the state or federal regulatory environment relating to the cannabis industry, restrictions that potential investors may have to own our equity or debt due to our tenant’s operations in the regulated cannabis industry, changes in market conditions for the regulated cannabis industry, our own operating or financial performance or otherwise, to access capital markets on a timely basis and on favorable terms or at all.
−Removed: In addition, U.S.
−Removed: federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gain and that it pay U.S.
−Removed: federal income tax at regular corporate rates to the extent that it annually distributes less than 100% of its taxable income.
−Removed: Because we intend to grow our business, this limitation may require us to raise additional equity or incur debt at a time when it may be disadvantageous to do so.
−Removed: Our access to capital will depend upon a number of factors over which we have little or no control, including general market conditions, restrictions imposed on potential investors and other capital markets participants due to our tenants’ operations in the regulated cannabis industry, and the market’s perception of our current and potential future earnings.
−Removed: If general economic instability or downturn leads to an inability to borrow at attractive rates or at all, our ability to obtain capital to finance the purchase of real estate assets could be negatively impacted.
−Removed: In addition, banks and other financial institutions may be reluctant to enter into lending transactions with us, particularly secured lending, because we intend to acquire properties used in the cultivation, production or dispensing of cannabis.
−Removed: If this source of funding is unavailable to us, our growth may be limited and our levered return on the properties we purchase may be lower.
−Removed: If we are unable to obtain capital on terms and conditions that we find acceptable, we likely will have to reduce the number of properties we can purchase.
−Removed: In addition, our ability to refinance all or any debt we may incur in the future, on acceptable terms or at all, is subject to all of the above factors, and will also be affected by our future financial position, results of operations and cash flows, which additional factors are also subject to significant uncertainties, and therefore we may be unable to refinance any debt we may incur in the future, as it matures, on acceptable terms or at all.
−Removed: All of these events would have a material adverse effect on our business, financial condition, liquidity and results of operations.
−Removed: In addition, securities clearing firms may refuse to accept deposits of our securities, which may negatively impact the trading of our securities and have a material adverse impact on our ability to obtain capital.
−Removed: In recent months, general financial conditions have deteriorated significantly, which has also significantly reduced our access to capital.
−Removed: If sustained, this would have a material adverse effect on our business, financial condition and results of operations, including our ability to continue to make acquisitions of new properties and fund draws for future improvements at existing properties.
−Removed: We are currently subject to securities lawsuits and we may be subject to similar or other litigation in the future, which may divert management’s attention and have a material adverse effect on our business, financial condition and results of operations.
−Removed: A purported securities class action lawsuit was filed against us and certain of our executive officers alleging that the Company made false or misleading statements regarding its business.
−Removed: According to the filed complaint, the p laintiff is seeking an undetermined amount of damages, interest, attorneys’ fees and costs and other relief on behalf of the putative classes of all persons who acquired shares of the Company’s common stock between May 7, 2020 and April 13, 2022.
−Removed: A derivative action lawsuit was also filed against us and certain of our officers and directors asserting putative derivative claims for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, and waste of corporate assets against our directors and certain of our officers.
−Removed: According to the filed complaint, t he plaintiffs are seeking declaratory relief, direction to reform and improve corporate governance and internal procedures, and an undetermined amount of damages, restitution, interest, and attorneys’ fees and costs.
−Removed: We will continue to incur legal fees in connection with these pending cases, including expenses for the reimbursement of legal fees of our officers and directors under indemnification obligations.
−Removed: The expense of continuing to defend such litigation may be significant.
−Removed: We intend to defend these lawsuits vigorously, but there can be no assurance that we will be successful in any defense.
−Removed: If any of the lawsuits are adversely decided, we may be liable for significant damages directly or under our indemnification obligations, which could adversely affect our business, results of operations and cash flows.
−Removed: Further, the amount of time that will be required to resolve these lawsuits is unpredictable and these actions may divert management's attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows.
−Removed: We cannot predict the outcome of these lawsuits and we may be subject to other similar securities litigation in the future.
−Removed: Monitoring and defending against legal actions, whether or not meritorious, is time-consuming for our management and detracts from our ability to fully focus our internal resources on our business activities.
−Removed: In addition, we may incur substantial legal fees and costs in connection with litigation.
−Removed: Although we have insurance, coverage could be denied or prove to be insufficient.
−Removed: We are not currently able to estimate the possible cost to us from the currently pending lawsuits, and we cannot be certain how long it may take to resolve these matters or the possible amount of any damages that we may be required to pay.
−Removed: We have not established any reserves for any potential liability relating to these or future lawsuits.
−Removed: It is possible that we could, in the future, incur judgments or enter into settlements of claims for monetary damages.
−Removed: A decision adverse to our interests on these actions could result in the payment of substantial damages and could have a material adverse effect on our business, results of operations and financial condition.
−Removed: In addition, the uncertainty of the currently pending lawsuits could lead to volatility in our stock price.
−Removed: The ultimate outcome of litigation could have a material adverse effect on our business and the trading price for our securities.
+Added: We have identified a material weakness in our system of internal controls pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.
+Added: If not remediated, this material weakness could result in material misstatements in our consolidated financial statements.
+Added: We may be unable to develop, implement and maintain appropriate controls in future periods.
+Added: Our management identified a material weakness in our internal control over financial reporting.
+Added: A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.
+Added: Management has concluded that, because of this material weakness, our internal control over financial reporting was not effective as of September 30, 2022.
+Added: These operational deficiencies related to the Company’s reviews and approvals of requests for funding disbursements by the Company for tenant improvements at the Company’s properties previously leased to Kings Garden.
+Added: As a result of the material weakness, the Company’s management, under the supervision of the Audit Committee of the Board of Directors and with participation of the Company’s Chief Executive Officer and Chief Financial Officer, concluded that the Company’s internal control over financial reporting was not effective as of September 30, 2022.
+Added: Although we are working to remedy the ineffectiveness of the Company’s internal control over financial reporting, there can be no assurance as to when the remediation plan will be fully developed and implemented.
+Added: Until our remediation plan is fully implemented, our management will continue to devote significant time, attention and financial resources to these efforts.
+Added: If we do not complete our remediation in a timely fashion, or at all, or if our remediation plan is inadequate, there will continue to be an increased risk that our future consolidated financial statements could contain errors that will be undetected.
+Added: Further and continued determinations that there are one or more material weaknesses in the effectiveness of the Company’s internal control over financial reporting could also reduce our ability to obtain financing or could increase the cost of any financing we obtain and require additional expenditures of both money and our management’s time to comply with applicable requirements.
+Added: For more information relating to the Company’s internal control over financial reporting, the material weakness that existed as of September 30, 2022 and the remediation activities undertaken by us, see Part I, Item 4, “Controls and Procedures” of this Quarterly Report on Form 10-Q.
Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.