Annual report pursuant to Section 13 and 15(d)

Income Taxes

v3.23.1
Income Taxes
 12 Months Ended
Dec. 31, 2022
Income Tax Disclosure [Abstract]  
Income Taxes
Note 16 - Income Taxes
Income tax expense (recoveries) for the years ended December 31, 2022 and 2021 consisted of the following:
 
 
  
2022
 
  
2021
 
Current income tax expense
  
 
 
  
(Revised)
 
Federal
   
$
 
16,035
      $ 21,288  
State
     
2,438
        5,071  
    
 
 
     
 
 
  
Total current income tax expense
     
18,473
        26,359  
    
 
 
     
 
 
  
Deferred income tax recoveries
                  
Federal
     
(7,360
 )
 		      (3,919 ) 
State
       
(422
 )

      (704 ) 
 
 
 
 
 
 
 
 
 
Total deferred income tax recoveries
     
(7,782
 )      (4,623 ) 
    
 
 
     
 
 
  
Net income tax expense
   
$
10,691
 
   
$
21,736
 
    
 
 
     
 
 
  
Total income tax expense differed from the amount computed by applying the federal statutory tax rate of 21.0% for the years ended December 31, 2022 and 2021 due to the following:
 
 
  
2022
 
  
2021
 
 
  
 
 
  
(Revised)
 
Pretax loss at federal statutory rate
   
$
(92,128

 )

    $ (11,709 ) 
State income tax expense, net of federal expense
     
(512
 )

      (1,580 ) 
Non-deductible
items
     
109,980
        18,573  
True-up of income taxes payable

     
(398
 )
 		      1,257
Foreign deferred taxes with no benefit recognized
     
(24,663
 )      (1,553 )
Other items
     
(31
 )
      (123 ) 
Change in valuation allowance
     
18,443
        16,871  
    
 
 
     
 
 
  
Total income tax expense
   
$
10,691
     
$
21,736
 
    
 
 
     
 
 
  
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and liabilities as of December 31, 2022 and 2021 are presented below:
 
 
  
2022
 
  
2021
 
Deferred income tax assets
  
  
Net operating loss carryforwards
    $
45,761
      $ 37,896  
Interest expense carryforwards
     
32,440
        29,038  
Stock based compensation
     
14,927
        9,082  
Intangible assets
     
3,901
        4,396  
Property, plant and equipment
     
4,898
        3,652  
Inventories
     
309
        670  
Other items
     
597
        772  
    
 
 
     
 
 
  
       102,833     
 
85,506
 
    
 
 
     
 
 
  
Valuation allowance
     
(98,519
 )
      (80,070 ) 
    
 
 
     
 
 
  
Deferred income tax assets
   
 
4,314
 
   
 
5,436
 
    
 
 
     
 
 
  
Deferred income tax liabilities
                  
Intangibles resulting from acquisitions
     
(28,129
 )

      (32,943 ) 
    
 
 
     
 
 
  
Deferred income tax liabilities
   
 
(28,129
 )   
 
(32,943
) 
    
 
 
     
 
 
  
Net deferred income tax liabilities
   
$
(23,815
)
 
   
$
(27,507
) 
    
 
 
     
 
 
  
The Company is subject to taxation in Canada and the United States. As the Company operates in state-level legal cannabis industry within the United States, the Company is subject to the limits of Internal Revenue Code (“IRC”) Section 280E under which the Company is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed
non-allowable
under IRC Section 280E and a higher effective tax rate than most industries.
As of December 31, 2022, the Company has Canadian
non-capital
loss carryforwards of $119.5 million available to offset future income which will expire in the years 2025 through 2042. As of December 31, 2022, the Company has federal net operating loss carryforwards o
f
approximately $145.3 million available to offset future income of which $10.8 million will expire in the years 2035 through 2037 while the remaining $134.6 million are indefinite lived. Of the $145.3 million of federal net operating loss carryforwards, approximately 
all amounts
 
are subject to IRC Section 382 limitations. Additionally, the Company has net operating loss carryforwards for state purposes aggregating $135.4 million as of December 31, 2022,
 of
 which
$133.4
 million will expire in the yea
r 2035 through
2042
while the remaining
 
$2.0 
million
have indefinite lives. Of the $133.4 million of state net operating loss carryforwards, approximately all amounts
are subject to IRC Section 382 limitations. The increase in the valuation allowance was primarily due to management’s conclusion that the deferred tax assets of non-cultivator entities are more likely than not to not be realized
as well as recording of a valuation allowance against certain net operating losses and
Section 163(j)
 
carryforwards on entities impacted by the Recapitalization Transaction which closed June 24, 2022 for which no previous valuation allowance was recorded
.
 
In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards (“NOLs”) to offset future taxable income. Similarly, where control of a corporation has been acquired by a person or group of persons, subsection 111(5) of the Income Tax Act (Canada), and equivalent provincial income tax legislation restrict the corporation’s ability to carry forward non-capital losses from preceding taxation years. The Company
concluded that
the Recapitalization Transaction which closed on June 24, 2022
did
not
qualify as an acquisition of control
for
Canadian tax purposes; therefore, the Company’s existing Canadian non-capital losses are unlimited and continue to have a full valuation allowance set against its deferred tax assets. The U.S. NOLs will be subject to a
substantial annual
limitation arising from the Company’s ownership changes.
As a result
,
a full valuation allowance has been recorded by the Company on these deferred tax assets as well as any
Section 163(j) interest limitation deduction carryforwards. The Section 382 limitation is increased by recognized built-in gain (“RBIG”) in the five year period following the change date to the extent that the value of the loss corporation’s assets exceed the tax basis of these assets. Under the Section 338 approach, assets are treated as generating RBIG even if these assets are not disposed of during the five year recognition period. The Company is in the process of reviewing the tax basis of their fixed assets so it can compare it to the deemed selling price under Section 382 of the code. The Company is expecting that this calculation may result in a RBIG that would increase the Section 382 limitation available over the next five years.
The Company files income tax returns in Canada, Luxembourg, United States and various state and local tax jurisdictions. The Company’s income tax years open to examination for Canadian federal income taxes are from 2013 through 2020, for United States federal income taxes are from 2019 through 2021, and for state and local income taxes vary from 2019 to 2021. There are no open audits. Net operating losses arising prior to these years are also open to examination if and when utilized. 
The Company is in active collection procedures with the Internal Revenue Services and is negotiating payment agreements with the support of an external advisor.

The Internal Revenue Service filed Notices of Federal Tax Lien against GHHIA Management Inc. (“GHHIA
”),
Mayflower Medicinals Inc. (“Mayflower
”), and ABACA, Inc. (“ABACA”) for $8.5 million, $1.0 million
and
$1.1 million
for
the
year ended December
31, 2020
; respectively. The Internal Revenue Service filed Notice of Federal Tax Lien against ABACA on December 2, 2022, in the amount of $1.1 million
for
the year
ended December
31,
2021
. The Company is actively working to resolve these matters with the Internal Revenue Service.