| | |
| ACREAGE HOLDINGS, INC. |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
| | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| (in thousands) | 2022 | | 2021 | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net loss | $ | (13,911) | | | $ | (8,642) | | | |
| Adjustments for: | | | | | |
| Depreciation and amortization | 1,807 | | | 969 | | | |
| Depreciation and amortization included in COGS | 1,084 | | | 552 | | | |
| Equity-based compensation expense | 4,159 | | | 6,042 | | | |
| | | | | |
| | | | | |
| Loss on disposal of capital assets | 49 | | | 1,592 | | | |
| Loss on impairment | 2,138 | | | 818 | | | |
| | | | | |
| Bad debt expense | (96) | | | — | | | |
| Non-cash interest expense | 644 | | | 1,119 | | | |
| Non-cash operating lease expense | (9) | | | (391) | | | |
| Deferred tax (income) expense | (279) | | | (400) | | | |
| Non-cash income from investments, net | (788) | | | (157) | | | |
| Other non-cash (income) expense, net | — | | | (2,500) | | | |
| (Recovery) write-down of assets held-for-sale | 874 | | | (8,616) | | | |
| | | | | |
| Change, net of acquisitions in: | | | | | |
| Inventory | (7,002) | | | (1,736) | | | |
| Other assets | (62) | | | (1,289) | | | |
| Interest receivable | (417) | | | 292 | | | |
| Accounts payable and accrued liabilities | (1,856) | | | (1,328) | | | |
| Taxes payable | 6,071 | | | 4,618 | | | |
| Interest payable | 1,130 | | | 2,184 | | | |
| Other liabilities | 1,101 | | | 5,284 | | | |
| Net cash used in operating activities | $ | (5,363) | | | $ | (1,589) | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Purchases of capital assets | $ | (8,290) | | | $ | (5,421) | | | |
| Investments in notes receivable | — | | | (1,229) | | | |
| Collection of notes receivable | 5,279 | | | 86 | | | |
| Cash paid for long-term investments | — | | | 302 | | | |
| | | | | |
| | | | | |
| Proceeds from sale of capital assets | — | | | 5 | | | |
| Business acquisitions, net of cash acquired | — | | | (286) | | | |
| | | | | |
| | | | | |
| Distributions from investments | 345 | | | 13 | | | |
| | | | | |
| | | | | |
| | | | | |
| Cash paid for short-term investment | (3,400) | | | — | | | |
| Net cash used in investing activities | $ | (6,066) | | | $ | (6,530) | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| | | | | |
| | | | | |
| Proceeds from financing (refer to Note 14 for related party financing) | — | | | 1,190 | | | |
| Deferred financing costs paid | (11) | | | — | | | |
| Proceeds from issuance of private placement units and warrants, net | — | | | 301 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Repayment of debt | — | | | (2,070) | | | |
| | | | | |
| | | | | |
| Net cash used in financing activities | $ | (11) | | | $ | (579) | | | |
| Net decrease in cash, cash equivalents, restricted cash, and cash held for sale | $ | (11,440) | | | $ | (8,698) | | | |
| Cash, cash equivalents, restricted cash, and cash held for sale - Beginning of period | 44,501 | | | 54,639 | | | |
| Cash, cash equivalents, restricted cash, and cash held for sale - End of period | $ | 33,061 | | | $ | 45,941 | | | |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-5
| | |
| ACREAGE HOLDINGS, INC. |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
| | | | | | | | | | | | | |
| | | | | |
| RECONCILIATION OF CASH FLOW INFORMATION: | | | | | |
| Cash and cash equivalents | $ | 32,619 | | | $ | 22,844 | | | |
| Restricted cash | 95 | | | 23,097 | | | |
| Cash held for sale | $ | 347 | | | $ | — | | | |
| Total cash, cash equivalents, restricted cash, and cash held for sale at end of period | $ | 33,061 | | | $ | 45,941 | | | |
| | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| (in thousands) | 2022 | | 2021 | | |
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | | | |
| Interest paid - non-lease | $ | 2,446 | | | $ | 1,555 | | | |
| Income taxes paid | 2,065 | | | 1,044 | | | |
| OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | |
| Capital assets not yet paid for | $ | 3,631 | | | $ | 1,805 | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Non-cash proceeds from finance lease | 5,785 | | | — | | | |
| | | | | |
| | | | | |
| | | | | |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-6
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
1. NATURE OF OPERATIONS
Acreage Holdings, Inc. (the “Company”, “Pubco” or “Acreage”) is a vertically integrated, multi-state operator in the United States (“U.S.”) cannabis industry and has contractual relationships with cannabis cultivation facilities, dispensaries and other cannabis-related companies in the U.S. The Company’s operations include (i) cultivating and processing cannabis plants, (ii) manufacturing branded consumer products, (iii) distributing cannabis flower and manufactured products, and (iv) retailing dosable cannabis products to consumers. The Company’s products appeal to medical and adult recreational use customers through brand strategies intended to build trust and loyalty. The Company’s Class E subordinate voting shares (“Fixed Shares”) and Class D subordinate voting shares (“Floating Shares”) are listed on the Canadian Securities Exchange under the symbols “ACRG.A.U” and “ACRG.B.U”, respectively, quoted on the OTCQX under the symbols “ACRHF” and “ACRDF”, respectively, and traded on the Frankfurt Stock Exchange under the symbols “0VZ1” and “0VZ2”, respectively.
High Street Capital Partners, LLC, a Delaware limited liability company doing business as “Acreage Holdings” (“HSCP”), was formed on April 29, 2014. The Company became the indirect parent of HSCP on November 14, 2018 in connection with the reverse takeover (“RTO”) transaction described below.
The Company’s principal place of business is located at 450 Lexington Avenue, #3308, New York, New York in the U.S. The Company’s registered and records office address is Suite 2800, Park Place, 666 Burrard Street, Vancouver, British Columbia in Canada.
The RTO transaction
On September 21, 2018, the Company, HSCP, HSCP Merger Corp. (a wholly-owned subsidiary of the Company), Acreage Finco B.C. Ltd. (a special purpose corporation) (“Finco”), Acreage Holdings America, Inc. (“USCo”) and Acreage Holdings WC, Inc. (“USCo2”) entered into a business combination agreement (the “Business Combination Agreement”) whereby the parties thereto agreed to combine their respective businesses, which would result in the RTO of Pubco by the security holders of HSCP, which was deemed to be the accounting acquiror. On November 14, 2018, the parties to the Business Combination Agreement completed the RTO.
Canopy Growth Corporation transaction
On June 27, 2019, the Company and Canopy Growth Corporation (“Canopy Growth” or “CGC”) implemented the Prior Plan of Arrangement (as defined in Note 13) contemplated by the Original Arrangement Agreement (as defined in Note 13). Pursuant to the Prior Plan of Arrangement, Canopy Growth was granted an option to acquire all of the issued and outstanding shares of the Company in exchange for the payment of 0.5818 of a common share in the capital of Canopy Growth for each Class A subordinate voting share (each, a “SVS”) held (with the Class B proportionate voting shares (the “PVS”) and Class C multiple voting shares (the “MVS”) being automatically converted to SVS immediately prior to consummation of the Acquisition (as defined in Note 13), which original exchange ratio was subject to adjustment in accordance with the Original Arrangement Agreement. Canopy Growth was required to exercise the option upon a change in federal laws in the United States to permit the general cultivation, distribution and possession of marijuana (as defined in the relevant legislation) or to remove the regulation of such activities from the federal laws of the United States (the “Triggering Event”) and, subject to the satisfaction or waiver of certain closing conditions set out in the Original Arrangement Agreement, Canopy Growth was required to acquire all of the issued and outstanding SVS (following the mandatory conversion of the PVS and MVS into SVS).
On June 24, 2020, Canopy Growth and the Company entered into an agreement to, among other things, amend the terms of the Original Arrangement Agreement and the terms of the Prior Plan of Arrangement (the “Amended Arrangement”). On September 16, 2020, the Company’s shareholders voted in favor of a special resolution authorizing and approving the terms of, among other things, the Amended Arrangement. Subsequently, on September 18, 2020, the Company obtained a final order from the Supreme Court of British Columbia approving the Amended Arrangement, and on September 23, 2020 the Company and Canopy Growth entered into the Amending Agreement (as defined in Note 13) and implemented the Amended Arrangement. Pursuant to the Amended Arrangement, the Company’s articles were amended to create the Fixed Shares, the Floating Shares and the Class F multiple voting shares (the “Fixed Multiple Shares”), and each outstanding SVS was exchanged for 0.7 of a Fixed Share and 0.3 of a Floating Share, each outstanding PVS was exchanged for 28 Fixed Shares and 12 Floating Shares; and each outstanding MVS was exchanged for 0.7 of a Fixed Multiple Share and 0.3 of a Floating Share. Refer to Note 13 for further discussion.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
Pursuant to the implementation of the Amended Agreement, on September 23, 2020, a subsidiary of Canopy Growth advanced gross proceeds of $50,000 to Universal Hemp, LLC, an affiliate of the Company. The debenture bears interest at a rate of 6.1% per annum. Refer to Note 10 for further discussion.
COVID-19
In December 2019, a novel strain of coronavirus (“COVID-19”) emerged in Wuhan, China. Since then, it has spread to other countries and infections have been reported around the world. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic.
In response to the outbreak, governmental authorities in the United States, Canada and internationally have introduced various recommendations and measures to try to limit the pandemic, including travel restrictions, border closures, non-essential business closures, quarantines, self-isolations, shelters-in-place and social distancing. The COVID-19 outbreak and the response of governmental authorities to try to limit it are having a significant impact on the private sector and individuals, including unprecedented business, employment and economic disruptions. Management has been closely monitoring the impact of COVID-19, with a focus on the health and safety of the Company’s employees, business continuity and supporting the communities where the Company operates. The company has implemented various measures to reduce the spread of the virus, including implementing social distancing measures at its cultivation facilities, manufacturing facilities, and dispensaries, enhancing cleaning protocols at such facilities and dispensaries and encouraging employees to adhere to preventative measures recommended by local, state, and federal health officials.
Despite some impact to our day-to-day operations at select locations from time-to-time, COVID-19 has had a minimal impact overall on the Company’s performance.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and going concern
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022, or any other period.
As reflected in the unaudited condensed consolidated financial statements, the Company had an accumulated deficit as of March 31, 2022, as well as a net loss and negative cash flow from operating activities for the three months ended March 31, 2022. These factors raise substantial doubt about the Company’s ability to continue as a going concern for at least one year from the issuance of these financial statements.
However, management believes that substantial doubt about the Company’s ability to meet its obligations for the next twelve months from the date these financial statements were issued has been alleviated due to, but not limited to, (i) access to future capital commitments, (ii) continued sales growth from the Company’s consolidated operations, (iii) latitude as to the timing and amount of certain operating expenses as well as capital expenditures, (iv) restructuring plans that have already been put in place to improve the Company’s profitability, (v) the AFC-VRT credit facilities (refer to Note 10 for further discussion), and (vi) the anticipated Non-Core Divestitures (refer to Note 3 for further discussion), as well as access to the U.S. public equity markets.
If the Company is unable to raise additional capital whenever necessary, it may be forced to decelerate or curtail its footprint build-out or other operational activities until such time as additional capital becomes available. Such limitation of the Company’s activities would allow it to slow its rate of spending and extend its use of cash until additional capital is raised. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. Management also cannot provide any assurance as to unforeseen circumstances that could occur at any time within the next twelve months or thereafter which could increase the Company’s need to raise additional capital on an immediate basis.
These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
year ended December 31, 2021, dated March 11, 2022, as filed with the Securities and Exchange Commission (the “2021 Form 10-K”).
Use of estimates
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates presented and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Significant estimates inherent in the preparation of the accompanying unaudited condensed consolidated financial statements include the fair value of assets acquired and liabilities assumed in business combinations, assumptions relating to equity-based compensation expense, estimated useful lives for property, plant and equipment and intangible assets, the valuation allowance against deferred tax assets and the assessment of potential charges on goodwill, intangible assets and investments in equity and notes receivable.
Emerging growth company
The Company is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.
Functional and presentation currency
The unaudited condensed consolidated financial statements and the accompanying notes are expressed in U.S. dollars. Financial metrics are presented in thousands. Other metrics, such as shares outstanding, are presented in thousands unless otherwise noted.
Basis of consolidation
The Company’s unaudited condensed consolidated financial statements include the accounts of Acreage, its subsidiaries and variable interest entities (“VIEs”) where the Company is considered the primary beneficiary, if any, after elimination of intercompany accounts and transactions. Investments in business entities in which Acreage lacks control but is able to exercise significant influence over operating and financial policies are accounted for using the equity method. The Company’s proportionate share of net income or loss of the entity is recorded in Income (loss) from investments, net in the Unaudited Condensed Consolidated Statements of Operations.
VIEs
In determining whether the Company is the primary beneficiary of a VIE, the Company assesses whether it has the power to direct matters that most significantly impact the activities of the VIE and have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. There were no material consolidated VIEs as of March 31, 2022 or December 31, 2021.
Non-controlling interests (“NCI”)
Non-controlling interests represent ownership interests in consolidated subsidiaries by parties that are not shareholders of Pubco. They are shown as a component of Total equity in the Unaudited Condensed Consolidated Statements of Financial Position, and the share of loss attributable to non-controlling interests is shown as a component of Net loss in the Unaudited Condensed Consolidated Statements of Operations. Changes in the parent company’s ownership that do not result in a loss of control are accounted for as equity transactions.
Restricted cash
Restricted cash represents funds contractually held for specific purposes and, as such, not available for general corporate purposes.
Cash and restricted cash, as presented on the Unaudited Condensed Consolidated Statements of Cash Flows, consists of $32,619 and $95 as of March 31, 2022, respectively, and $22,844 and $23,097 as of March 31, 2021, respectively.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
Accounts receivable valuations and reclassifications
Accounts receivable are stated at their net realizable value. The allowance against gross trade receivables reflects the best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information. As of March 31, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts was $350 and $445, respectively.
Net loss per share
Net loss per share represents the net loss attributable to shareholders divided by the weighted average number of shares outstanding during the period on an as converted basis. Basic and diluted loss per share are the same as of March 31, 2022, 2021 and 2020, as the issuance of shares upon conversion, exercise or vesting of outstanding units would be anti-dilutive in each period. There were 39,522 and 44,466 anti-dilutive shares outstanding as of March 31, 2022 and 2021, respectively.
Accounting Pronouncements Recently Adopted
As of January 1, 2022, the Company adopted ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 attempts to simplify aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The adoption of ASU 2019-12 did not have a material effect on the Company’s unaudited condensed consolidated financial statements.
As of January 1, 2022, the Company adopted ASU 2020-01 - Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The adoption of ASU 2020-01 did not have a material effect on the Company’s unaudited condensed consolidated financial statements.
As of January 1, 2022, the Company adopted ASU 2021-04 - Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Topic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which clarifies existing guidance for freestanding written call options which are equity classified and remain so after they are modified or exchanged in order to reduce diversity in practice. The standard applies prospectively to modifications or exchanges that occur after it is adopted. The adoption of ASU 2021-04 did not have a material effect on the Company’s unaudited condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which was subsequently revised by ASU 2018-19 and ASU 2020-02. The ASU introduces a new model for assessing impairment on most financial assets. Entities will be required to use a forward-looking expected loss model, which will replace the current incurred loss model, which will result in earlier recognition of allowance for losses. The ASU will be effective for the Company’s first interim period of fiscal 2023. The Company continues to evaluate the impact of this ASU on its unaudited condensed consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08 - Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new standard improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency. The new standard requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606 - Revenue from Contracts with Customers. The ASU will be effective for the Company’s first interim period of fiscal 2024. The standard should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company does not anticipate a material impact on the Company’s unaudited condensed consolidated financial statements upon adoption.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
3. ACQUISITIONS, DIVESTITURES AND ASSETS HELD FOR SALE
Acquisitions
During the three month period ended March 31, 2022, the Company did not complete any business combinations. During the year ended December 31, 2021, the Company completed the following business combinations, and has allocated the purchase price as follows:
| | | | | | | | | | | | | | | | | | | | |
| Purchase Price Allocation | | CWG | | Greenleaf | | Total |
| Assets acquired: | | | | | | |
| Cash and cash equivalents | | $ | 828 | | | $ | 1,209 | | | $ | 2,037 | |
| Inventory | | 1,200 | | | 2,692 | | | 3,892 | |
| Other current assets | | 347 | | | 1,520 | | | 1,867 | |
| | | | | | |
| Capital assets, net | | 3,312 | | | 22,923 | | | 26,235 | |
| Operating lease right-of-use asset | | 1,584 | | | 2,819 | | | 4,403 | |
| Goodwill | | 1,482 | | | 18,619 | | | 20,101 | |
| Intangible assets, net - cannabis licenses | | 3,200 | | | — | | | 3,200 | |
| Intangible assets, net - customer relationships | | 1,000 | | | — | | | 1,000 | |
| | | | | | |
| Other non-current assets | | 40 | | | 189 | | | 229 | |
| Liabilities assumed: | | | | | | |
| Accounts payable and accrued liabilities | | (464) | | | (1,829) | | | (2,293) | |
| | | | | | |
| Taxes payable | | (68) | | | (33) | | | (101) | |
| Operating lease liability, current | | (193) | | | (315) | | | (508) | |
| | | | | | |
| Other current liabilities | | 3 | | | (294) | | | (291) | |
| | | | | | |
| | | | | | |
| Operating lease liability, non-current | | (1,391) | | | (2,504) | | | (3,895) | |
| Fair value of net assets acquired | | $ | 10,880 | | | $ | 44,996 | | | $ | 55,876 | |
| | | | | | |
| Consideration paid: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Settlement of pre-existing relationship | | 10,880 | | | 44,996 | | | $ | 55,876 | |
| | | | | | |
| Total consideration | | $ | 10,880 | | | $ | 44,996 | | | $ | 55,876 | |
| | | | | | |
| | | | | | |
CWG
On April 30, 2021, a subsidiary of the Company acquired 100% of CWG Botanicals, Inc. (“CWG”), an adult-use cannabis cultivation and processing operations in the state of California. The completion of this acquisition expanded the Company’s footprint in California.
The consideration paid for CWG consisted of the settlement of a pre-existing relationship, which included a line of credit of $9,321 and the related interest receivable of $1,559, which were both previously recorded in Notes receivable, non-current on the Statements of Financial Position.
The purchase price allocation is based upon final valuations within the measurement period (generally one year from the acquisition date).
Greenleaf
On October 1, 2021, a subsidiary of the Company acquired of 100% of Greenleaf Apothecaries (“GLA”), Greenleaf Gardens (“GLG”), and Greenleaf Therapeutics (“GLT”), collectively known as “Greenleaf.” Greenleaf consists of cannabis cultivation, processing, and dispensary operations in the state of Ohio. The completion of this acquisition established Acreage’s footprint in the Ohio cannabis market.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
On July 2, 2018, the Company entered into purchase agreements for Greenleaf for the total purchase price of approximately $8,245 in cash, $6,096 in seller notes payable and 1.2 million shares of HSCP with an average fair value of $7.73 per share, which are convertible into shares of the Company. In addition, the Company extended a $31,200 line of credit and issued $12,500 in promissory notes to the Greenleaf entities. The consideration paid was made in exchange for: (a) the rights to acquire the Greenleaf entities upon state regulatory approval and; (b) master services agreements (“MSAs”) to operate the entities until such approval was granted and ownership interests were transferred. The purchase consideration paid represents the fair value of the intangible asset related to the MSA that was recorded on the Company’s Statement of Financial Position at the time of the transaction. The intangible asset was amortized over the life of the MSAs.
Upon closing, the Company repaid the remaining $3,300 worth of sellers notes payable and accrued interest and assumed $42,043 in notes and interest receivable owed to the Company by Greenleaf that was eliminated upon consolidation. Total consideration for the asset transfer transaction was $44,996, representing the sum of the $2,953 carrying value of intangible assets from the 2018 transaction and the liabilities assumed. As the Company owns 100% of Greenleaf, the subsidiary is accounted for on a consolidated basis as of the closing date.
The purchase price allocation is based upon preliminary valuations and estimates and assumptions which are subject to change within the measurement period, generally one year from the acquisition date. The primary areas of the purchase price allocation that are not yet finalized relate to the valuation of the tangible and intangible assets acquired and the residual goodwill resulting from the transaction.
NCCRE
On March 19, 2021, a subsidiary of the Company, HSC Solutions, LLC (“HSC Solutions”) entered into an assignment of membership agreement to acquire the remaining non-controlling interests of its subsidiary, NCC Real Estate, LLC (“NCCRE”), based primarily on the fair value of property held by NCCRE estimated in the amount of $850. The consideration paid to the non-controlling interest sellers of $286 was recorded in Additional paid-in capital and Non-controlling interests on the Statements of Financial Position. Additionally, the Company subsequently repaid the outstanding principal balance of the NCCRE secured loan.
Divestitures
During the three months ended March 31, 2022 and 2021, the Company did not complete any divestitures.
Assets Held for Sale
The Company determined certain businesses and assets met the held-for-sale criteria. Upon classification of the disposal groups as held for sale, the Company tested each disposal group for impairment and recognized charges (recovery) of $874 for the three months ended March 31, 2022 related to the Oregon disposal group and $(8,616) for the three months ended March 31, 2021 related to the Acreage Florida disposal group within Write down (recovery) of assets held-for-sale on the Unaudited Condensed Consolidated Statements of Operations. Additionally, all assets and liabilities determined within these disposal groups were transferred into Assets held-for-sale and Liabilities related to assets held for sale on the Unaudited Condensed Consolidated Statements of Financial Position as of March 31, 2022 and December 31, 2021. Furthermore, the Company was unsuccessful in finding a satisfactory buyer for all of its Michigan locations. As a result, the assets remaining in Michigan no longer meet the criteria for being classified as held-for sale and have been impaired (refer to Note 7 for further discussion).
The tables below present the preliminary fair values of the assets and liabilities classified as held for sale on the Unaudited Condensed Consolidated Statements of Financial Position for the years ended March 31, 2022 and December 31, 2021, respectively, and are subject to change based on developments during the sales process.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
| | | | | | | | | | | | |
| | | | March 31, 2022 | | |
| | | | Oregon(1) | | |
| Cash | | | | $ | 347 | | | |
| Accounts receivable, net | | | | 140 | | | |
| Inventory | | | | 309 | | | |
| | | | | | |
| Other current assets | | | | 4 | | | |
| Total current assets classified as held-for-sale | | | | 800 | | | |
| Capital assets, net | | | | 1,673 | | | |
| Operating lease right-of-use assets | | | | 1,556 | | | |
| | | | | | |
| Goodwill | | | | 2,191 | | | |
| Non-current assets | | | | 91 | | | |
| Total assets classified as held for sale | | | | $ | 6,311 | | | |
| | | | | | |
| Accounts payable and accrued liabilities | | | | $ | (564) | | | |
| | | | | | |
| Operating lease liability, current | | | | (434) | | | |
| | | | | | |
| Total current liabilities classified as held-for-sale | | | | (998) | | | |
| | | | | | |
| Operating lease liability, non-current | | | | (671) | | | |
| | | | | | |
| Total liabilities classified as held-for-sale | | | | $ | (1,669) | | | |
(1) In February 2021, a subsidiary of the Company entered into a definitive agreement and management services agreement to sell an indoor cultivation facility in Medford, Oregon and a retail dispensary in Portland, Oregon, for total consideration of $3,000, to be paid in a series of tranches based on estimated regulatory approvals which are not expected to exceed 18 months. In March 2022, the total consideration was reduced to $2,000. Additionally, in September 2021, a subsidiary of the Company entered into a definitive agreement and management services agreements to sell, upon regulatory approval, four retail dispensaries in Oregon for total consideration of $6,500, consisting of a $250 cash payment at the time of signing and a 10-month secured promissory note.
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Michigan(1) | | Oregon | | Total |
| Cash | | $ | — | | | $ | 223 | | | $ | 223 | |
| Inventory | | — | | | 445 | | | 445 | |
| Notes receivable, current | | — | | | 31 | | | 31 | |
| Other current assets | | — | | | 9 | | | 9 | |
| Total current assets classified as held-for-sale | | — | | | 708 | | | 708 | |
| Capital assets, net | | 1,907 | | | 2,342 | | | 4,249 | |
| Operating lease right-of-use assets | | — | | | 1,695 | | | 1,695 | |
| | | | | | |
| Goodwill | | — | | | 2,191 | | | 2,191 | |
| Non-current assets | | — | | | 109 | | | 109 | |
| Total assets classified as held for sale | | $ | 1,907 | | | $ | 7,045 | | | $ | 8,952 | |
| | | | | | |
| Accounts payable and accrued liabilities | | $ | — | | | $ | (639) | | | $ | (639) | |
| | | | | | |
| Operating lease liability, current | | — | | | (441) | | | (441) | |
| | | | | | |
| Total current liabilities classified as held-for-sale | | — | | | (1,080) | | | (1,080) | |
| | | | | | |
| Operating lease liability, non-current | | — | | | (787) | | | (787) | |
| | | | | | |
| Total liabilities classified as held-for-sale | | $ | — | | | $ | (1,867) | | | $ | (1,867) | |
(1) As of December 31, 2021, the Company was unsuccessful in finding a satisfactory buyer for certain of its Michigan locations. As a result, the assets at these specific locations no longer meet the criteria for being classified as held-for-sale.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
4. INTANGIBLE ASSETS AND GOODWILL
Intangible assets
The following table details the intangible asset balances by major asset classes:
| | | | | | | | | | | | | | |
| Intangibles | | March 31, 2022 | | December 31, 2021 |
| Finite-lived intangible assets: | | | | |
| Management contracts | | $ | 1,808 | | | $ | 1,511 | |
| Customer relationships | | 1,000 | | | 1,000 | |
| | | | |
| | 2,808 | | | 2,511 | |
| Accumulated amortization on finite-lived intangible assets: | | | | |
| Management contracts | | (639) | | | (493) | |
| Customer relationships | | (550) | | | — | |
| | | | |
| | (1,189) | | | (493) | |
| Finite-lived intangible assets, net | | 1,619 | | | 2,018 | |
| | | | |
| Indefinite-lived intangible assets | | | | |
| Cannabis licenses | | 117,080 | | | 117,677 | |
| | | | |
| Total intangibles, net | | $ | 118,699 | | | $ | 119,695 | |
The intangible assets balance as of March 31, 2022 and December 31, 2021 excludes intangible assets reclassified to assets held-for-sale (refer to Note 3 for further discussion). The average useful life of finite-lived intangible assets ranges from 0.8 to 2.0 years, with 0.8 and 2.0 years being the average useful life for customer relationships and management contracts, respectively.
Impairment of intangible assets
The Company assessed whether any events or changes in circumstances ("triggering events") indicated finite-lived intangible assets to be held-and-used would not be recovered. During the three months ended March 31, 2022, the Company did not identify any triggering events. During the three months ended March 31, 2021, the Company identified a triggering event for its management contract owned by Prime Alternative Treatment Center Consulting, LLC ("PATCC"). The Company evaluated the recoverability of the asset by comparing the carrying value of the asset to the future net undiscounted cash flows expected to be generated by the asset. The carrying value was determined to not be recoverable and the Company proceeded to test the asset for impairment. The Company recognized an impairment charge of $818 due to changes in expected cash flows pursuant to a revised consulting services agreement. These charges are recognized in Impairments, net on the Unaudited Condensed Consolidated Statements of Operations.
The impairment resulted in the recognition of a tax provision benefit and an associated reversal of deferred tax liabilities of $205 during the three months ended March 31, 2021.
Amortization expense recorded during the three months ended March 31, 2022 and 2021 was $696 and $541, respectively.
Expected annual amortization expense for existing intangible assets subject to amortization at March 31, 2022 is as follows for each of the next five fiscal years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amortization of Intangibles | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 |
| Amortization expense | | $ | 889 | | | $ | 585 | | | $ | 145 | | | $ | — | | | $ | — | |
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
Goodwill
The following table details the changes in the carrying amount of goodwill:
| | | | | | | | |
| Goodwill | | Total |
| December 31, 2021 | | $ | 43,310 | |
| | |
| | |
Other Adjustments(1) | | 224 | |
| March 31, 2022 | | $ | 43,534 | |
(1) Represents adjustments related to the remeasurement of certain deferred tax assets and related adjustments within the measurement period.
5. INVESTMENTS
The carrying values of the Company’s investments in the Unaudited Condensed Consolidated Statements of Financial Position as of March 31, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | | | | |
| Investments | | March 31, 2022 | | December 31, 2021 |
| Total short-term investments | | $ | 3,401 | | | $ | — | |
| | | | |
| Investments held at FV-NI | | 36,014 | | | 35,226 | |
| | | | |
| Total long-term investments | | $ | 36,014 | | | $ | 35,226 | |
Income (loss) from investments, net in the Unaudited Condensed Consolidated Statements of Operations during the three months ended March 31, 2022 and 2021 is as follows:
| | | | | | | | | | | | | | | | |
| Investment income (loss) | | Three Months Ended March 31, |
| | 2022 | | 2021 | | |
| Short-term investments | | $ | 1 | | | $ | — | | | |
| | | | | | |
| Investments held at FV-NI | | 1,132 | | | (144) | | | |
| | | | | | |
| | | | | | |
| Income (loss) from investments, net | | $ | 1,133 | | | $ | (144) | | | |
Short-term investments
During the three months ended March 31, 2022, the Company made an investment in a Canadian guaranteed investment certificate (“GIC”) which bears an interest rate of 0.2% and has an original maturity of 1 year. GIC’s are a deposit investment generally sold by Canadian banks.
Investments held at FV-NI
The Company has investments in equity of several companies that do not result in significant influence or control. These investments are carried at fair value, with gains and losses recognized in the Unaudited Condensed Consolidated Statements of Operations.
As further described under the “6.10% Secured debenture due September 2030” in Note 10, on September 23, 2020, a subsidiary of the Company, Universal Hemp, LLC ("Universal Hemp") was advanced gross proceeds of $50,000 (less transaction costs) pursuant to the terms of a secured debenture. The Company subsequently engaged an investment advisor, which under the investment advisor's sole discretion, on September 28, 2020 invested $34,019 of these proceeds on behalf of Universal Hemp. As a result, Universal Hemp acquired 34,019 class B units, at $1 par value per unit, which represented 100% financial interest in an Investment Partnership, a Canada-based limited partnership. An affiliate of the Institutional Investor holds Class A units of the Investment Partnership. The general partner of the Investment Partnership is also an affiliate of the Institutional Investor. The Class B units are held by the Investment Advisor as an agent for Universal Hemp.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
Universal Hemp, through its investment with the Investment Advisor, was originally determined to hold significant influence in the Investment Partnership in accordance with ASC 810 due to (1) the economic financial interest, and (2) the entitlement to matters as they pertain to ‘Extraordinary Resolution’ items as defined within the Investment Partnership Agreement. As a result, the Company accounted for the investment in the Investment Partnership under the equity method until December 2020. Refer to Note 10 for further discussion. In December 2020, as the Company no longer held significant influence due to the removal of the Extraordinary Resolution entitlements and other revisions in the Investment Partnership Agreement. As a result, the Company changed its accounting for the Investment Partnership to recognize the investment at fair value, with gains and losses recognized in the Unaudited Condensed Consolidated Statements of Operations.
6. NOTES RECEIVABLE
Notes receivable as of March 31, 2022 and December 31, 2021 consisted of the following:
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| Promissory notes receivable | | $ | 27,262 | | | $ | 27,260 | |
| Line of credit receivable | | 7,551 | | 12,609 |
| Interest receivable | | 3,300 | | | 2,834 | |
| Allowance for notes and interest receivables | | (8,258) | | (8,036) |
| Total notes receivable | | $ | 29,855 | | | $ | 34,667 | |
| Less: Notes receivable, current | | 2,222 | | | 7,104 | |
| Notes receivable, non-current | | $ | 27,633 | | | $ | 27,563 | |
Interest income on notes receivable during the three months ended March 31, 2022 and 2021 totaled $417 and $1,465, respectively.
The Company determined that the collectability of certain notes receivables is doubtful based on information available. As of March 31, 2022 and December 31, 2021, the Company’s allowance for notes receivable of $8,258 and $8,036, respectively, included $6,046 of principal outstanding for both periods and $2,212 and $1,990 of accrued interest, respectively, and represents the full value of such loan balances.
Activity during the three months ended March 31, 2022
On February 10, 2022, the Company received a $5,279 cash payment in full on a line of credit due from Patient Centric Martha’s Vineyard (“PCMV”), and subsequently closed the line of credit.
Activity during the three months ended March 31, 2021
In March 2021, the Company entered into a revised consulting services and line of credit agreement with PATCC, whereby previously unrecognized management fees were settled for $2,500, which was recognized in Other revenue, net on Unaudited Condensed Consolidated Statements of Operations during the three months ended March 31, 2021. Pursuant to the revised line of credit agreement, the line of credit is non-interest bearing and will be repaid on a payment schedule with seven payments in the aggregate amount of $7,150 through June 2023.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
7. CAPITAL ASSETS, net
Net property, plant and equipment consisted of:
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| Land | | $ | 3,758 | | | $ | 3,777 | |
| Building | | 57,935 | | | 43,921 | |
| Right-of-use asset, finance leases | | 10,865 | | | 5,077 | |
| Construction in progress | | 17,866 | | | 7,644 | |
| Furniture, fixtures and equipment | | 31,590 | | | 31,325 | |
| Leasehold improvements | | 39,656 | | | 51,646 | |
| Capital assets, gross | | $ | 161,670 | | | $ | 143,390 | |
| Less: accumulated depreciation | | (19,602) | | | (16,593) | |
| Capital assets, net | | $ | 142,068 | | | $ | 126,797 | |
Depreciation of capital assets for the three months ended March 31, 2022 and 2021 is comprised of $1,111 and $428 of depreciation expense, and $1,922 and $911 that was capitalized to inventory, respectively.
During the three months ended March 31, 2022 the Company determined that it was unable to find a satisfactory buyer for the held-for-sale assets related to its Michigan operations and, as such, these assets were reclassified as held-and-used. This conclusion was considered a triggering event for capital asset impairment testing. Upon assessment, these specific capital assets were not considered to have future economic value. As such, the fair value of the assets was considered to be nil and the Company recognized an impairment charge of $1,907 within Impairments, net on the Statements of Operations during the three months ended March 31, 2022. Refer to Note 3 for further discussion on changes in held-for-sale entities.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
8. LEASES
The Company leases land, buildings, equipment and other capital assets which it plans to use for corporate purposes in addition to the production and sale of cannabis products. Leases with an initial term of 12 months or less are not recorded on the Unaudited Condensed Consolidated Statements of Financial Position and are expensed in the Unaudited Condensed Consolidated Statements of Operations on the straight-line basis over the lease term. The Company does not have any material variable lease payments, and accounts for non-lease components separately from leases.
| | | | | | | | | | | | | | | | | | | | | | |
| Balance Sheet Information | | Classification | | March 31, 2022 | | December 31, 2021 | | |
| Right-of-use assets | | | | | | | | |
| Operating | | Operating lease right-of-use assets | | $ | 24,571 | | | $ | 24,598 | | | |
| Finance | | Capital assets, net | | 10,246 | | | 4,522 | | | |
| Total right-of-use assets | | | | $ | 34,817 | | | $ | 29,120 | | | |
| | | | | | | | |
| Lease liabilities | | | | | | | | |
| Current | | | | | | | | |
| Operating | | Operating lease liability, current | | $ | 2,343 | | | $ | 2,145 | | | |
| Financing | | Debt, current | | 5,786 | | | — | | | |
| Non-current | | | | | | | | |
| Operating | | Operating lease liability, non-current | | 24,146 | | | 24,255 | | | |
| Financing | | Debt, non-current | | 5,257 | | | 5,245 | | | |
| Total lease liabilities | | | | $ | 37,532 | | | $ | 31,645 | | | |
| | | | | | | | |
| Statement of Operations Information | | Classification | | Three Months Ended March 31, 2022 | | Three Months Ended
March 31, 2021 | | |
| Short-term lease expense | | General and administrative | | $ | 48 | | | $ | 88 | | | |
| | | | | | | | |
| Operating lease expense | | General and administrative | | 1,248 | | | 1,046 | | | |
| Finance lease expense: | | | | | | | | |
| Amortization of right of use asset | | Depreciation and amortization | | 63 | | | 63 | | | |
| Interest expense on lease liabilities | | Interest expense | | 212 | | | 184 | | | |
| Sublease income | | Other income (loss), net | | — | | | (3) | | | |
| Net operating and finance lease cost | | | | $ | 1,523 | | | $ | 1,290 | | | |
| | | | | | | | |
| Statement of Cash Flows Information | | Classification | | Three Months Ended
March 31, 2022 | | Three Months Ended
March 31, 2021 | | |
| Cash paid for operating leases | | Net cash used in operating activities | | $ | 1,257 | | | $ | 1,437 | | | |
| Cash paid for finance leases - interest | | Net cash used in operating activities | | $ | 201 | | | $ | 169 | | | |
| | | | | | | | |
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
The following represents the Company’s future minimum payments required under existing leases with initial terms of one year or more as of March 31, 2022:
| | | | | | | | | | | | | | | | |
| Maturity of lease liabilities | | Operating Leases(1) | | Finance Leases | | |
| 2022 | | $ | 3,763 | | | $ | 6,500 | | | |
| 2023 | | 4,823 | | | 722 | | | |
| 2024 | | 4,537 | | | 743 | | | |
| 2025 | | 4,554 | | | 766 | | | |
| 2026 | | 4,453 | | | 789 | | | |
| Thereafter | | 20,470 | | | 12,486 | | | |
| Total lease payments | | $ | 42,600 | | | $ | 22,006 | | | |
| Less: interest | | 15,006 | | | 10,963 | | | |
| Present value of lease liabilities | | $ | 27,594 | | | $ | 11,043 | | | |
| | | | | | |
| Weighted average remaining lease term (years) | | 8 | | 2 | | |
| Weighted average discount rate | | 9% | | 10% | | |
(1) Includes minimum payments under existing operating leases currently classified as held-for-sale (refer to Note 3 for further discussion).
As of March 31, 2022, the Company entered into three lease agreements that have not yet commenced. The Company will determine the classifications at the respective commencement dates for the leases, but currently expect all of the leases to be classified as operating leases. The lease terms range from five to ten-year periods with initial payments ranging from $86 per year to $432 per year.
9. INVENTORY
The Company’s inventory balance consists of the following:
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| Retail inventory | | $ | 3,630 | | | $ | 3,331 | |
| Wholesale inventory | | 34,611 | | | 28,643 | |
| Cultivation inventory | | 6,988 | | | 6,367 | |
| Supplies & other | | 3,469 | | | 3,463 | |
| Total | | $ | 48,698 | | | $ | 41,804 | |
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
10. DEBT
The Company’s debt balances consist of the following:
| | | | | | | | | | | |
| Debt balances | March 31, 2022 | | December 31, 2021 |
| Financing liability (failed sale-leaseback) | $ | 15,253 | | | $ | 15,253 | |
| Finance lease liabilities | 11,043 | | | 5,245 | |
7.50% Loan due April 2026 | 30,893 | | | 30,763 | |
6.10% Secured debenture due September 2030 | 46,162 | | | 46,050 | |
| Note due December 2024 | 4,750 | | | 4,750 | |
9.75% Credit facilities due January 2026 | 68,551 | | | 68,673 | |
| Total debt | $ | 176,652 | | | $ | 170,734 | |
| Less: current portion of debt | 7,370 | | | 1,583 | |
| Total long-term debt | $ | 169,282 | | | $ | 169,151 | |
Scheduled maturities of debt, excluding amortization of discount and issuance costs, are as follows:
| | | | | | | | |
| 2022 | | $ | 7,321 | |
| 2023 | | 1,583 | |
| 2024 | | 1,584 | |
| 2025 | | — | |
| 2026 | | 108,011 | |
| Thereafter | | 70,547 | |
Total payments (excluding amortization of discount and issuance costs) | | $ | 189,046 | |
During the three months ended March 31, 2022 and 2021, the Company incurred interest expense of $4,781 and $4,857, respectively, on the Unaudited Condensed Consolidated Statements of Operations. Interest expense for the three months ended March 31, 2022 and 2021 included debt discount amortization of $373 and $260, respectively, and amortization of debt issuance costs of $266 and $852, respectively. As of March 31, 2022 and December 31, 2021, the Company had unamortized discount $5,821 and $6,320, respectively, and debt issuance costs of $6,573 and $6,194, respectively, which is netted against the gross carrying value of long-term debt in Debt, non-current on Unaudited Condensed Unaudited Condensed Consolidated Statements of Financial Position. Additionally, as of March 31, 2022 and December 31, 2021, the Company had accrued interest of $2,562 and $1,432, respectively, within Interest payable on the Unaudited Condensed Consolidated Statements of Financial Position.
Financing liability (failed sales leaseback)
In connection with the Company’s failed sale-leaseback transaction (refer to Note 7 for further discussion), a financing liability was recognized equal to the cash proceeds received. The Company will recognize the cash payments made on the lease as interest expense, and the principal will be de-recognized upon expiration of the lease.
6.10% Secured debenture due September 2030
On September 23, 2020, pursuant to the implementation of the Amended Arrangement (Refer to Note 13 for further discussion), a subsidiary of Canopy Growth advanced gross proceeds of $50,000 (less transaction costs of approximately $4,025) to Universal Hemp, an affiliate of the Company, pursuant to the terms of a secured debenture (“6.1% Loan”). In accordance with the terms of the debenture, the funds cannot be used, directly or indirectly, in connection with or for any cannabis or cannabis-related operations in the United States, unless and until such operations comply with all applicable laws of the United States. An additional $50,000 may be advanced pursuant to the debenture subject to the satisfaction of certain conditions by Universal Hemp. The debenture bears interest at a rate of 6.1% per annum, matures 10 years from the date hereof or such earlier date in accordance with the terms of the debenture and all interest payments made pursuant to the debenture are payable in cash by Universal Hemp. The debenture is not convertible and is not guaranteed by Acreage.
With a portion of the proceeds for the 6.1% Loan received by Universal Hemp, Acreage engaged an Investment Advisor which, under the Investment Advisor’s sole discretion, invested on behalf of Universal Hemp $34,019 on September 28, 2020. As a
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
result, Universal Hemp acquired 34,019 class B units, at $1.00 par value per unit, which represented 100% financial interest in the Investment Partnership, a Canada-based limited partnership. An affiliate of the Institutional Investor holds class A units of the Investment Partnership. The general partner of the Investment Partnership is also an affiliate of the Institutional Investor. The class B units are held by the Investment Advisor as an agent for Universal Hemp. Upon execution of the limited partnership agreement, $1,019 was distributed to the class A unit holders of the Investment Partnership.
7.50% Loan due April 2026
On September 28, 2020, the Company received gross proceeds of $33,000 (less transaction costs of approximately $959) from an affiliate of the Institutional Investor (the “Lender”) and used a portion of the proceeds of this loan to retire its short-term $11,000 convertible note (as described above) and its short-term note aggregating approximately $18,000 in October 2020, with the remainder being used for working capital purposes. The loan is unsecured, matures in 3 years and bears interest at a 7.5% annual interest rate. The Lender is controlled by the Institutional Investor. The Investment Partnership is the investor in the Lender. On December 16, 2021, the Company paid an amendment fee of $413 to extend the maturity date from September 28, 2023 to April 2, 2026. The amendment was treated as a debt extinguishment.
Note due December 2024
In November 2020, the Company issued a promissory note with a third party, which is non-interest bearing and payable based on a payment schedule with ten payments in the aggregate amount of $7,750 through December 31, 2024, as a result of a settlement described under the “CanWell Dispute” in Note 13.
9.75% Credit facilities due January 2026
On December 16, 2021 the Company entered into a $150,000 senior secured credit facility with a syndicate of lenders consisting of a $75,000 initial draw, a $25,000 delayed draw that must be advanced within 12 months and a $50,000 committed accordion facility that is available after December 1, 2022, provided certain financial covenants are met, and with a maturity of January 1, 2026. Upon closing, gross proceeds of $75,000 were drawn (before origination discounts and issuance costs of approximately $4,000 and $1,500, respectively, which were capitalized).
The loan is secured by pledged equity interests and substantially all of the assets of the Company. Advances under the facility bear interest at 9.75% per annum (plus an additional 1.0% per annum until certain collateral assignment agreements are delivered) and undrawn amounts (excluding the committed accordion facility until it is available) bear interest at 3.0% per annum.
The loan is subject to various financial covenants, including a fixed charge coverage ratio and two leverage ratios. The Company has obtained a waiver of these covenants for the three month periods ended March 31, 2022 and June 30, 2022. This waiver included a $500 waiver fee that was paid to the lenders.
Commencing with the receipt of the of the loan, mandatory prepayments are required from net proceeds of certain sale or disposition activities provided these proceeds are not invested in additional capital assets within 12 months of the disposition date, as defined by the Credit Agreement.
As of March 31, 2022, the $25,000 delayed draw was not drawn upon. Refer to Note 14 for further discussion of the syndicated related party lender.
11. SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTERESTS
The table below details the change in Pubco shares outstanding by class for the three months ended March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ Equity | | Fixed Shares | | Floating Shares | | Fixed Shares Held in Treasury | | Floating Shares Held in Treasury | | Fixed Multiple Shares | | Total Shares Outstanding |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| December 31, 2021 | | 74,665 | | | 32,962 | | | (589) | | | (253) | | | 118 | | | 106,903 | |
| Issuances | | 255 | | | 253 | | | — | | | — | | | — | | | 508 | |
| | | | | | | | | | | | |
| March 31, 2022 | | 74,920 | | | 33,215 | | | (589) | | | (253) | | | 118 | | | 107,411 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
Warrants
A summary of the warrants activity outstanding is as follows:
| | | | | | | | | | | | | | | | | | |
| Warrants | | Fixed Shares | | Floating Shares | | | | |
| December 31, 2021 | | 5,817 | | | 2,524 | | | | | |
| | | | | | | | |
| Expired | | — | | | — | | | | | |
| | | | | | | | |
| March 31, 2022 | | 5,817 | | | 2,524 | | | | | |
The exercise price of each Fixed and Floating Share warrant is $3.15 and $3.01, respectively. The warrants are exercisable for a period of 4 years. The weighted-average remaining contractual life of the warrants outstanding is approximately 2.9 years. There was no aggregate intrinsic value for warrants outstanding as of March 31, 2022.
Non-controlling interests - convertible units
The Company has NCIs in consolidated subsidiaries USCo2 and HSCP. The non-voting shares of USCo2 and HSCP units make up substantially all of the NCI balance as of March 31, 2022 and are convertible for either 0.7 of a Fixed Share and 0.3 of a Floating Share of Pubco or cash, as determined by the Company. Summarized financial information of HSCP is presented below. USCo2 does not have discrete financial information separate from HSCP.
| | | | | | | | | | | | | |
| HSCP net asset reconciliation | March 31, 2022 | | December 31, 2021 | | |
| Current assets | $ | 103,620 | | | $ | 113,011 | | | |
| Non-current assets | 391,449 | | | 375,807 | | | |
| Current liabilities | (38,437) | | | (29,256) | | | |
| Non-current liabilities | (195,686) | | | (195,791) | | | |
| Other NCI balances | (718) | | | (718) | | | |
| Accumulated equity-settled expenses | (230,756) | | | (226,596) | | | |
| Net assets | $ | 29,472 | | | $ | 36,457 | | | |
| HSCP/USCo2 ownership % of HSCP | 17.18 | % | | 17.24 | % | | |
| Net assets allocated to USCo2/HSCP | $ | 5,063 | | | $ | 6,285 | | | |
| Net assets attributable to other NCIs | 718 | | | 718 | | | |
| Total NCI | $ | 5,781 | | | $ | 7,003 | | | |
| | | | | |
| Three Months Ended March 31, |
| HSCP Summarized Statement of Operations | 2022 | | 2021 | | |
| Net loss allocable to HSCP/USCo2 | $ | (7,080) | | | $ | (4,549) | | | |
| HSCP/USCo2 weighted average ownership % of HSCP | 17.21 | % | | 18.40 | % | | |
| Net loss allocated to HSCP/USCo2 | $ | (1,218) | | | $ | (837) | | | |
| Net loss allocated to other NCIs | 1 | | | 4 | | | |
| Net loss attributable to NCIs | $ | (1,217) | | | $ | (833) | | | |
| | | | | |
|
As of March 31, 2022, USCo2’s non-voting shares owned approximately 0.51% of HSCP units. USCo2’s capital structure is comprised of voting shares (approximately 71.33%), all of which are held by the Company, and of non-voting shares (approximately 28.67%) held by certain former HSCP members. Certain executive employees and profits interests holders own approximately 16.67% of HSCP units. The remaining 82.82% interest in HSCP is held by USCo and represents the members’ equity attributable to shareholders of the parent.
During the three months ended March 31, 2021, the Company had several transactions with HSCP and USCo2 that changed its ownership interest in the subsidiaries but did not result in loss of control. These transactions included business acquisitions and the redemption of HSCP and USCo2 convertible units for Pubco shares (as shown in the table below), and resulted in a $(601) allocation from NCI to shareholders' equity for the three months ended March 31, 2021.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
A reconciliation of the beginning and ending amounts of convertible units is as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| Convertible Units | | 2022 | | 2021 |
| Beginning balance | | 23,076 | | | 24,142 | |
| | | | |
| Vested LLC C-1s canceled | | — | | | — | |
| LLC C-1s vested | | — | | | — | |
| | | | |
| NCI units converted to Pubco | | — | | | (400) | |
| Ending balance | | 23,076 | | | 23,742 | |
12. EQUITY-BASED COMPENSATION EXPENSE
Amended Arrangement with Canopy Growth
On September 23, 2020, the Company announced the implementation of the Amended Arrangement (as defined in Note 13). Pursuant to the Amended Arrangement, the Company’s articles have been amended to create new Fixed Shares, Floating Shares and Fixed Multiple Shares. Consequently, the Company’s equity-based compensation was modified into new equity awards of the Company. Refer to Note 13 for further discussion.
Equity-based compensation - Plan (Acreage Holdings, Inc. Omnibus Incentive Plan)
In connection with the RTO transaction, the Company’s Board of Directors adopted an Omnibus Incentive Plan, as amended September 23, 2020 (the “Plan”), which permits the issuance of stock options, stock appreciation rights, stock awards, share units, performance shares, performance units and other stock-based awards up to an amount equal to 15% of the issued and outstanding Subordinate Voting Shares of the Company.
Pursuant to the Amended Arrangement, the Company retained the Plan described above, the upper limit of issuances being up to an amount equal to 15% of the issued and outstanding Fixed Shares and Floating Shares of the Company. As of March 31, 2022, the Company had 11,595 shares authorized and available for grant under the Plan.
Restricted Share Units (“RSUs”)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fixed Shares | | Floating Shares |
Restricted Share Units (Fair value information expressed in whole dollars) | | RSUs | | Weighted Average Grand Date Fair Value | | RSUs | | Weighted Average Grand Date Fair Value |
| Unvested, January 1, 2022 | | 3,188 | | | $ | 7.30 | | | 1,262 | | | $ | 7.39 | |
| Granted | | 28 | | | $ | 1.35 | | | 95 | | | $ | 1.19 | |
| Forfeited | | (177) | | | $ | 2.55 | | | (21) | | | $ | 2.47 | |
| Vested | | (841) | | | $ | 8.81 | | | (395) | | | $ | 8.00 | |
Unvested, March 31, 2022 | | 2,198 | | | $ | 7.03 | | | 941 | | | $ | 6.62 | |
Vested and unreleased(1) | | 718 | | | $ | 10.70 | | | 310 | | | $ | 10.37 | |
Outstanding, March 31, 2022 | | 2,916 | | | $ | 7.94 | | | 1,251 | | | $ | 7.55 | |
(1) RSUs that are vested and unreleased represent RSUs that are pending delivery.
RSUs of the Company generally vest over a period of three years and RSUs granted to certain executives vest based on achievement of specific performance conditions. In certain situations for specified individuals, RSUs vest on an accelerated basis on separation. The fair value for RSUs is based on the Company’s share price on the date of the grant. The Company recorded $3,877 and $5,025 as Equity-based compensation expense on Unaudited Condensed Consolidated Statements of Operations during the three months ended March 31, 2022 and 2021, respectively. The fair value of RSUs vested during the three months ended March 31, 2022 and 2021 was $1,882 and $5,667, respectively.
The total weighted average remaining contractual life and aggregate intrinsic value of unvested RSUs as of March 31, 2022 was approximately 1 year and $4,897, respectively. Unrecognized compensation expense related to these awards at March 31, 2022 was $12,340 and is expected to be recognized over a weighted average period of approximately 1 year.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
Stock options
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fixed Shares | | Floating Shares |
Stock Options
(Exercise price expressed in whole dollars) | | Options | | Weighted Average Exercise Price | | Options | | Weighted Average Exercise Price |
| Options outstanding, January 1, 2022 | | 1,529 | | | $ | 11.07 | | | 2,414 | | | $ | 3.06 | |
| | | | | | | | |
| Forfeited | | (4) | | | $ | 13.14 | | | (1) | | | $ | 5.63 | |
| | | | | | | | |
| | | | | | | | |
Options outstanding, March 31, 2022 | | 1,525 | | | $ | 11.07 | | | 2,413 | | | $ | 3.06 | |
| | | | | | | | |
Options exercisable, March 31, 2022 | | 1,195 | | | $ | 13.06 | | | 1,894 | | | $ | 3.15 | |
Stock options of the Company generally vest over a period of three years and options granted to certain executives vest based on achievement of specific performance conditions. Stock options of the Company have an expiration period of 5 or 10 years from the date of grant. The weighted average contractual life remaining for Fixed Share options outstanding and exercisable as of March 31, 2022 was approximately 6 and 7 years, respectively. The weighted average contractual life remaining for Floating Share options outstanding and exercisable as of March 31, 2022 was approximately 5 and 5 years, respectively. The Company recorded $282 and $1,017 as Equity-based compensation expense on Unaudited Condensed Consolidated Statements of Operations during the three months ended March 31, 2022 and 2021, respectively, in connection with these awards.
As of March 31, 2022, unamortized expense related to stock options totaled $1,241 and is expected to be recognized over a weighted-average period of approximately 1 year. As of March 31, 2022, the aggregate intrinsic value for unvested options and for vested and exercisable options was nil, respectively.
13. COMMITMENTS AND CONTINGENCIES
Commitments
The Company provides revolving lines of credit to several third parties. As of March 31, 2022, the maximum obligation under these arrangements was $15,150 (refer to Note 6 for further discussion).
Prior Plan of Arrangement with Canopy Growth
On June 19, 2019, the shareholders of the Company and of Canopy Growth separately approved the proposed plan of arrangement (the “Prior Plan of Arrangement”) involving the two companies, and on June 21, 2019, the Supreme Court of British Columbia granted a final order approving the Prior Plan of Arrangement. Effective June 27, 2019, the articles of the Company were amended pursuant to the Prior Plan of Arrangement to provide that, upon the occurrence (or waiver by Canopy Growth) of the Triggering Event, and subject to the satisfaction of the conditions set out in the arrangement agreement entered into between Acreage and Canopy Growth on April 18, 2019, as amended on May 15, 2019 (the “Original Arrangement Agreement”), Canopy Growth will acquire (the “Acquisition”) all of the issued and outstanding shares in the capital of the Company (each, an “Acreage Share”).
Second Amendment to the Arrangement Agreement with Canopy Growth
On September 23, 2020, Acreage and Canopy Growth entered into an amending agreement (the “Amending Agreement” or “Amended Arrangement”) (and together with the Original Arrangement Agreement and any further amendments thereto, the “Amended Plan of Arrangement”) and the Amended Arrangement became effective at 12:01 a.m. (Vancouver time) (the “Amendment Time”) on September 23, 2020 (the “Amendment Date”). Pursuant to the Amended Plan of Arrangement, Canopy Growth made a cash payment of $37,500 which was delivered to Acreage’s shareholders and certain holders of securities convertible or exchangeable into shares of Acreage. Acreage also completed a capital reorganization (the “Capital Reorganization”) effective as of the Amendment Time whereby: (i) each existing SVS was exchanged for 0.7 of a Fixed Share and 0.3 of a Floating Share; (ii) each issued and outstanding PVS was exchanged for 28 Fixed Shares and 12 Floating Shares; and (iii) each issued and outstanding MVS was exchanged for 0.7 of a Fixed Multiple Share and 0.3 of a Floating Share.
At the Amendment Time, each option, restricted share unit, compensation option, and warrant to acquire existing SVS (each a “Security”) that was outstanding immediately prior to the Amendment Time was exchanged for a replacement Security to acquire Fixed Shares (a “Fixed Share Replacement Security”) or Floating Shares (a “Floating Share Replacement Security”) to account for the Capital Reorganization.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
Pursuant to the Amended Plan of Arrangement, upon the occurrence or waiver (at the discretion of Canopy Growth) of the Triggering Event (the “Triggering Event Date”), Canopy Growth will, subject to the satisfaction or waiver of certain closing conditions set out in the Amended Plan of Arrangement: (i) acquire all of the issued and outstanding Fixed Shares (following the mandatory conversion of the Fixed Multiple Shares into Fixed Shares) on the basis of 0.3048 of a common share of Canopy Growth (each whole common share, a “Canopy Growth Share”) for each Fixed Share held (the “Fixed Exchange Ratio”) at the time of the acquisition of the Fixed Shares (the “Acquisition Time”), subject to adjustment in accordance with the terms of the Amended Plan of Arrangement (the “Canopy Call Option”); and (ii) have the right (but not the obligation), exercisable for a period of 30 days following the Triggering Event Date to acquire all of the issued and outstanding Floating Shares (the “Floating Call Option”) at a price to be determined based upon the 30 day volume-weighted average trading price of the Floating Shares, subject to a minimum price of $6.41, as may be adjusted in accordance with the terms of the Amended Plan of Arrangement, to be payable, at the option of Canopy Growth, in cash, Canopy Growth Shares, or a combination thereof. If any portion is paid in Canopy Growth Shares, the number of Canopy Growth Shares to be exchanged for each Floating Share shall be determined on the basis of a 30 day volume-weighted average calculation using the Floating Shares (the “Floating Ratio”). The closing of the acquisition of the Floating Shares pursuant to the Floating Call Option, if exercised, will take place concurrently with the closing of the acquisition of the Fixed Shares pursuant to the Canopy Call Option, if exercised. The Canopy Call Option and the Floating Call Option will expire 10 years from the Amendment Date.
At the Acquisition Time each Fixed Share Replacement Security will be exchanged for a replacement Security from Canopy Growth equal to: (i) the number of Fixed Shares that were issuable upon exercise of such Fixed Share Replacement Security immediately prior to the Acquisition Time, multiplied by (ii) the Fixed Exchange Ratio in effect immediately prior to the Acquisition Time (if the foregoing would result in the issuance of a fraction of a Canopy Growth Share, then the number of Shares to be issued would be rounded down to the nearest whole number).
In the event that the Floating Call Option is exercised and Canopy Growth acquires the Floating Shares at the Acquisition Time, each Floating Share Replacement Security will be exchanged for a replacement Security from Canopy Growth equal to: (i) the number of Floating Shares that were issuable upon exercise of such Floating Share Replacement Security immediately prior to the Acquisition Time, multiplied by (ii) the Floating Ratio (if the foregoing would result in the issuance of a fraction of a Canopy Growth Share, then the number of Shares to be issued would be rounded down to the nearest whole number). In the event that the Floating Call Option is exercised and Canopy Growth acquires the Floating Shares at the Acquisition Time, Acreage will be a wholly-owned subsidiary of Canopy Growth.
The Amended Plan of Arrangement provides for, among other things, Amendments to the definition of Purchaser Approved Share Threshold (as defined therein) to change the number of Acreage shares available to be issued by Acreage without an adjustment in the Fixed Exchange Ratio such that Acreage may issue a maximum of 32,700 shares. Furthermore, Acreage generally may not issue any equity securities without Canopy Growth’s prior consent. Additionally, the Amended Plan of Arrangement allows for various Canopy Growth rights that extend beyond the Acquisition Date, including, among others, (i) rights to nominate a majority of Acreage’s Board of Directors following the Acquisition Time; (ii) restrictive covenants in respect of the business conduct in favor of Canopy Growth; (iii) termination of non-competition and exclusivity rights granted to Acreage by Canopy Growth in the event that Acreage does not meet certain specified financial targets; (iv) implementation of further restrictions on Acreage’s ability to operate its business in the event that Acreage does not meet certain specified financial targets; and (v) termination of the Amended Plan of Arrangement in the event that Acreage does not meet certain specified financial targets in the trailing 12 month period. Further, the Amended Plan of Arrangement imposes restrictions on Acreage entering into any contracts in respect of Company Debt if: (i) such contract would be materially inconsistent with market standards for companies operating in the United States cannabis industry; (ii) such contract prohibits a prepayment of the principal amount of such Company Debt; and (iii) such contract would provide for interest payments to be paid through the issuance of securities as opposed to cash, among other restrictions. The Amended Plan of Arrangement also provides for the following: (i) certain financial reporting obligations to Canopy; (ii) certain specified criteria related to any new directors or officers of Acreage, (iii) a limit to Acreage’s operations to the Identified States (as defined therein).
Debenture
In connection with the implementation of the Amended Arrangement, pursuant to a secured debenture dated September 23, 2020 (the “Debenture”) issued by Universal Hemp, LLC, an affiliate of Acreage that operates solely in the hemp industry in full compliance with all applicable laws (the “Borrower”), to 11065220 Canada Inc., an affiliate of Canopy Growth (the “Lender”), the Lender agreed to provide a loan of up to $100,000 (the “Loan”), $50,000 of which was advanced on the Amendment Date (the “Initial Advance”), and $50,000 of the Loan will be advanced in the event that the following conditions, among others, are satisfied: (a) the Borrower’s EBITDA (as defined in the Debenture) for any 90 day period is greater than or equal to 2.0 times the interest costs associated with the Initial Advance; and (b) the Borrower’s business plan for the 12 months following the applicable 90 day period supports an Interest Coverage Ratio (as defined in the Debenture) of at least 2.00:1.
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
The principal amount of the Loan will bear interest from the date of advance, compounded annually, and be payable on each anniversary of the date of the Debenture in cash in U.S. dollars at a rate of 6.1% per annum. The Loan will mature 10 years from the date of the Initial Advance.
The Loan must be used exclusively for U.S. hemp-related operations and on the express condition that such amount will not be used, directly or indirectly, in connection with or for the operation or benefit of any of the Borrower’s affiliates other than subsidiaries of the Borrower exclusively engaged in U.S. hemp-related operations and not directly or indirectly, towards the operation or funding of any activities that are not permissible under applicable law. The Loan proceeds must be segregated in a distinct bank account and detailed records of debits to such distinct bank account will be maintained by the Borrower.
No payment due and payable to the Lender by the Borrower pursuant to the Debenture may be made using funds directly or indirectly derived from any cannabis or cannabis-related operations in the United States, unless and until the Triggering Event Date.
The Debenture includes usual and typical events of default for a financing of this nature, including, without limitation, if: (i) Acreage is in breach or default of any representation or warranty in any material respect pursuant to the Arrangement Agreement; (ii) the Non-Core Divestitures are not completed within 18 months from the Amendment Date; and (iii) Acreage fails to perform or comply with any covenant or obligation in the Arrangement Agreement which is not remedied within 30 days after written notice is given to the Borrower by the Lender. The Debenture also includes customary representations and warranties, positive covenants and negative covenants of the Borrower.
Surety bonds
The Company has indemnification obligations with respect to surety bonds primarily used as security against non-performance in the amount of $5,000 as of March 31, 2022, for which no liabilities are recorded on the Unaudited Condensed Consolidated Statements of Financial Position.
The Company is subject to other capital commitments and similar obligations. As of March 31, 2022 and 2021, such amounts were not material.
CanWell Settlement
In November 2020, the Company entered into a final confidential settlement agreement with CanWell, LLC for certain outstanding proceedings. As part of that agreement, the Company accrued for $7,750 in Legal settlements, net on the Statements of Operations for the year ended December 31, 2020. In connection with this settlement agreement, the Company issued a promissory note in the amount of $7,750 to CanWell, which is non-interest bearing and is payable in periodic payments through December 31, 2024. Through March 31, 2022, the Company has paid $3,000 of the promissory note.
Contingencies
The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company’s applicable subsidiaries ceasing operations. While management of the Company believes that the Company’s subsidiaries are in compliance with applicable local and state regulations as of March 31, 2022, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company’s subsidiaries may be subject to regulatory fines, penalties, or restrictions in the future.
The Company and its subsidiaries may be, from time to time, subject to various administrative, regulatory and other legal proceedings arising in the ordinary course of business. Contingent liabilities associated with legal proceedings are recorded when a liability is probable, and the contingent liability can be reasonably estimated.
New York outstanding litigation
On November 2, 2018, EPMMNY LLC (“EPMMNY”) filed a complaint in the Supreme Court of the State of New York, County of New York, asserting claims against 16 defendants, including NYCANNA, Impire State Holdings LLC, NY Medicinal Research & Caring, LLC (each, a wholly-owned subsidiary of High Street) and High Street. The Index Number for the action is 655480/2018. EPMMNY alleges that it was wrongfully deprived of a minority equity interest and management
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
role in NYCANNA by its former partner, New Amsterdam Distributors, LLC, which attempted to directly or indirectly sell or transfer EPMMNY’s alleged interest in NYCANNA to other entities in 2016 and 2017, including Impire, NYMRC and High Street.
EPMMNY alleges that it is entitled to the value of its alleged minority interest in NYCANNA or minority ownership in NYCANNA. EPMMNY also alleges that certain defendants misused its alleged intellectual property and/or services, improperly solicited its employees, and aided and abetted or participated in the transfer of equity and/or business opportunities from EPMMNY.
High Street intends to vigorously defend this action, which the Company firmly believes is without merit. High Street is also entitled to full indemnity from the claims asserted against it by EPMMNY pursuant to the purchase agreement pertaining to its acquisition of NYCANNA and personal guarantee by the largest shareholders of the seller. High Street, along with the other defendants filed a motion to dismiss on April 1, 2019. The motion was fully briefed and submitted to the Court as of July 18, 2019, and oral argument was heard on September 6, 2019. The motion remains pending before the Court. Following a hearing held the week of April 25-29, 2022, the Court ruled that Plaintiff had the capacity to bring this action on behalf of EPMMNY. The motions to dismiss remain pending on all other grounds.
Compass Neuroceuticals Litigation
In February 2021, a JAMS arbitration was initiated in Atlanta by Acreage Georgia LLC (“Acreage Georgia”) against its former consultant, Compass Neuroceuticals, Inc. (“Compass”), stemming from Compass’ breach of the consulting agreement entered into between the parties in June 2019, related to the preparation of an application for a Class 1 cultivation license in Georgia. Acreage Georgia is seeking approximately $1,000, plus attorney’s fees and costs. Compass has filed a counterclaim for breach in the $9,000 range.
A final arbitration hearing took place from September 20 through September 24, in Atlanta, Georgia. On December 13, 2021, the arbitrator issued her interim award, finding in favor of the Company and denying Compass' counterclaim. A hearing took place on February 9, 2022 to determine the Company’s damages and attorney’s fees. On March 8, 2022, the arbitrator issued a final award of $694 to the Company. A contested action is currently pending in Forsyth County, Georgia seeking to confirm the arbitrator’s award.
14. RELATED PARTY TRANSACTIONS
Transactions with related parties are entered into in the normal course of business and are measured at the amount established and agreed to by the parties.
Related party notes receivable
Acreage has certain outstanding notes receivable with related parties. Refer to Note 6 for further discussion.
In May 2021, the Company sold two secured promissory notes totaling $28,000 received from the sale of Acreage Florida to Viridescent for cash proceeds of approximately $26,000. Viridescent is an entity controlled by Kevin Murphy, the Chairman of the board of directors. Refer to Note 3 for further discussion.
6.10% Secured debenture due September 2030
As disclosed in Note 10, “6.10% Secured debenture due September 2030”, on September 23, 2020, pursuant to the implementation of the Amended Arrangement, a subsidiary of Canopy Growth advanced gross proceeds of $50,000 (less transaction costs of approximately $4,025) to Universal Hemp, an affiliate of the Company, pursuant to the terms of a secured debenture. In accordance with the terms of the debenture, the funds cannot be used, directly or indirectly, in connection with or for any cannabis or cannabis-related operations in the United States, unless and until such operations comply with all applicable laws of the United States. Acreage then engaged an investment advisor (the “Investment Advisor”) which, under the Investment Advisor’s sole discretion, invested on behalf of Universal Hemp, $34,019 of the proceeds on September 28, 2020.
As a result, Universal Hemp, a subsidiary of the Company, acquired 34,019 class B units, at $1 par value per unit, which represented 100% financial interest in an Investment Partnership, a Canada-based limited partnership. An affiliate of the Institutional Investor holds Class A Units of the Investment Partnership. The general partner of the Investment Partnership is also an affiliate of the Institutional Investor. The class B units are held by the Institutional Investor as agent for Universal Hemp. On September 28, 2020, the Company received gross proceeds of $33,000 (less transaction costs of approximately
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
$959) from an affiliate of the Institutional Lender (the “Lender”) and used a portion of the proceeds of this loan to retire its short-term $11,000 convertible note and its short-term note aggregating approximately $18,000 in October 2020, with the remainder being used for working capital purposes. The Lender is controlled by the Institutional Lender. The Investment Partnership is the investor in the Lender.
Michigan consulting agreement
Pursuant to the Consulting Services Agreement by and between Kevin Michigan, LLC, a company controlled by Kevin Murphy, and High Street (the “Michigan Consulting Agreement”), High Street provides certain consulting services to Kevin Michigan, LLC, which includes, but is not limited to, services related to application support, provisioning center administration and operation, local and state regulatory filings, human resource matters, and marketing matters. The Michigan Consulting Agreement explicitly states that High Street is not able to direct or control the business of Kevin Michigan, LLC. Additionally, there are certain leases held by and between Kevin Michigan, LLC, as lessee and certain wholly owned subsidiaries of High Street, as lessors. As of March 31, 2022, Kevin Michigan, LLC is not operational, and no consulting fees or rents has been paid to High Street or its wholly owned subsidiaries. Kevin Michigan, LLC is owned and controlled by the Company’s Chairman, Kevin Murphy.
9.75% Credit facilities due January 2026
On December 16, 2021, the Company entered into the 9.75% Credit facilities due January 2026 with a syndicate of lenders, including Viridescent Realty Trust, Inc. (“Viridescent”), an entity controlled by Kevin Murphy. Under the terms of the 9.75% Credit facilities due January 2026, a $75,000 initial draw was available immediately, an additional $25,000 delayed draw is available that must be advanced within 12 months, and a $50,000 committed accordion facility is available after December 1, 2022, provided certain financial covenants are met. Advances under the facilities bear interest at 9.75% per annum and undrawn amounts (excluding the committed accordion facility until it is available) bear interest at 3.0% per annum.
Viridescent has committed $30,000 of the $100,000 available for immediate use under the Credit Facility, with third-party syndicated affiliates committing the additional $70,000. During the year ended March 31, 2022, $108 of interest expense under the facilities was attributed to Viridescent. The loan is secured by first-lien mortgages on Acreage’s wholly owned real estate and other commercial security interests. A third-party syndicate served as Administrative Agent for the transaction.
15. REPORTABLE SEGMENTS
The Company prepares its segment reporting on the same basis that its Chief Operating Decision Maker manages the business, and makes operating decisions. The Company operates under one operating segment, which is its only reportable segment: the production and sale of cannabis products. The Company’s measure of segment performance is net income, and derives its revenue primarily from the sale of cannabis products, as well as related management or consulting services which were not material in all periods presented. All of the Company’s operations are located in the United States.
16. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net loss attributable to common shareholders of the Company by the weighted average number of outstanding shares for the period. Diluted earnings per share are calculated based on the weighted number of outstanding common shares plus the dilutive effect of stock options and warrants, as if they were exercised, and restricted stock units and profits interests, as if they vested and NCI convertible units, as if they converted.
Basic and diluted loss per share is as follows:
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 | | |
| Net loss attributable to common shareholders of the Company | | $ | (12,694) | | | $ | (7,809) | | | |
| Weighted average shares outstanding - basic | | 106,900 | | | 102,343 | | | |
| Effect of dilutive securities | | — | | | — | | | |
| Weighted average shares - diluted | | 106,900 | | | 102,343 | | | |
| Net loss per share attributable to common shareholders of the Company - basic | | $ | (0.12) | | | $ | (0.08) | | | |
| Net loss per share attributable to common shareholders of the Company - diluted | | $ | (0.12) | | | $ | (0.08) | | | |
During the three months ended March 31, 2022, 5,817 Fixed warrants, 2,524 Floating warrants, 2,916 Fixed Share RSUs, 1,251 Floating Share RSUs, 1,525 Fixed Share stock options, 2,413 Floating Share stock options and 23,076 NCI convertible units
| | |
| ACREAGE HOLDINGS, INC. |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
| (in thousands, except per share data) |
were excluded from the calculation of net loss per share attributable to common shareholders of the Company - diluted, as they were anti-dilutive. During the three months ended March 31, 2021, 7,131 Fixed warrants, 3,087 Floating warrants, 4,441 Fixed Share RSUs, 2,431 Floating Share RSUs, 1,511 Fixed Share stock options, 2,123 Floating Share stock options and 23,742 NCI convertible units were excluded from the calculation of net loss per share attributable to common shareholders of the Company - diluted, as they were anti-dilutive.
17. SUBSEQUENT EVENTS
In December 2021, the Company secured a $150,000 Credit Facility with a syndicate of lenders. Under the terms of the Credit Facility, $100,000 was available for immediate use and a further $50,000 is available in future periods under a committed accordion option once certain, predetermined milestones are achieved. As of March 31, 2022, $75,000 was drawn under this facility and the remaining current availability was $25,000. In April 2022, the Company drew down on the remaining $25,000 under this facility.
On May 3, 2022, the Company announced the sale of its cultivation and processing facility in Medford, Oregon for total consideration of $2.0 million, and closed its dispensary in Powell, Oregon.
Management has reviewed all other events subsequent to March 31, 2022 through the date of issuing these financial statements and determined that no further subsequent events require adjustment or disclosure.