iANTHUS CAPITAL HOLDINGS, INC 10-Q for FY2022 Q3
iANTHUS CAPITAL HOLDINGS, INC. (ITHUF)
About this 10-Q
iANTHUS CAPITAL HOLDINGS, INC filed this 10-Q on November 8, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $39.37M
- down 20.1% from $49.26M a year earlier
- Net loss
- $22M
- compared with a net loss of $15.84M a year earlier
- Diluted EPS
- $0.00
- compared with -$0.09 a year earlier
Table of Contents
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
British Columbia, |
||
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| |
||
(Address of principal executive offices) |
(Zip Code) | |
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company | ||||
| Emerging growth company | ||||||
Table of Contents
TABLE OF CONTENTS
| Page No. | ||||||
| PART I. FINANCIAL INFORMATION | ||||||
| Item 1. | 4 | |||||
| Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021 |
4 | |||||
| 5 | ||||||
| 6 | ||||||
| 7 | ||||||
| Notes to the Condensed Consolidated Financial Statements (Unaudited) |
8 | |||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
37 | ||||
| Item 3. | 49 | |||||
| Item 4. | 49 | |||||
| PART II. OTHER INFORMATION | 50 | |||||
| Item 1. | 50 | |||||
| Item 1A. | 52 | |||||
| Item 2. | 52 | |||||
| Item 3. | 52 | |||||
| Item 4. | 52 | |||||
| Item 5. | 52 | |||||
| Item 6. | 52 | |||||
| 53 | ||||||
2
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common shares and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statements.
Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout our most recent Annual Report on Form 10-K and any updates described in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as may be amended, supplemented or superseded from time to time by other reports we file with the U.S. Securities and Exchange Commission (the “SEC”). You should read this Quarterly Report on Form10-Q and the documents that we referenced herein and have filed as exhibits to the reports we file with the SEC, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this Quarterly Report on Form 10-Q is accurate as of the date hereof. Because the risk factors in our SEC reports could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.
3
Table of Contents
ITEM 1. |
FINANCIAL STATEMENTS |
September 30, |
December 31, |
|||||||
2022 |
2021 |
|||||||
(Revised) |
||||||||
Assets |
||||||||
Cash |
$ | $ | ||||||
Restricted cash |
||||||||
Accounts receivable, net of allowance for doubtful accounts of $ |
||||||||
Prepaid expenses |
||||||||
Inventories, net |
||||||||
Other current assets |
||||||||
Current Assets |
||||||||
Investments |
||||||||
Property, plant and equipment, net |
||||||||
Right-of-use |
||||||||
Other long-term assets |
||||||||
Intangible assets, net |
||||||||
Total Assets |
$ |
$ |
||||||
Liabilities and Shareholder’s Equity (Deficit) |
||||||||
Accounts payable |
$ | $ | ||||||
Accrued and other current liabilities |
||||||||
Current portion of long-term debt, net of issuance costs |
||||||||
Derivative liabilities |
||||||||
Current portion of lease liabilities |
||||||||
Current Liabilities |
||||||||
Long-term debt, net of issuance costs |
||||||||
Deferred income tax |
||||||||
Long-term portion of lease liabilities |
||||||||
Total Liabilities |
||||||||
Commitments and Contingencies |
||||||||
Shareholders’ Equity (Deficit) |
||||||||
Common shares — |
||||||||
Shares to be issued |
||||||||
Additional paid-in capital (Refer to Note 6) |
||||||||
Accumulated deficit |
( |
) | ( |
) | ||||
Total Shareholders’ Equity (Deficit) |
$ |
$ |
( |
) | ||||
Total Liabilities and Shareholders’ Equity (Deficit) |
$ |
$ |
||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Revenues, net of discounts |
$ |
$ |
$ |
$ |
||||||||||||
| Costs and expenses applicable to revenues |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Gross profit |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Operating expenses |
||||||||||||||||
| Selling, general and administrative expenses |
||||||||||||||||
| Depreciation and amortization |
||||||||||||||||
| (Recoveries), write-downs and other charges, net |
( |
) |
( |
) |
||||||||||||
| Impairment loss |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total operating expenses |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Loss from operations |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
| Interest income |
||||||||||||||||
| Other income |
||||||||||||||||
| Interest expense |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
| Accretion expense |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
| Provision for debt obligation fee |
( |
) |
( |
) |
( |
) | ||||||||||
| Loss on debt extinguishment (Refer to Note 5) |
( |
) |
||||||||||||||
| (Losses)/gains from changes in fair value of financial instruments |
( |
) |
( |
) |
( |
) |
||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Loss before income taxes |
( |
) |
( |
) |
( |
) |
( |
) | ||||||||
| Income tax expense |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net loss |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) | ||||
| |
|
|
|
|
|
|
|
|||||||||
| Net loss per share - basic and diluted |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) | ||||
| Weighted average number of common shares outstanding |
||||||||||||||||
Three Months Ended September 30, 2022 |
||||||||||||||||||||
Number of Common Shares (‘000) |
Shares to be Issued |
Additional Paid- in-Capital |
Accumulated Deficit |
Total Shareholders’ Equity |
||||||||||||||||
| Balance – June 30, 2022 |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
| Share-based compensation |
— | — | — | |||||||||||||||||
| Share issuance - MPX purchase option |
( |
) | — | — | ||||||||||||||||
| Net loss |
— | — | — | ( |
) | ( |
) | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance – September 30, 2022 |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
Nine Months Ended September 30, 2022 |
||||||||||||||||||||
Number of Common Shares (‘000) |
Shares to be Issued |
Additional Paid- in-Capital |
Accumulated Deficit |
Total Shareholders’ (Deficit) Equity |
||||||||||||||||
| Balance – January 1, 2022 - (Revised) |
$ |
$ |
$ |
( |
) |
$ |
( |
) | ||||||||||||
| Share-based compensation | — | — | — | |||||||||||||||||
| Share issuance - Recapitalization Transaction |
— | — | ||||||||||||||||||
| Share issuance - MPX purchase option |
( |
) | — | — | ||||||||||||||||
| Net loss |
— | — | — | ( |
) | ( |
) | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance – September 30, 2022 |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
Three Months Ended September 30, 2021 |
||||||||||||||||||||
Number of Common Shares (‘000) |
Shares to be Issued |
Additional Paid- in-Capital |
Accumulated Deficit |
Total Shareholders’ Equity |
||||||||||||||||
| Balance – June 30, 2021 |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
| Share-based compensation |
— | — | — | |||||||||||||||||
| Net loss |
— | — | — | ( |
) | ( |
) | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance – September 30, 2021 |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
Nine Months Ended September 30, 2021 |
||||||||||||||||||||
Number of Common Shares (‘000) |
Shares to be Issued |
Additional Paid- in-Capital |
Accumulated Deficit |
Total Shareholders’ Equity |
||||||||||||||||
| Balance – January 1, 2021 - (Revised) |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
| Share-based compensation |
— | — | — | |||||||||||||||||
| Net loss |
— | — | — | ( |
) | ( |
) | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance – September 30, 2021 |
$ |
$ |
$ |
( |
) |
$ |
||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
Nine Months Ended September 30, |
||||||||
2022 |
2021 |
|||||||
CASH FLOW FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | ( |
) | $ | ( |
) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operations: |
||||||||
Interest income |
( |
) | ( |
) | ||||
Interest expense |
||||||||
Accretion expense |
||||||||
Debt obligation fees |
||||||||
Impairment loss |
||||||||
Depreciation and amortization |
||||||||
(Recoveries), write-downs and other charges, net |
( |
) | ||||||
Share-based compensation |
||||||||
Losses from change in fair value of financial instruments |
( |
) | ||||||
Gain from nonmonetary consideration from acquisition (Refer to Note 4) |
( |
) | — | |||||
Loss on debt extinguishment (Refer to Note 5) |
— | |||||||
Change in operating assets and liabilities (Refer to Note 13) |
||||||||
NET CASH FLOW (USED IN) PROVIDED BY OPERATING ACTIVITIES |
$ |
( |
) |
$ |
||||
CASH FLOW FROM INVESTING ACTIVITIES |
||||||||
Purchase of property, plant and equipment |
( |
) | ( |
) | ||||
Acquisition of other intangible assets |
( |
) | ( |
) | ||||
Proceeds from sale of property, plant and equipment |
— | |||||||
Issuance of related party promissory note |
( |
) | ( |
) | ||||
Purchase of subsidiaries, net of cash acquired |
— | |||||||
NET CASH USED IN INVESTING ACTIVITIES |
$ |
( |
) |
$ |
( |
) | ||
CASH FLOW FROM FINANCING ACTIVITIES |
||||||||
Proceeds from issuance of debt |
||||||||
Debt issuance costs |
( |
) | ||||||
Repayment of debt |
( |
) | ( |
) | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
$ |
$ |
||||||
CASH AND RESTRICTED CASH: |
||||||||
NET INCREASE IN CASH AND RESTRICTED CASH DURING THE PERIOD |
||||||||
CASH AND RESTRICTED CASH, BEGINNING OF PERIOD (Refer to Note 13) |
||||||||
CASH AND RESTRICTED CASH, END OF PERIOD (Refer to Note 13) |
$ |
$ |
||||||
| Prior Year’s Line item |
Reclassified Amount |
Current Year’s Line item | ||||||||
Three Months Ended September 30, 2021 |
Nine Months Ended September 30, 2021 |
|||||||||
| Depreciation and amortization |
$ | $ | Selling, general and administrative expenses | |||||||
| Depreciation and amortization |
( |
) | ( |
) | Depreciation and amortization | |||||
December 31, 2021 |
||||||||||||
As previously reported |
Adjustment |
As adjusted |
||||||||||
| Inventories |
$ | $ | ( |
) | $ | |||||||
| Current assets |
( |
) | ||||||||||
| Total assets |
( |
) | ||||||||||
| Accrued and other current liabilities |
( |
) | ||||||||||
| Current liabilities |
( |
) | ||||||||||
| Total liabilities |
( |
) | ||||||||||
| Accumulated deficit |
( |
) | ( |
) | ( |
) | ||||||
| Total shareholders’ deficit |
( |
) | ( |
) | ( |
) | ||||||
| Total liabilities and shareholders’ deficit |
( |
) | ||||||||||
Year Ended December 31, 2021 |
||||||||||||
As previously reported |
Adjustment |
As adjusted |
||||||||||
| Costs and expenses applicable to revenues |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Gross profit |
( |
) | ||||||||||
| Loss from operations |
( |
) | ( |
) | ( |
) | ||||||
| Loss from operations before income tax |
( |
) | ( |
) | ( |
) | ||||||
| Income tax expense |
( |
) | ||||||||||
| Net loss |
( |
) | ( |
) | ( |
) | ||||||
| Earnings per share |
( |
) | ( |
) | ( |
) | ||||||
September 30, 2022 |
||||||||||||
As reported |
Adjustment |
As adjusted |
||||||||||
| Accumulated deficit – Balance January 1, 2022 |
$ | ( |
) | $ | ( |
) | $ | ( |
) | |||
| Total s hareholders’ deficit – Balance January 1, 2022 |
( |
) | ( |
) | ( |
) | ||||||
Operating Leases |
||||
| 2023 |
$ | |||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| 2027 |
||||
| Thereafter |
||||
| |
|
|||
| Total lease payments |
$ | |||
| Less: interest expense |
( |
) | ||
| |
|
|||
| Present value of lease liabilities |
$ | |||
| Weighted-average remaining lease term (years) |
||||
| Weighted-average discount rate |
% | |||
| |
|
|||
| Balance Sheet Information |
Classification |
September 30, 2022 |
December 31, 2021 |
|||||||
| Right-of-use |
Operating leases |
$ | |
$ | |
|||||
| Lease liabilities |
||||||||||
| Current portion of lease liabilities |
Operating leases | $ | $ | |||||||
| Long-term lease liabilities |
Operating leases | |||||||||
| |
|
|
|
|||||||
| Total |
$ |
$ |
||||||||
| |
|
|
|
|||||||
September 30, 2022 |
December 31, 2021 |
|||||||
(Revised) |
||||||||
| Supplies |
$ | $ | ||||||
| Raw materials |
||||||||
| Work in process |
||||||||
| Finished goods |
||||||||
| |
|
|
|
|||||
| Total |
$ |
$ |
||||||
| |
|
|
|
|||||
| Consideration |
||||
| Cash |
$ | |||
| Settlement of pre-existing relationships |
||||
| |
|
|||
| Fair value of consideration |
$ |
|||
| |
|
|||
| Assets acquired and liabilities assumed |
||||
| Cash |
$ | |||
| Fixed assets |
||||
| Other non-current assets |
||||
| Intangible assets |
||||
| Accounts payable |
( |
) | ||
| Accrued and other current liabilities |
( |
) | ||
| |
|
|||
| Net assets acquired |
$ |
|||
| |
|
| • | renegotiation of existing financing arrangements and other material contracts, including any amendments, waivers, extensions or similar agreements with the Lenders and/or stakeholders of the Company and/or its subsidiaries that the Special Committee determines are in the best interest of the Company and/or its subsidiaries; |
| • | managing available sources of capital, including equity investments or debt financing or refinancing and the terms thereof; |
| • | implementing the operational and financial restructuring of the Company and its subsidiaries and their respective businesses, assets and licensure and other rights; and |
| • | implementing other potential strategic transactions. |
Secured Notes (1) |
March 2019 Debentures |
May 2019 Debentures |
June Secured Debentures |
Additional Secured Debentures |
June Unsecured Debentures |
Other |
Total |
|||||||||||||||||||||||||
As of January 1, 2022 |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||||
Fair value of financial liabilities issued |
— | — | — | |||||||||||||||||||||||||||||
Accretion of balance |
— | — | ||||||||||||||||||||||||||||||
Debt extinguishment |
( |
) | ( |
) | ( |
) | — | — | — | — | ( |
) | ||||||||||||||||||||
Repayment |
— | — | — | — | — | ( |
) | ( |
) | |||||||||||||||||||||||
As of September 30, 2022 |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
$ |
||||||||||||||||||||||||
| (1) | This amount includes the Company’s obligation to pay an exit fee of $ d interest at a rate of |
| • | On June 24, 2022, an aggregate of |
| • | On August 18, 2022, |
September 30, 2022 |
||||||||
Units |
Weighted Average Exercise Price (C$) |
|||||||
| Warrants outstanding, beginning |
$ | |||||||
| Granted |
||||||||
| Forfeited |
( |
) | ||||||
| Expired |
( |
) | ||||||
| |
|
|
|
|||||
| Warrants outstanding, ending |
$ | |||||||
| |
|
|
|
|||||
September 30, 2022 |
December 31, 2021 |
|||||||
| Risk-free interest rate |
% | |||||||
| Expected dividend yield |
% | |||||||
| Expected volatility |
% | |||||||
| Expected life |
||||||||
September 30, 2022 |
December 31, 2021 |
|||||||||||||||
| Year of expiration |
Number Outstanding |
Weighted Average Exercise Price (C$) |
Number Outstanding |
Weighted Average Exercise Price (C$) |
||||||||||||
| 2022 |
||||||||||||||||
| 2023 |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Warrants outstanding |
$ | $ | |
|||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
September 30, 2022 |
December 31, 2021 |
|||||||
| Common share options |
||||||||
| Restricted stock units |
||||||||
| Warrants |
||||||||
| Secured notes |
||||||||
| Debentures |
||||||||
| MPX dilutive instruments (1) |
||||||||
| |
|
|
|
|||||
| Total |
||||||||
| |
|
|
|
|||||
(1) |
Prior to the acquisition of MPX Bioceutical Corporation (“MPX”) on February 5, 2019 (the “MPX Acquisition”), MPX had instruments outstanding that were potentially dilutive and as a result of the MPX Acquisition, the Company assumed certain of these instruments which were settled on August 18, 2022 by issuing |
September 30, 2022 |
December 31, 2021 |
|||||||||||||||||||||||
Units |
Weighted Average Exercise Price (1) |
Weighted Average Contractual Life |
Units |
Weighted Average Exercise Price (1) |
Weighted Average Contractual Life |
|||||||||||||||||||
| Options outstanding, beginning |
$ | |
— | $ | |
— | ||||||||||||||||||
| Granted |
— | — | ||||||||||||||||||||||
| Exercised |
— | — | ||||||||||||||||||||||
| Cancellations |
( |
) | — | — | ||||||||||||||||||||
| Forfeitures |
( |
) | — | — | ||||||||||||||||||||
| Expirations |
( |
) | — | ( |
) | — | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Options outstanding, ending (2) |
$ | $ | ||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
(1) |
The Original Awards are denominated in Canadian dollars. Exercise prices have been converted to U.S. dollar equivalents using an exchange rate of CAD$ |
(2) |
As of September 30, 2022, |
September 30, 2022 |
December 31, 2021 |
|||||||
| Risk-free interest rate | % | |||||||
| Expected dividend yield | % | |||||||
| Expected volatility | % | |||||||
| Expected life |
— | |||||||
September 30, 2022 |
||||||||
Units |
Weighted Average Grant Price (1) |
|||||||
| Unvested balance, beginning |
$ | |||||||
| Granted |
||||||||
| Vested |
( |
) | ||||||
| Forfeited |
( |
) | ||||||
| |
|
|
|
|||||
| Unvested balance, ending |
$ |
|||||||
| |
|
|
|
|||||
(1) |
Weighted average grant price is presented in U.S. dollars for the three and nine months ended September 30, 2022, as compared to previously issued financial statements, which present this figure in Canadian dollars. |
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Loss before income taxes |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Income tax expense |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Effective tax rate |
( |
)% | ( |
)% | ( |
)% | ( |
)% | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Revenues |
||||||||||||||||
Eastern Region |
$ | $ | $ | $ | ||||||||||||
| Western Region | ||||||||||||||||
| Other (1) |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Gross profit |
||||||||||||||||
Eastern Region |
$ | $ | $ | $ | ||||||||||||
| Western Region | ||||||||||||||||
| Other | ||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Depreciation and amortization |
||||||||||||||||
Eastern Region |
$ | $ | $ | $ | ||||||||||||
| Western Region | ||||||||||||||||
| Other | ||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| (Recoveries), write-downs and other charges, net |
|
|||||||||||||||
Eastern Region |
$ | ( |
) | $ | $ | ( |
) | $ | ||||||||
| Western Region | ||||||||||||||||
| Other | ( |
) | ( |
) | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
( |
) |
$ |
$ |
( |
) |
$ |
||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Net (loss) income |
||||||||||||||||
Eastern Region |
$ | ( |
) | $ | $ | $ | ||||||||||
| Western Region | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) | ||||
| |
|
|
|
|
|
|
|
|||||||||
| Purchase of property, plant and equipment |
||||||||||||||||
Eastern Region |
$ | $ | $ | $ | ||||||||||||
| Western Region | ||||||||||||||||
| Other | ||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Purchase of intangibles |
||||||||||||||||
Eastern Region |
$ | — | $ | — | $ | — | $ | |||||||||
| Western Region | — | — | — | — | ||||||||||||
| Other | ||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| (1) | Revenues from segments below the quantitative thresholds are attributable to an operating segment of the Company that includes revenue from the sale of CBD products throughout the United States. This segment has never met any of the quantitative thresholds for determining reportable segments nor does it meet the qualitative criteria for aggregation with the Company’s reportable segments. |
September 30, |
December 31, |
|||||||
2022 |
2021 (Revised) |
|||||||
| Assets |
||||||||
Eastern Region |
$ | $ | ||||||
| Western Region | ||||||||
| Other | ||||||||
| |
|
|
|
|||||
| Total |
$ |
$ |
||||||
| |
|
|
|
|||||
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
2022 |
2021 |
2022 |
2021 |
|||||||||||||
| Revenue |
||||||||||||||||
iAnthus branded products |
$ | $ | $ | $ | ||||||||||||
| Third party branded products | ||||||||||||||||
| Wholesale/bulk/other products | ||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| • | Level 1 – fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; |
| • | Level 2 – fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and |
| • | Level 3 – fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). |
September 30, 2022 |
December 31, 2021 |
|||||||||||||||||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||||||||||||||
| Financial a ssets |
||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Long term investments - other 1 |
$ | $ | — | $ | — | $ | $ | $ | — | $ | — | $ | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Financial l iabilities |
||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Derivative liabilities |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | $ | ||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
(1) |
Long-term investments – other are included in the investments balance on the unaudited interim condensed consolidated balance sheets. |
Financial Assets |
||||
| Balance as of December 31, 2021 |
$ |
|||
| Revaluations on Level 1 instruments |
( |
) | ||
| |
|
|||
| Balance as of September 30, 2022 |
$ |
|||
| |
|
|||
Derivative Liabilities |
||||
| Balance as of December 31, 2021 |
$ |
|||
| Revaluations on Level 3 instruments |
( |
) | ||
| |
|
|||
| Balance as of September 30, 2022 |
$ |
|||
| |
|
|||
September 30, 2022 |
December 31, 2021 |
|||||||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
June Unsecured Debentures |
$ | $ | $ | $ | ||||||||||||
| June Secured Debentures | ||||||||||||||||
| Secured Notes | — | — | ||||||||||||||
| Other | ||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
$ |
$ |
$ |
||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| For the twelve months ended September 30, |
2023 |
2024 |
2025 |
2026 |
2027 |
|||||||||||||||
| Operating leases |
$ | $ | $ | $ | $ | |||||||||||||||
| Service contracts | ||||||||||||||||||||
| Long-term debt | ||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| • | There was a claim by a former consultant against the Company, with respect to alleged consulting fees owed by MPX to the consultant, claiming the right to receive approximately $ |
| • | There is a claim from two former noteholders against the Company and MPX Bioceutical ULC (“MPX ULC”), with respect to alleged payments of $ |
| • | There is a claim against the Company, MPX ULC and MPX, with respect to a prior acquisition made by MPX in relation to a subsidiary that was not acquired by the Company as part of the MPX Acquisition, claiming $ |
September 30, |
December 31, |
|||||||
2022 |
2021 |
|||||||
| Financial Statement Line Item |
||||||||
| Current portion of long-term debt, net of issuance costs (1) |
— | |||||||
| Long-term debt, net of issuance costs (1) |
— | |||||||
| Accrued and other current liabilities |
— | |||||||
| Other long-term assets |
||||||||
| |
|
|
|
|||||
| Total |
$ |
$ |
||||||
| |
|
|
|
|||||
| (1) | Upon the closing of the Recapitalization Transaction, certain of the Company’s lenders held greater than |
Nine Months Ended September 30, |
||||||||
2022 |
2021 |
|||||||
Income taxes |
$ | $ | ||||||
Interest |
||||||||
Nine Months Ended September 30, |
||||||||
2022 |
2021 |
|||||||
Decrease (increase) in: |
||||||||
Accounts receivables |
$ | $ | ( |
) | ||||
Prepaid expenses |
( |
) | ||||||
Inventories |
( |
) | ( |
) | ||||
Other current assets |
( |
) | ||||||
Other long-term assets |
( |
) | ||||||
Operating leases |
( |
) | ( |
) | ||||
(Decrease) increase in: |
||||||||
Accounts payable |
( |
) | ||||||
Accrued and other current liabilities |
||||||||
$ |
$ |
|||||||
Nine Months Ended September 30, |
||||||||
2022 |
2021 |
|||||||
Property, plant and equipment |
$ | $ | ||||||
Operating lease right-of-use |
||||||||
Intangible assets |
||||||||
$ |
$ |
|||||||
Nine Months Ended September 30, |
||||||||
2022 |
2021 |
|||||||
Account receivable recoveries |
$ | ( |
) | $ | ( |
) | ||
Operating lease liabilities |
( |
) | ||||||
Operating lease right-of-use |
( |
) | ||||||
Property, plant and equipment |
( |
) | — | |||||
$ |
( |
) |
$ |
|||||
Nine Months Ended September 30, |
||||||||
2022 |
2021 |
|||||||
Supplemental Cash Flow Information: |
||||||||
Non-cash consideration for paid-in-kind |
||||||||
Non-cash consideration for asset acquisition |
— | |||||||
Shares issued to settle MPX purchase options assumed from the MPX Acquisition |
||||||||
Non-cash issuance of shares from consummation of the Recapitalization Transaction |
— | |||||||
Non-cash debt extinguishment from the consummation of the Recapitalization Transaction |
( |
) | — | |||||
Non-cash issuance of June Secured Debentures and June Unsecured Debentures from the consummation of the Recapitalization Transaction |
— | |||||||
September 30, |
December 31, |
|||||||
2022 |
2021 |
|||||||
Cash |
$ | $ | ||||||
Restricted cash |
||||||||
Total cash and restricted cash presented in the statements of cash flows |
$ |
$ |
||||||
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited interim condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise note.
Overview
We are a vertically-integrated, multi-state owner and operator of licensed cannabis cultivation, processing and dispensary facilities, and a developer, producer and distributor of innovative branded cannabis and CBD products in the United States. Although we are committed to creating a national retail brand and portfolio of branded cannabis and cannabidiol (“CBD”) products recognized in the United States, cannabis currently remains illegal under U.S. federal law.
Through our subsidiaries, we currently own and/or operate 35 dispensaries and 10 cultivation and/or processing facilities in nine U.S. states. Pursuant to our existing licenses, interests and contractual arrangements, and subject to regulatory approval, we have the capacity to own and/or operate up to an additional 9 dispensary licenses and/or dispensary facilities in six states, plus an uncapped number of dispensary licenses in Florida, and up to 21 cultivation, manufacturing and/or processing facilities, and we have the right to manufacture and distribute cannabis products in nine U.S. states, all subject to the necessary regulatory approvals.
Our multi-state operations encompass the full spectrum of medical and adult-use cannabis and CBD enterprises, including cultivation, processing, product development, wholesale-distribution and retail. Cannabis products offered by us include flower and trim, products containing cannabis flower and trim (such as pre-rolls), cannabis infused products (such as topical creams and edibles) and products containing cannabis extracts (such as vape cartridges, concentrates, live resins, wax products, oils and tinctures). Our CBD products include topical creams, tinctures and sprays and products designed for beauty and skincare (such as lotions, creams, haircare products, lip balms and bath bombs). Under U.S. federal law, cannabis is classified as a Schedule I controlled substance under the U.S. Controlled Substances Act. A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety use under medical supervision and a high potential for abuse. Other than Epidiolex (cannabidiol), a cannabis-derived product, and three synthetic cannabis-related drug products (Marinol (dronabinol), Syndros (dronabinol) and Cesamet (nabilone), to our knowledge, the U.S. Food and Drug Administration has not approved a marketing application for cannabis for the treatment of any disease or condition and has not approved any cannabis, cannabis-derived or CBD products.
Financial Restructuring
The significant disruption of global financial markets, and specifically, the decline in the overall public equity cannabis markets due to the COVID-19 pandemic negatively impacted our ability to secure additional capital, which caused liquidity constraints. In early 2020, due to the liquidity constraints, we attempted to negotiate temporary relief of our interest obligations with the lenders (the “Secured Lenders”) of our 13.0% senior secured debentures (the “Secured Notes”) issued by our wholly-owned subsidiary, iAnthus Capital Management, LLC (“ICM”). However, we were unable to reach an agreement and did not make interest payments when due and payable to the Secured Lenders or payments that were due to the lenders (the “Unsecured Lenders” and together with the Secured Lenders, the “Lenders”) of our 8.0% convertible unsecured debentures (the “Unsecured Debentures”). As a result, we defaulted on our obligations pursuant to the Secured Notes and Unsecured Debentures.
On June 22, 2020, we received a notice demanding repayment under the Amended and Restated Debenture Purchase Agreement dated October 19, 2019 of the entire principal amount of the Secured Notes, together with interest, fees, costs and other charges that have accrued or may accrue from Gotham Green Admin 1, LLC (the “Collateral Agent”) holding security for the benefit of the Secured Notes. The Collateral Agent concurrently provided us with the Notice of Intention to Enforce Security under section 244 of the Bankruptcy and Insolvency Act (Canada).
On July 10, 2020, we entered into a restructuring support agreement (as amended on June 15, 2021, the “Restructuring Support Agreement”) with the Secured Lenders and certain of our Unsecured Lenders (the “Consenting Unsecured Lenders”) to effectuate a recapitalization transaction (the “Recapitalization Transaction”), which we consummated on June 24, 2022 (the “Closing Date”). The Recapitalization Transaction closed pursuant to the terms of the amended and restated plan of arrangement (the “Plan of Arrangement”) under the Business Corporations Act (British Columbia) approved by the Supreme Court of British Columbia (the “Court”). Pursuant to the terms of the Restructuring Support Agreement, the Collateral Agent, the Secured Lenders and the Consenting Unsecured Lenders agreed to forbear from further exercising any rights or remedies in connection with any events of default that existed or may have existed in the future arising under any of the purchase agreements with respect to the Secured Notes and all other agreements delivered in connection therewith, the purchase agreements with respect to the Unsecured Debentures and all other agreements delivered in connection therewith and any other agreement to which the Collateral Agent, Secured Lenders, or Consenting Unsecured Lenders are a party to (collectively, the “Defaults”). As of the Closing Date, the Collateral Agent, Secured Lenders and Consenting Unsecured Lenders irrevocably waived all Defaults.
37
Table of Contents
In connection with the closing of the Recapitalization Transaction, we issued an aggregate of 6,072,579,705 common shares to the Secured Lenders and the Unsecured Lenders. Specifically, we issued 3,036,289,852 common shares (the “Secured Lender Shares”), or 48.625% of our outstanding common shares, to the Secured Lenders and 3,036,289,853 common shares (the “Unsecured Lender Shares” and together with Secured Lender Shares, the “Shares”), or 48.625% of our outstanding common shares, to the Unsecured Lenders. As of the Closing Date, we had 6,244,297,897 common shares issued and outstanding. As of the Closing Date, the holders of our common shares collectively held 171,718,192 common shares, or 2.75% of our outstanding common shares.
As of the Closing Date, the outstanding principal amount of the Secured Notes (including the interim financing secured notes in the aggregate principal amount of approximately $14.7 million originally due on July 13, 2025) together with interest accrued and fees thereon were forgiven in part and exchanged for (A) the Secured Lender Shares, (B) the June Secured Debentures (as defined below) in the aggregate principal amount of $99.7 million and (C) the June Unsecured Debentures (as defined below) in the aggregate principal amount of $5.0 million. In addition, as of the Closing Date, the outstanding principal amount of the Unsecured Debentures together with interest accrued and fees thereon were forgiven in part and exchanged for (A) the Unsecured Lender Shares and (B) the June Unsecured Debentures in the aggregate principal amount of $15.0 million. Furthermore, all existing options and warrants to purchase our common shares, including certain debenture warrants and exchange warrants previously issued to the Secured Lenders, the warrants previously issued in connection with the Unsecured Debentures and all other Affected Equity (as defined in the Plan of Arrangement), were cancelled and extinguished for no consideration.
Secured Debenture Purchase Agreement
In connection with the closing of the Recapitalization Transaction, we entered into a Third Amended and Restated Secured Debenture Purchase Agreement (the “Secured DPA”), dated as of June 24, 2022, with ICM, the other Credit Parties (as defined in the Secured DPA), the Collateral Agent, and the lenders party thereto (the “New Secured Lenders”) pursuant to which ICM issued the New Secured Lenders 8.0% secured debentures (the “June Secured Debentures”) in the aggregate principal amount of $99.7 million pursuant to the Plan of Arrangement.
The June Secured Debentures accrue interest at a rate of 8.0% per annum (increasing to 11.0% upon the occurrence of an Event of Default (as defined in the Secured DPA)), are due on June 24, 2027, and may be prepaid on a pro rata basis from and after the third anniversary of the Closing Date upon prior written notice to the New Secured Lenders without premium or penalty. Upon receipt of a Change of Control Notice (as defined in the Secured DPA), each New Secured Lender may provide notice to ICM to either (i) purchase the June Secured Debenture at a price equal to 103.0% of the then outstanding principal amount together with interest accrued thereon (the “Offer Price”) or (ii) if the Change of Control Transaction (as defined in Secured DPA) results in a new issuer, or if the New Secured Lender desires that the June Secured Debenture remain unpaid and continue in effect after the closing of the Change of Control Transaction, convert or exchange the June Secured Debenture into a replacement debenture of the new issuer or ICM, as applicable, in the aggregate principal amount of the Offer Price on substantially equivalent terms to those terms contained in the June Secured Debenture. Notwithstanding the foregoing, if 90.0% or more of the principal amount of all June Secured Debentures outstanding have been tendered for redemption on the date of the Change of Control Notice, ICM may, at its sole discretion, redeem all of the outstanding June Secured Debentures at the Offer Price. As security for the Obligations (as defined in the Secured DPA), ICM and the Company granted to the Collateral Agent, for the benefit of the New Secured Lenders, a security interest over all of their present and after acquired personal property.
Pursuant to the Secured DPA, so long as Gotham Green Partners, LLC or any of its Affiliates (as defined in the Secured DPA) hold at least 50.0% of the outstanding principal amount of June Secured Debentures, the Collateral Agent will have the right to appoint two non-voting observers to our Board of Directors (the “Board of Directors” or “Board”), each of which shall receive up to a maximum amount of $25,000 in any 12-month period for reasonable out-of-pocket expenses. In addition, pursuant to the Secured DPA, the New Secured Lenders purchased an additional $25.0 million of Secured Debentures (the “Additional Secured Debentures”).
Unsecured Debenture Purchase Agreement
In connection with the closing of the Recapitalization Transaction, we, as guarantor of the Guaranteed Obligations (as defined in the Unsecured DPA (as defined herein)), entered into an Unsecured Debenture Purchase Agreement (the “Unsecured DPA”) dated as of June 24, 2022 with ICM, the Secured Lenders and the Consenting Unsecured Lenders pursuant to which ICM issued 8.0% unsecured debentures (the “June Unsecured Debentures”) in the aggregate principal amount of $20.0 million pursuant to the Plan of Arrangement, including $5.0 million to the Secured Lenders and $15.0 million to the Unsecured Lenders.
38
Table of Contents
The June Unsecured Debentures accrue interest at a rate of 8.0% per annum (increasing to 11.0% upon the occurrence of an Event of Default (as defined in the Unsecured DPA)), are due on June 24, 2027, and may be prepaid on a pro rata basis from and after the third anniversary of the Closing Date upon prior written notice to the Unsecured Lender without premium or penalty. Upon receipt of a Change of Control Notice (as defined in the Unsecured DPA), each Unsecured Lender may provide notice to ICM to either (i) purchase the June Unsecured Debenture at a price equal to 103.0% of the then outstanding principal amount together with interest accrued thereon (the “Unsecured Offer Price”) or (ii) if the Change of Control Transaction (as defined in Unsecured DPA) results in a new issuer, or if the Unsecured Lender desires that the June Unsecured Debenture remain unpaid and continue in effect after the closing of the Change of Control Transaction, convert or exchange the June Unsecured Debenture into a replacement debenture of the new issuer or ICM, as applicable, in the aggregate principal amount of the Unsecured Offer Price on substantially equivalent terms to those terms contained in the June Unsecured Debenture. Notwithstanding the foregoing, if 90.0% or more of the principal amount of all June Unsecured Debentures outstanding have been tendered for redemption on the date of the Change of Control Notice, ICM may, at its sole discretion, redeem all of the outstanding June Unsecured Debentures at the Unsecured Offer Price. Pursuant to the Unsecured DPA, the Obligations (as defined in the Unsecured DPA) are subordinated in right of payment to the Senior Indebtedness (as defined in the Unsecured DPA).
Pursuant to the Recapitalization Transaction, the Secured Lenders, the Unsecured Lenders and the existing holders of our common shares at the closing of the Recapitalization Transaction (the “Existing Shareholders”) were allocated and issued the June Secured Debentures, the June Unsecured Debentures and percentage of our pro forma common shares, as presented in the following table:
| (in ’000s of U.S. dollars) |
June Secured Debentures1 |
Interim Financing2 | June Unsecured Debentures3 |
Pro Forma Common Equity4 |
||||||||||||
| Secured Lenders |
$ | 85,000 | $ | 14,737 | $ | 5,000 | 48.625 | % | ||||||||
| Unsecured Lenders |
— | — | 15,000 | 48.625 | % | |||||||||||
| Existing Shareholders |
— | — | — | 2.75 | % | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 85,000 | $ | 14,737 | $ | 20,000 | 100 | % | ||||||||
| (1) | The Secured Notes and Interim Financing (as defined below) were extinguished as of the Closing Date and, in exchange, ICM issued the June Secured Debentures, which may be prepaid on a pro rata basis from and after the third anniversary of the Closing Date upon prior written notice to the New Secured Lenders without premium or penalty. |
| (2) | Certain of the Secured Lenders provided $14.7 million of interim financing (the “Interim Financing”) to ICM pursuant to the Restructuring Support Agreement. |
| (3) | The Unsecured Debentures were extinguished as of the Closing Date, and in exchange, ICM issued the June Unsecured Debentures, which may be prepaid on a pro rata basis from and after the third anniversary of the Closing Date upon prior written notice to the Unsecured Lenders without premium or penalty. The June Unsecured Debentures are subordinate to the June Secured Debentures, but are senior to the Company’s common shares. |
| (4) | On December 31, 2021, our Board of Directors approved the terms of a Long-Term Incentive Program (“LTIP”) recommended by our compensation committee and, pursuant to which, on July 26, 2022 we issued to certain of our employees (including executive officers) an aggregate of 320,165,409 restricted stock units (“RSUs”), under our Amended and Restated Omnibus Incentive Plan dated October 15, 2018 in order to attract and retain such employees. All of our existing warrants and options were cancelled, and our common shares may be consolidated pursuant to a consolidation ratio which has yet to be determined. |
Consummation of the Recapitalization Transaction through the Plan of Arrangement was subject to certain conditions, including: approval of the Secured Lenders, Unsecured Lenders and existing holders of our common shares, warrants and options, which was obtained; approval of the Plan of Arrangement by the Court, which was obtained; and the receipt of all approvals by state-level regulators and the Canadian Securities Exchange (collectively, the “Requisite Approvals”). All Requisite Approvals required to consummate the Recapitalization Transaction were satisfied, conditioned, or waived by the Company, Secured Lenders and Consenting Unsecured Lenders, for purposes of closing the Recapitalization Transaction on the Closing Date. As of September 2022, we have finalized all outstanding Requisite Approvals, including state regulatory approvals in the states of New Jersey and New York.
Registration Rights Agreement
In connection with the consummation of the Recapitalization Transaction, we entered into a registration rights agreement (the “RRA”), dated June 24, 2022, with ICM and certain holders of Registrable Securities (as defined in the RRA) (the “Holders”) pursuant to which we shall, upon receipt of written notice (the “Shelf Request”) from Holders of at least 15.0% of our outstanding common shares (the “Substantial Holders”), prepare and file (i) with the applicable Canadian Securities Regulators (as defined in the RRA), a Shelf Prospectus (as defined in the RRA) to facilitate a secondary offering of all of the Registrable Securities or (ii) with the Securities and Exchange Commission (the “SEC”), a registration statement on Form S-3 (the “S-3 Registration Statement”) covering the resale of all Registrable Securities. In addition, pursuant to the RRA and subject to certain exceptions, the Substantial Holders may request (the “Demand Registration Request”) that we file a Prospectus (as defined in the RRA) (other than a Shelf Prospectus) or a registration statement on any form that we are then eligible to use (the “Registration Statement”) to facilitate a Distribution (as defined in the RRA) in Canada or the United States of all or any portion of the Registrable Securities (the “Demand Registration”) held by the Holders requesting the Demand Registration. Moreover, pursuant to the RRA and subject to certain exceptions, if, at any time, we propose to make a Distribution for our own account, we shall notify the Holders of such Distribution (the “Piggyback Registration”) and shall use reasonable commercial efforts to include in the Piggyback Registration such Registrable Securities requested by the Holders be included in such Piggyback Registration.
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Investor Rights Agreement
Furthermore, in connection with the closing of the Recapitalization Transaction, we entered into an Investor Rights Agreement (“IRA”), dated June 24, 2022, with ICM and certain investors (the “Investors”). Pursuant to the IRA, among other things, the Investors are entitled to designate nominees for election or appointment to our Board as follows:
| • | one investor (the “First Investor”) shall be entitled to designate director nominees as follows: |
| i. | For so long as the First Investor’s Debt Exchange Common Share Percentage (as defined in the IRA) is at least 30.0%, the First Investor shall be entitled to designate up to three individuals as director nominees; |
| ii. | For so long as the First Investor’s Debt Exchange Common Share Percentage is less than 30.0% but is at least 15.0%, the First Investor shall be entitled to designate up to two individuals as director nominees; and |
| iii. | For so long as the First Investor’s Debt Exchange Common Share Percentage is less than 15.0% but is at least 5.0%, the First Investor shall be entitled to designate up to one individual as a director nominee. |
The initial nominees of the First Investor were Scott Cohen, Michelle Mathews-Spradlin and Kenneth Gilbert.
| • | a second Investor (the “Second Investor”) shall be entitled to designate up to one individual as a director nominee for so long as such Investor’s Debt Exchange Common Share Percentage is at least 5.0%. |
| • | a third Investor (the “Third Investor”) shall be entitled to designate up to one individual as a director nominee for so long as such Investor’s Debt Exchange Common Share Percentage is at least 5.0%. |
| • | a fourth Investor (the “Fourth Investor”) shall be entitled to designate up to one individual as a director nominee for so long as such Investor’s Debt Exchange Common Share Percentage is at least 5.0%. |
The Second Investor, Third Investor and Fourth Investor nominated Alexander Shoghi, Zachary Arrick and Marco D’Attanasio, respectively, as members of the Board. Mr. D’Attanasio resigned from the Board effective as of September 15, 2022. Pursuant to the IRA, the Fourth Investor is entitled to nominate a replacement.
Acquisitions
In January 2018, we, through our wholly - owned subsidiary, CGX Life Sciences, Inc. (“CGX”), entered into separate option agreements, as amended, with (i) all of the shareholders (the “Budding Rose Sellers”) of Budding Rose, Inc. (“Budding Rose”); (ii) all of the shareholders (the “Rosebud Sellers”) of Rosebud Organics, Inc. (“Rosebud”) and (iii) Elizabeth Stavola (the “GMMD Seller” and together with the Budding Rose Sellers and Rosebud Sellers, the “Sellers”), our former officer and director and the sole member of GreenMart of Maryland, LLC (“GMMD”), pursuant to which, CGX was granted and exercised its options to acquire 100% ownership of Budding Rose, Rosebud and GMMD on September 16, 2021, April 1, 2021 and November 5, 2021, respectively, all subject to regulatory approval by the Maryland Medical Cannabis Commission (the “MMCC”). On July 28, 2022, the MMCC approved CGX’s request to acquire 100% ownership of Budding Rose, Rosebud and GMMD. On August 9, 2022, CGX closed on its acquisition of GMMD, and on August 18, 2022, CGX closed on its acquisitions of Rosebud and Budding Rose.
Recent Developments
Issuance of Common Shares
On October 3, 2022, we issued 159,021,690 common shares for vested RSUs and withheld 60,995,855 common shares to satisfy our employees’ tax obligations of $1.9 million.
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Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021
Revenues and Gross Profit
| Three Months Ended September 30, | Nine Months Ended September 30, |
|||||||||||||||
| (in ’000s of U.S. dollars) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Revenues |
||||||||||||||||
| Eastern Region |
$ | 23,770 | $ | 31,518 | $ | 74,315 | $ | 99,298 | ||||||||
| Western Region |
15,331 | 17,361 | 50,476 | 54,767 | ||||||||||||
| Other |
270 | 384 | 851 | 1,231 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total revenues |
$ | 39,371 | $ | 49,263 | $ | 125,642 | $ | 155,296 | ||||||||
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|
|
|
|
|
|
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| Cost and expenses applicable to revenues |
||||||||||||||||
| Eastern Region |
$ | (12,557 | ) | $ | (12,058 | ) | $ | (32,766 | ) | $ | (34,273 | ) | ||||
| Western Region |
(10,454 | ) | (11,130 | ) | (33,975 | ) | (32,953 | ) | ||||||||
| Other |
(179 | ) | (18 | ) | (560 | ) | (981 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total cost and expenses applicable to revenues |
$ | (23,190 | ) | $ | (23,206 | ) | $ | (67,301 | ) | $ | (68,207 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
| Gross profit |
||||||||||||||||
| Eastern Region |
$ | 11,213 | $ | 19,460 | $ | 41,549 | $ | 65,025 | ||||||||
| Western Region |
4,877 | 6,231 | 16,501 | 21,814 | ||||||||||||
| Other |
91 | 366 | 291 | 250 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total gross profit |
$ | 16,181 | $ | 26,057 | $ | 58,341 | $ | 87,089 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The eastern region includes our operations in Florida, Maryland, Massachusetts, New York, New Jersey and Vermont. The western region includes our operations in Arizona and Nevada as well as our assets and investments in Colorado.
Expenses
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| (in ’000s of U.S. dollars) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Total operating expenses |
$ | 29,905 | $ | 30,841 | $ | 126,868 | $ | 92,538 | ||||||||
| Total other expenses |
3,946 | 6,962 | 322,541 | 25,829 | ||||||||||||
| Income tax expense |
4,325 | 4,090 | 14,591 | 19,265 | ||||||||||||
Selling, General and Administrative Expenses Details
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| (in ’000s of U.S. dollars) |
2022 | 2021 | 2022 | 2021 | ||||||||||||
| Salaries and employee benefits |
$ | 9,094 | $ | 9,592 | $ | 28,334 | $ | 28,943 | ||||||||
| Severance |
352 | — | 12,242 | — | ||||||||||||
| Share-based compensation |
4,657 | 1,613 | 27,493 | 4,908 | ||||||||||||
| Legal and other professional fees |
2,096 | 4,387 | 7,464 | 13,223 | ||||||||||||
| Deferred professional fees related to the Recapitalization Transaction |
— | — | 7,091 | — | ||||||||||||
| Facility, insurance and technology costs |
3,943 | 3,929 | 11,908 | 11,902 | ||||||||||||
| Marketing expenses |
1,129 | 1,218 | 3,637 | 3,389 | ||||||||||||
| Travel and pursuit costs |
197 | 180 | 666 | 444 | ||||||||||||
| Amortization on right-of-use assets |
540 | 530 | 1,748 | 1,567 | ||||||||||||
| Other general corporate expenditures |
1,212 | 1,662 | 4,173 | 4,454 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 23,220 | $ | 23,111 | $ | 104,756 | $ | 68,830 | ||||||||
|
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|
|
|
|
|
|
|
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Total operating expenses
Total operating expenses other than those included in costs and expenses applicable to revenues consist of selling, general, and administrative expenses which are necessary to conduct our ordinary business operations. In addition, total operating expenses consist of marketing, technology, and other growth initiatives related expenses such as opening new dispensaries and building-out our facilities, as well as depreciation and amortization charges taken on our fixed and intangible assets, and any write-downs or impairment on our assets. We have taken the necessary measures to control our discretionary spending and employ capital as efficiently as possible. After normalizing for one-time items, we expect total operating expenses to remain consistent over the remainder of 2022 as we continue to employ a disciplined capital allocation approach and continue to closely monitor operating expenditures and discretionary spending.
Total other income and expenses
Total other income and expenses include income and expenses that are not included in the ordinary day-to-day activities of our business. This includes the impact of any debt extinguishments, interest and accretion expenses on our financing arrangements, fair value gains or losses on our financial instruments, and income earned from arrangements that are not from our ordinary revenue streams of retail, wholesale, or the delivery of cannabis products.
Income tax expense
As a company operating in the federally illegal cannabis industry, we are subject to the limitations of Internal Revenue Code Section 280E (“Section 280E”) under which taxpayers are only allowed to deduct expenses directly related to sales of product and no other ordinary business expenses. Our effective tax rate differs from the statutory tax rate and varies from year to year primarily as a result of numerous permanent differences, the provision for income taxes at different rates in foreign and domestic jurisdictions, including changes in enacted statutory tax rate increases or reductions in the year, changes in our valuation allowance based on our recoverability assessments of deferred tax assets and favorable or unfavorable resolution of various tax examinations.
Results of Operations for the Three Months Ended September 30, 2022 and 2021
Eastern region
For the three months ended September 30, 2022, our sales revenues in the eastern region were $23.8 million as compared to $31.5 million for the three months ended September 30, 2021, which represents a decrease of 24.6%. The main drivers for the decrease in revenues are lower retail revenues in Florida and both lower retail and wholesale revenues in Maryland and Massachusetts from increased competition and price compression in these markets. This was offset by an increase in retail revenues in New York attributable to the sale of whole flower which was approved for sale in the state of New York in October 2021 and retail revenues from our new dispensary in New Jersey, which opened on May 5, 2022.
For the three months ended September 30, 2022, gross profit was $11.2 million, or 47.2% of sales revenues, as compared to a gross profit of $19.5 million, or 61.7% of sales revenues, for the three months ended September 30, 2021. Gross margins decreased due to lower selling prices in retail dispensaries in Florida, Maryland and Massachusetts as well as lower wholesale prices in Maryland and Massachusetts while production costs and sales discounts continued to increase as a result of nationwide inflation and increased competition in these markets.
During the three months ended September 30, 2022, approximately 10,440 pounds of plant material was harvested in the eastern region as compared to approximately 9,740 pounds harvested during the three months ended September 30, 2021. The increase in harvested of plant material was due to an increase in harvests in Massachusetts and New Jersey from the ramp up of our Fall River and Pleasantville facilities during the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.
Western region
For the three months ended September 30, 2022, our sales revenues in the western region were $15.3 million as compared to $17.4 million for the three months ended September 30, 2021, which represents a decrease of 11.7%. The decrease in revenues in the western region is attributable to lower wholesale revenues in Arizona and Nevada and a decrease in retail revenues in Arizona during the three months ended September 30, 2022, as compared to the three months ended September 30, 2021. This was partially offset by new retail revenues from our new Las Vegas, Nevada dispensary which opened in September 2022.
For the three months ended September 30, 2022, gross profit was $4.9 million, or 31.8% of sales revenues, as compared to a gross profit of $6.2 million, or 35.9% of sales revenues, for the three months ended September 30, 2021. Gross margins decreased due to higher sales discounts offered in Arizona and higher cultivation costs incurred in Nevada during the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.
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During the three months ended September 30, 2022, approximately 1,590 pounds of plant material was harvested in the western region as compared to approximately 2,060 pounds harvested during the three months ended September 30, 2021. The decrease in harvested plant material is attributable to lower cultivation yields in Nevada during the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.
Other revenues
For the three months ended September 30, 2022, other revenues were $0.3 million as compared to $0.4 million for the three months ended September 30, 2021. This decrease is due to lower sales from our CBD business.
Total operating expenses
For the three months ended September 30, 2022, our total operating expenses were $29.9 million as compared to $30.8 million for the three months ended September 30, 2021, which represents a decrease of 3.0%.
The decrease in total operating expenses between the three months ended September 30, 2022 and 2021 is due to one-time recoveries during the three months ended September 30, 2022 of $1.1 million from the sale of our Fall River property and the early termination of an office lease. Further, we incurred no impairment losses during the three months ended September 30, 2022 as compared to impairment losses of $0.1 million from the three months ended September 30, 2021. This was partially offset by an increase in our depreciation and amortization expenses of $0.2 million and an increase in our selling, general and administrative expenses of $0.1 million as compared to the three months ended September 30, 2021.
Total other income and expenses
For the three months ended September 30, 2022, our total other expenses were $3.9 million as compared to $7.0 million for the three months ended September 30, 2021, which represents a decrease of 43.3%.
The decrease in total other expenses between the three months ended September 30, 2022 and 2021 is primarily a result of the closing of the Recapitalization Transaction on June 24, 2022 that extinguished a portion of our total outstanding debt and reduced the interest rates on the June Secured Debentures, June Unsecured Debentures and the Senior Secured Bridge Notes. This resulted in lower interest expense of $3.5 million during the three months ended September 30, 2022 as compared to $6.0 million for the three months ended September 30, 2021. Further, we did not incur any interest on the Exit Fee during the three months ended September 30, 2022 as the Exit Fee was cancelled as part of the Recapitalization Transaction, as compared to $0.4 million during the three months ended September 30, 2021. Other income increased by $0.3 million during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021, as we are now earning rental income from our sublease arrangements.
Total other expenses increased by an increase in accretion expense of $0.3 million as we are now accruing accretion on the June Secured Debentures and June Unsecured Debentures as compared to no accretion expense on the $40.0 million secured notes we issued on May 14, 2018 (the “Tranche One Secured Notes”), the $20.0 million of secured notes we issued on September 30, 2019 (the “Tranche Two Secured Notes”) and the $36.2 million of secured notes we issued on December 20, 2019 (the “Tranche Three Secured Notes”) which were fully accreted as of May 2021.
Income tax expense
For the three months ended September 30, 2022, our income tax expense was $4.3 million as compared to $4.1 million for the three months ended September 30, 2021, which represents an increase of 5.7%. The increase in income tax expense is a result of our higher taxable income during the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.
Results of Operations for the Nine Months Ended September 30, 2022 and 2021
Eastern region
For the nine months ended September 30, 2022, our sales revenues in the eastern region were $74.3 million as compared to $99.3 million for the nine months ended September 30, 2021, which represents a decrease of 25.2%. The main drivers for the decrease in revenues are lower retail revenues in Florida and both lower retail and wholesale revenues in Maryland, Massachusetts and Vermont from increased competition and price compression in these markets. This was offset by an increase in retail revenues in New York attributable to the sale of whole flower which was approved for sale in the state of New York in October 2021 and from retail revenues earned from our new dispensary in New Jersey, which opened on May 5, 2022.
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For the nine months ended September 30, 2022, gross profit was $41.5 million, or 55.9% of sales revenues, as compared to a gross profit of $65.0 million, or 65.5% of sales revenues, for the nine months ended September 30, 2021. Gross profit decreased due to lower selling prices in Florida, Maryland and Massachusetts as well as lower wholesale prices in Maryland and Massachusetts while production costs and sales discounts continued to increase as a result of nationwide inflation and increased competition in these markets.
During the nine months ended September 30, 2022, approximately 30,360 pounds of plant material was harvested in the eastern region as compared to approximately 33,240 pounds harvested during the nine months ended September 30, 2021. The decrease in harvested plant material was due to lower yields in Florida due to poor weather conditions, partially offset by an increase in harvests in Massachusetts and New Jersey from the ramp up of our Fall River and Pleasantville facilities during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.
Western region
For the nine months ended September 30, 2022, our sales revenues in the western region were $50.5 million as compared to $54.8 million for the nine months ended September 30, 2021, which represents a decrease of 7.8%. The decrease in revenue in the western region is attributable to lower wholesale revenues in Nevada and a decrease in retail revenues in Arizona during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.
For the nine months ended September 30, 2022, gross profit was $16.5 million, or 32.7% of sales revenues, as compared to a gross profit of $21.8 million, or 39.8% of sales revenues, for the nine months ended September 30, 2021. Gross margins decreased due to higher sales discounts offered in Arizona and from higher cultivation costs incurred in Nevada during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.
During the nine months ended September 30, 2022, approximately 5,260 pounds of plant material was harvested in the western region as compared to approximately 5,160 pounds harvested during the nine months ended September 30, 2021. Cultivation yields in both Arizona and Nevada have remained relatively consistent during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.
Other revenues
For the nine months ended September 30, 2022, other revenues were $0.9 million as compared to $1.2 million for the nine months ended September 30, 2021. This decrease is due to lower sales from our CBD business.
Total operating expenses
For the nine months ended September 30, 2022, our total operating expenses were $126.9 million as compared to $92.5 million for the nine months ended September 30, 2021, which represents an increase of 37.1%.
The increase in total operating expenses between the nine months ended September 30, 2022 and 2021 resulted from an increase of $35.9 million in our selling, general, and administrative expenses which is attributable to: $12.2 million increase in severance expenses, including a $12.0 million payment to our former Interim Chief Executive Officer; a $22.6 million increase in share-based compensation from the grant of restricted stock units to employees and directors and the concurrent cancellation of existing stock options; and an increase in deferred professional fees of $7.1 million from the closing of the Recapitalization Transaction on June 24, 2022. Total selling, general and administrative expenses were partially offset by a decrease in legal and other fees by $5.8 million and a decrease from salaries and other general corporate expenditures of $0.2 million during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.
Further, there was an increase in our depreciation and amortization expenses of $1.3 million as our depreciable fixed asset base increased from $136.7 million as of September 30, 2021 to $143.8 million as of September 30, 2022. The increase in operating expenses was offset by a decrease of impairment losses of $1.8 million year-over-year as there were no impairment charges during the nine months ended September 30, 2022. In addition, one-time recoveries of $1.1 million from the sale of our Fall River property and the early termination of an office lease during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021, further offset the increase in operating expenses.
For the nine months ended September 30, 2022, excise taxes were $0.4 million as compared to $0.8 million for the nine months ended September 30, 2021. Excise taxes are included as part of the selling, general, and administrative expenses on the unaudited interim condensed consolidated statements of operations.
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Total other income and expenses
For the nine months ended September 30, 2022, our total other expenses were $322.5 million as compared to total other expenses of $25.8 million for the nine months ended September 30, 2021, which represents an increase of 1,148.8%.
The increase in total other income and expenses between the nine months ended September 30, 2022 and 2021 is primarily due to a one-time $316.6 million loss on debt extinguishment related to the closing of the Recapitalization Transaction. This increase in total other expenses was offset by a decrease in accretion expense of $5.7 million as our Tranche One Secured Notes, Tranche Two Secured Notes and Tranche Three Secured Notes were fully accreted as of May 2021 resulting in no accretion expense on these instruments during the nine months ended September 30, 2022, as compared to five months of accretion expense for these instruments taken during the nine months ended September 30, 2021. This was partially offset by accretion expense on the June Secured Debentures and June Unsecured Debentures since the closing of the Recapitalization Transaction on June 24, 2022. The closing of the Recapitalization Transaction also extinguished a portion of our total debt outstanding and reduced the interest rates on the June Secured Debentures, June Unsecured Debentures and the Senior Secured Bridge Notes. This resulted in a lower interest expense of $2.4 million during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021.
Furthermore, other income increased by $11.9 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily from a fair value gain net of tax of $10.5 million from the noncash consideration provided as part of the acquisition of MPX New Jersey LLC (“MPX NJ”) and from sublease income earned from our sublease arrangements.
Income tax expense
For the nine months ended September 30, 2022, our income tax expense was $14.6 million as compared to $19.3 million for the nine months ended September 30, 2021, which represents a decrease of 24.3%. The decrease in income tax expense is due to lower taxable income during the nine months ended September 30, 2022, as compared to nine months ended September 30, 2021.
Liquidity and Capital Resources
As of September 30, 2022, we held unrestricted cash of $22.7 million (December 31, 2021—$13.2 million) and had an accumulated deficit of $1,207.3 million (December 31, 2021—$801.6 million) and a working capital deficit of $44.9 million (December 31, 2021—$231.7 million). In assessing our liquidity, we monitor our cash on-hand and our operating expenditures required to execute our day-to-day operations and our long-term strategic plans. To date, we have financed our operations primarily through equity and debt financings and our cash flows from operations and we anticipate that we will need to raise additional capital to fund our operations in the future. We expect to finance our operating activities through a combination of additional financings and cash flows from our operations. However, we may be unable to raise additional funds when needed and on favorable terms, or at all, which may have a negative impact on our financial condition and could force us to curtail or cease our operations. Furthermore, the terms of certain of our debt instruments impose certain restrictions on our operating and financing activities, including, but not limited to, our ability to incur certain additional indebtedness and our ability to issue shares or convertible securities. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital due to favorable market conditions and/or as a result of strategic initiatives.
Going Concern
The accompanying unaudited interim condensed consolidated financial statements have been prepared on a going concern basis, which assumes that we will continue to operate as a going concern, and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Our ability to continue as a going concern is dependent upon our ability to raise additional capital, our ability to achieve sustainable revenues and profitable operations, and our ability to obtain the necessary capital to meet our obligations and repay our liabilities when they become due.
We believe that the consummation of the Recapitalization Transaction will provide the necessary funding for us to continue funding our operations in the future. Further, the consummation of the Recapitalization Transaction resulted in lower interest rates on the June Secured Debentures, June Unsecured Debentures and the $11.0 million senior secured bridge notes issued by iAnthus New Jersey, LLC, and allows interest to be paid-in-kind. As a result of the closing of the Recapitalization Transaction, we are now able to seek additional debt and/or equity financings as necessary. As such, we believe we may be able to continue as a going concern for a period of no less than 12 months from the date of these unaudited interim condensed consolidated financial statements. The unaudited interim condensed consolidated financial statements included in this Quarterly Report on Form 10-Q do not include any adjustments that might be necessary if we are unable to continue as a going concern.
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While we believe that we have funding necessary for us to continue as a going concern, we may need to raise additional capital and there can be no assurance that such capital will be available to us on favorable terms, if at all. As such, these material circumstances cast substantial doubt on our ability to continue as a going concern for a period of no less than 12 months from the date of this report, and our unaudited interim condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently plan due to incorrect assumptions or due to a decision to expand our activities beyond those currently planned.
Cash Flow for the Nine Months Ended September 30, 2022 as Compared to the Nine Months Ended September 30, 2021
Operating Activities
Our net cash flows from operating activities are affected by several factors, including revenues generated by operations, increases or decreases in our operating expenses, including expenses related to new capital projects and development and expansion of newly acquired businesses and the level of cash collections from our customers.
Net cash used in operating activities during the nine months ended September 30, 2022 was $14.1 million as compared to net cash provided by operating activities of $19.8 million for the nine months ended September 30, 2021. The reduction in our net cash provided from operating activities was due to our net loss of $405.7 million, partially offset by $316.6 million from loss on debt extinguishment from the consummation of the Recapitalization Transaction, $27.5 million in share-based compensation as a result of the issuance of restricted stock units and concurrent cancellation of all existing stock options, $24.8 million of depreciation and amortization expense, $15.1 million in interest expense, a $10.5 million gain from nonmonetary consideration from the MPX NJ acquisition, $2.6 million of accretion expense, and $15.2 million from changes in operating assets and liabilities items during the nine months ended September 30, 2022.
Changes in other operating assets for the nine months ended September 30, 2022 include an increase in inventory of $0.7 million due to lower sales during the nine months ended September 30, 2022, as compared to the nine months ended September 30, 2021, and an increase of $1.0 million related to the recognition of right-of-use assets during the nine months ended September 30, 2022.
Changes in other operating liabilities for the nine months ended September 30, 2022 include an increase in accrued and other current liabilities of $18.7 million due to accrued income taxes for the period, interest and recapitalization fees due upon closing of the Recapitalization Transaction on June 24, 2022, and a decrease in accounts payable of $2.3 million.
As we continue to expand our operations and as these operations become more established, we continue to expect our business to become cash generative and we intend to place less reliance on financing from other sources to fund our operations. We have negative cash flows from operations in 2022 and therefore no assurance can be given that we will have positive cash flows in the future.
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Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2022, was $3.6 million as compared to $18.0 million during the nine months ended September 30, 2021. The decrease in cash used in investing activities was primarily attributable to lower cultivation and dispensary construction expenditures of $5.8 million during the nine months ended September 30, 2022 as compared to $16.5 million during the nine months ended September 30, 2021. In addition, during the nine months ended September 30, 2022, we loaned $0.1 million to MPX NJ as compared to $1.0 million during the nine months ended September 30, 2021.
Cash flow provided from investing activities during the nine months ended September 30, 2022 included $2.4 million which was a result from the sale of certain property, plant and equipment compared to $Nil, during the nine months ended September 30, 2021.
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2022 was $23.9 million as compared to $10.3 million for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, we received proceeds from the issuance of the Additional Secured Notes of $24.3 million which was partially offset by approximately $0.3 million on repayment of debt. This compares to the issuance of the Senior Secured Bridge Notes in the principal amount of $11.0 million, offset by related debt issuance costs of $0.7 million and repayment of certain debt of less than $0.1 million during the nine months ended September 30, 2021.
Related Party Transactions
As part of the acquisition of MPX Bioceutical Corporation on February 5, 2019, we acquired a related party receivable of $0.7 million due from a company owned by a former director and officer, Elizabeth Stavola. The related party receivable was converted into a loan facility of up to $10.0 million, which accrued interest at the rate of 16.0%, compounded annually. Interest was due upon maturity of the loan on December 31, 2021. During the year ended December 31, 2021, we exercised our right to convert the principal balance of the loan and accrued interest into a 99% equity interest in MPX NJ and exercised our option to acquire the remaining 1% of MPX NJ, which was approved by the New Jersey Cannabis Regulatory Commission on January 7, 2022. We recorded acquisition costs of $Nil and $0.3 million within selling, general and administrative expenses on the unaudited interim condensed consolidated statements of operations for the three and nine months ended September 30, 2022 and 2021, respectively. As of September 30, 2022, the balance of such facility was $Nil (December 31, 2021 – $4.6 million), which includes accrued interest of $Nil (December 31, 2021—$0.9 million). The related party balances are presented in other long-term assets on the unaudited interim condensed consolidated balance sheets.
Upon the closing of the Recapitalization Transaction, certain of the Company’s lenders held greater than 10% of the voting interests in the Company and therefore are classified as related parties. For further discussion, refer to Note 5 of the unaudited interim condensed consolidated financial statements included in Item I of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022.
Effective as of May 6, 2022 (the “Resignation Date”), Randy Maslow, our Interim Chief Executive Officer and President and a member of the Board of Directors, resigned from his executive positions, including all positions with our subsidiaries and its affiliates, and from our Board of Directors and committees. In connection with the resignation, we executed a separation agreement (the “Separation Agreement”) with Mr. Maslow, pursuant to which Mr. Maslow will receive certain compensation and benefits valued to substantially equal the value of entitlements he would have received under Section 4(g) of his employment agreement. Specifically, Mr. Maslow will receive total cash compensation in the amount of approximately $12.2 million (the “Separation Payment”), of which $5.1 million was paid out on May 6, 2022 (made up, in part of a portion of severance payment of approximately $4.8 million, and unpaid 2021 bonus of $300,000). The remainder of the Separation Payment was to be paid out in equal installments of approximately $0.9 million per month over the next eight months following the Resignation Date, which became accelerated upon the closing of the Recapitalization Transaction. The total outstanding balance of the Separation Payment owed to Mr. Maslow was paid in full as of July 15, 2022. Under the terms of the Separation Agreement, we will continue to pay the monthly premium for Mr. Maslow’s continued participation in our health and dental insurance benefits pursuant to COBRA for one year from the Resignation Date. Mr. Maslow’s compensation and benefits under the Separation Agreement also included the extension of exercise period of options to acquire our common shares, until the earlier of (i) five years from the Resignation Date; (ii) the original expiration dates of the applicable option; or (iii) the closing of the Recapitalization Transaction. In accordance with the terms of the Separation Agreement, Mr. Maslow’s options to acquire our common shares expired as of the Closing Date of the Recapitalization Transaction. Mr. Maslow will continue to serve in a consulting role for a period of six months following the Resignation Date (provided that we may extend such period by an additional six months) at a base compensation of $25,000 per month. During the three and nine months ended September 30, 2022, we paid less than $0.1 million and $0.1 million, respectively, to Mr. Maslow in relation to consulting services provided (September 30, 2021—$Nil and $Nil, respectively).
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Pursuant to the Secured DPA, we have a related party payable of $6.3 million due to certain of the New Secured Lenders, including Gotham Green Fund 1, L.P., Gotham Green Fund 1 (Q), L.P., Gotham Green Fund II, L.P., Gotham Green Fund II (Q), L.P., Oasis Investment Master II Fund LTD., Senvest Global (KY), LP, and Senvest Master Fund, LP, for certain out-of-pocket costs, charges, fees, taxes and other expenses incurred by the New Secured Lenders in connection with the closing of the Recapitalization Transaction (the “Deferred Professional Fees”). These New Secured Lenders held greater than 10% of our outstanding common shares upon the closing of the Recapitalization Transaction and are therefore considered to be related parties. We have until December 31, 2022 to pay the Deferred Professional Fees ratably based on the amount of each New Secured Lender’s Deferred Professional Fees. The Deferred Professional Fees shall accrue simple interest at the rate of 12.0% from the Closing Date until December 31, 2022. Beginning with the first business day of the month following December 31, 2022, interest shall accrue on the Deferred Professional Fees at the rate of 20.0% calculated on a daily basis and is payable on the first business day of every month until the Deferred Professional Fees and accrued interest thereon is paid in full. As of September 30, 2022, the outstanding related party portion of the Deferred Professional Fees including accrued interest was $6.5 million (December 31, 2021 – $Nil). The related party balance is presented in accrued and other current liabilities on the unaudited interim condensed consolidated balance sheets.
Critical Accounting Policies and Accounting Estimates
The preparation of our unaudited interim condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
Our significant accounting policies and estimates are described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 18, 2022 which describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We believe the following critical accounting policies govern the more significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the consolidated financial statements are described below.
Other than those noted below, there have been no material changes to our critical accounting policies and estimates as from the date upon which we filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 with the SEC.
Business Combinations
In accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 805 Business Combinations (“ASC 805”), we allocate the fair value of the purchase consideration to the tangible and intangible asset purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets acquired and liabilities assumed requires estimates and the use of valuation techniques when a market value is not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. If we obtain new information about the facts and circumstances that existed as of the acquisition date during the measurement period, which may be up to one year from the acquisition date, we may record an adjustment to the assets acquired and liabilities assumed.
Classification of an acquisition as a business combination or an asset acquisition depends on whether the assets acquired constitute a business, which can be a complex judgment. Whether an acquisition is classified as a business combination or asset acquisition can have a significant impact on the accounting considerations on and after acquisition.
Debt Modifications and Extinguishments
In accordance with the Financial Accounting Standards Board Accounting Standards Codification Topic 470-50 Debt Modifications and Extinguishments (“ASC 470-50”), we determine the fair value of any debt modified or extinguished on the closing date of the modification as well as the fair value of what was received in exchange of any debt modification or extinguishment. The determination of these fair values requires estimates and the use of valuation techniques when a market value is not readily available. Any difference between the exchange resulting from a debt modification or extinguishment may result in a gain or loss on debt extinguishment within our unaudited interim condensed consolidated statements of operations.
JOBS Act
On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
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We have chosen to take advantage of the extended transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards until those standards would otherwise apply to private companies provided under the JOBS Act. As a result, our financial statements may not be comparable to those of companies that comply with public company effective dates for complying with new or revised accounting standards.
Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including, without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Our management, with the participation of our Interim Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Interim Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2022, our disclosure controls and procedures were not effective due material weakness, which could adversely affect our ability to record, process, summarize, and report financial data. Such weaknesses include valuation of inventory, sales and expense cutoff for certain subsidiaries, accounting for business combinations, accounting for debt modifications and extinguishments, and our provisioning of user access rights, password lengths, certain backup/recovery controls and change management controls.
We have developed a plan to remediate the material weaknesses, which includes implementing improved processes and internal controls to ensure the proper application of accounting practices and guidance. In addition, we intend to dedicate accounting resources to assessing our existing internal controls and to develop a plan to remediate these material weaknesses.
Changes in Internal Control
Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings. Litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth herein, we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
Roberts Matter
In October 2018, Craig Roberts and Beverly Roberts (the “Roberts”) and the Gary W. Roberts Irrevocable Trust Agreement I, Gary W. Roberts Irrevocable Trust Agreement II, and Gary W. Roberts Irrevocable Trust Agreement III (the “Roberts Trust” and together with the Roberts, the “Roberts Plaintiffs”) filed two separate but similar declaratory judgment actions in the Circuit Court of Palm Beach County, Florida against GrowHealthy Holdings, LLC (“GrowHealthy Holdings”) and the Company in connection with the acquisition of substantially all of GrowHealthy Holdings’ assets by the Company in early 2018. The Roberts Plaintiffs sought a declaration that the Company must deliver certain share certificates to the Roberts without requiring them to deliver a signed Shareholder Representative Agreement (“SRA”) to GrowHealthy Holdings, which delivery was a condition precedent to receiving the Company share certificates and required by the acquisition agreements between GrowHealthy Holdings and the Company. In January 2019, the Circuit Court of Palm Beach County denied the Roberts Plaintiffs’ motion for injunctive relief, and the Roberts Plaintiffs signed and delivered the SRA forms to GrowHealthy Holdings while reserving their rights to continue challenging the validity and enforceability of the SRA. The Roberts Plaintiffs thereafter amended their complaints to seek monetary damages in the aggregate amount of $22.0 million plus treble damages. On May 21, 2019, the court issued an interlocutory order directing the Company to deliver the share certificates to the Roberts Plaintiffs, which the Company delivered on June 17, 2019, in accordance with the court’s order. On December 19, 2019, the Company appealed the court’s order directing delivery of the share certificates to the Florida Fourth District Court of Appeal, which appeal was denied per curiam. On October 21, 2019, the Roberts Plaintiffs were granted leave by the Circuit Court of Palm Beach County to amend their complaints in order to add purported claims for civil theft and punitive damages, and on November 22, 2019, the Company moved to dismiss the Roberts Plaintiffs’ amended complaints. On May 1, 2020, the Circuit Court of Palm Beach County heard arguments on the motions to dismiss, and on June 11, 2020, the court issued a written order granting in part and denying in part the Company’s motion to dismiss. Specifically, the order denied the Company’s motion to dismiss for lack of jurisdiction and improper venue; however, the court granted the Company’s motion to dismiss the Roberts Plaintiffs’ claims for specific performance, conversion and civil theft without prejudice. With respect to the claim for conversion and civil theft, the Circuit Court of Palm Beach County provided the Roberts Plaintiffs with leave to amend their respective complaints. On July 10, 2020, the Roberts Plaintiffs filed further amended complaints in each action against the Company including claims for conversion, breach of contract and civil theft including damages in the aggregate amount of $22.0 million plus treble damages, and on August 13, 2020, the Company filed a consolidated motion to dismiss such amended complaints. On October 26, 2020, Circuit Court of Palm Beach County heard argument on the consolidated motion to dismiss, denied the motion and entered an order to that effect on October 28, 2020. Answers on both actions were filed on November 20, 2020 and the parties commenced discovery. On September 9, 2021, the Roberts Plaintiffs filed a motion to consolidate the two separate actions, which motion was granted on October 14, 2021. On August 6, 2020, the Roberts filed a lawsuit against Randy Maslow, the Company’s now former Interim Chief Executive Officer, President and director, in his individual capacity (the “Maslow Complaint”), alleging a single count of purported conversion. The Maslow Complaint was not served on Randy Maslow until November 25, 2021, and the allegations in the Maslow Complaint are substantially similar to those allegations for purported conversion in the complaints filed against the Company. On March 28, 2022, the court consolidated the action filed against Randy Maslow with the Roberts Plaintiffs’ action for discovery and trial purposes. As a result, the court vacated the matter’s initial trial date of May 9, 2022 and the case has not been reset for trial yet. On April 22, 2022, the parties attended a court required mediation, which was unsuccessful. On May 6, 2022, the Circuit Court of Palm Beach County granted Randy Maslow’s motion to dismiss the Maslow Complaint. On May 19, 2022, the Roberts filed a second amended complaint against Mr. Maslow (“Amended Maslow Complaint”). On June 3, 2022, Mr. Maslow filed a motion to dismiss the Amended Maslow Complaint, which was denied on September 9, 2022. Discovery is ongoing, and no date has been set for trial.
Oasis Matter
On February 27, 2020, the Company filed a statement of claim in the OSCJ against Oasis Investments II Master Fund Ltd. (“Oasis”), an Unsecured Lender. In response to the Company’s statement of claim, Oasis filed a statement of defense and counterclaim against the Company on March 13, 2020, alleging that the Company breached certain debt covenants and an order directing the Company to immediately repay Oasis its $25,000,000 investment plus applicable interest, expenses and fees, among other damages. On July 15, 2020, in connection with the Recapitalization Transaction, the Company agreed to discontinue with prejudice its claim against Oasis which was filed on February 27, 2020. In July 2022, Oasis discontinued its counterclaim with prejudice in connection with the closing of the Recapitalization Transaction.
Plan of Arrangement
On August 20, 2021, the Applicants filed the Application with the OSCJ, which sought, among other things, a declaration that the Outside Date for the closing of the Recapitalization Transaction be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On August 24, 2021, the Company and Applicants appeared for a case conference before the OSCJ at which the OSCJ issued the Stay Order that required the parties to the Restructuring Support Agreement to maintain the status quo until the hearing on September 23, 2021. Specifically, the Stay Order provided that the parties shall remain bound by the Restructuring Support Agreement and not take any steps to advance or impede the regulatory approval process for the closing of the Recapitalization Transaction or otherwise have any communication with the applicable state-level regulators concerning the Recapitalization Transaction or the other counterparties to the Restructuring Support Agreement. On September 23, 2021, the parties appeared before the OSCJ for a hearing on the Application. Following this hearing, the OSCJ issued an endorsement that extended the Stay Order from September 23, 2021 until 48 hours after the release of the OSCJ’s decision on the merits of the Application. On October 12, 2021, the OSCJ issued the Decision granting the Applicant’s relief sought in the Application. Specifically, the OSCJ granted the declaration sought by the Applicants and ordered that the Outside Date be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On November 10, 2021, the Company filed a Notice of Appeal with the Ontario Court of Appeal. On August 19, 2022, following the closing of the Recapitalization Transaction, the Company filed a Notice of Abandonment with the Ontario Court of Appeal to discontinue such appeal with prejudice.
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U.S. Hi-Med Matter
On May 19, 2020, Hi-Med LLC (“Hi-Med”), an equity holder and one of the Unsecured Lenders who held an Unsecured Debenture in the principal amount of $5.0 million prior to the closing of the Recapitalization Transaction, filed a complaint (the “Hi-Med Complaint”) with the United States District Court for the Southern District of New York (the “SDNY”) against the Company and certain of the Company’s current and former directors and officers and other defendants (the “Hi-Med Lawsuit”). Hi-Med is seeking damages of an unspecified amount and the full principal amount of the Unsecured Debenture against the Company, for among other things, alleged breaches of provisions of the Unsecured Debentures and the related Debenture Purchase Agreement as well as alleged violations of Federal securities laws, including Sections 10(b), 10b-5 and 20(a) of the Securities Exchange Act of 1934, as amended and common law fraud relating to alleged false and misleading statements regarding certain proceeds from the issuance of long-term debt that were held in escrow to make interest payments in the event of a default thereof. On July 9, 2020, the court issued an order consolidating the class action matter with the shareholder class action referenced below. On July 23, 2020, Hi-Med and the defendants filed a stipulation and proposed scheduling and coordination order to coordinate the pleadings for the consolidated actions. On September 4, 2020, Hi-Med filed an amended complaint (the “Hi-Med Amended Complaint”). On October 14, 2020, the SDNY issued a stipulation and scheduling and coordination order, which required that the defendants answer, move, or otherwise respond to the Hi-Med Amended Complaint no later than November 20, 2020. On November 20, 2020, the Company and certain of its current officers and directors filed a Motion to Dismiss the Hi-Med Amended Complaint. On January 8, 2021, Hi-Med filed an opposition to the Motion to Dismiss. The Company and certain of its current officers and directors’ reply were filed on February 22, 2021. In a memorandum of opinion dated August 30, 2021, the SDNY granted the Company’s and certain of its officers and directors’ Motion to Dismiss the Hi-Med Amended Complaint. The SDNY indicated that Hi-Med may move for leave to file a proposed second amended complaint by September 30, 2021. On September 30, 2021, Hi-Med filed a motion for leave to amend the Hi-Med Amended Complaint. On October 28, 2021, the parties filed a Stipulation and Proposed Scheduling Order Regarding Hi-Med’s Motion for Leave to File a second Amended Complaint (the “Stipulation”). On November 3, 2021, the SDNY so-ordered the Stipulation and Hi-Med’s second Amended Complaint was deemed filed as of this date. On December 20, 2021, the Company and its current named officers and directors filed a Motion to Dismiss Hi-Med’s second Amended Complaint. Hi-Med’s opposition to the Company’s and its current named officers and directors’ Motion to Dismiss was filed on February 3, 2022. The Company and its current named officers and directors’ reply to Hi-Med’s opposition was filed on March 21, 2022. On September 28, 2022, the SDNY issued an opinion granting in part and denying in part the Motion to Dismiss Hi-Med’s second Amended Complaint (the “Opinion”). On October 12, 2022, the parties filed a joint stipulation and proposed scheduling order (the “Joint Stipulation and Proposed Scheduling Order”), in which certain defendants indicated that they may be filing a motion seeking clarification of certain aspects of the court’s Opinion. The parties proposed that the Company’s answer would be due on November 21, 2022 and that the parties would submit a proposed discovery plan by December 12, 2022. The Joint Stipulation and Proposed Scheduling Order was so ordered by the court on October 19, 2022. Defendants’ motions seeking clarification were filed on October 24, 2022 and are currently pending before the court.
U.S. Shareholder Class Action
On April 20, 2020, Donald Finch, a shareholder of the Company, filed a putative class action lawsuit with the SDNY against the Company (the “Class Action Lawsuit”) and is seeking damages for an unspecified amount against the Company, its former Chief Executive Officer, its current Chief Financial Officer and others for alleged false and misleading statements regarding certain proceeds from the issuance of long-term debt, that were held in escrow to make interest payments in the event of default on such long-term debt. On May 5, 2020, Peter Cedeno, another shareholder of the Company, filed a putative class action against the same defendants alleging substantially similar causes of action. On June 16, 2020, four separate motions for consolidation, appointment as lead plaintiff, and approval of lead counsel were filed by Jose Antonio Silva, Robert and Sherri Newblatt, Robert Dankner, and Melvin Fussell. On July 9, 2020, the SDNY issued an order consolidating the Class Action Lawsuit and the Hi-Med Complaint referenced above and appointed Jose Antonio Silva as lead plaintiff (“Lead Plaintiff”). On July 23, 2020, the Lead Plaintiff and defendants filed a stipulation and proposed scheduling and coordination order to coordinate the pleadings for the consolidated actions. On September 4, 2020, the Lead Plaintiff filed a consolidated amended class action lawsuit against the Company (the “Amended Complaint”). On November 20, 2020, the Company and its Chief Financial Officer filed a Motion to Dismiss the Amended Complaint. On January 8, 2021, the Lead Plaintiff filed an opposition to the Motion to Dismiss the Amended Complaint. The Company and its Chief Financial Officer’s reply to the opposition was filed on February 22, 2021. In a memorandum of opinion dated August 30, 2021, the SDNY granted the Company’s and its Chief Financial Officer’s Motion to Dismiss the Amended Complaint. The SDNY indicated that the Lead Plaintiff may move for leave to file a proposed second amended complaint by September 30, 2021. On October 1, 2021, the Lead Plaintiff filed a motion for leave to amend the Amended Complaint. The Lead Plaintiff’s Motion for Leave to File a second Amended Complaint was included as part of the Stipulation identified above. On November 3, 2021, the SDNY so-ordered the Stipulation and the Lead Plaintiff’s second Amended Complaint was deemed filed as of this date. On December 20, 2021, the Company and its Chief Financial Officer filed a Motion to Dismiss the Lead Plaintiff’s second Amended Complaint. The Lead Plaintiff’s opposition to the Company’s and its Chief Financial Officer’s Motion to Dismiss was filed on February 3, 2022. The Company’s and its Chief Financial Officer’s reply to the Lead Plaintiff’s opposition was filed on March 21, 2022. On September 28, 2022, the SDNY issued an opinion granting in part and denying in part the Motion to Dismiss the Lead Plaintiff’s second Amended Complaint. On October 12, 2022, the parties filed the Joint Stipulation and Proposed Scheduling Order. The parties proposed that the Company’s answer would be due on November 21, 2022; that the parties would submit a proposed discovery plan by December 12, 2022; and that discovery in the Class Action Lawsuit would be coordinated with discovery in the Hi-Med Lawsuit to the extent the two actions involved overlapping issues. The Joint Stipulation and Proposed Scheduling Order was so ordered by the court on October 19, 2022.
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Claim by Maryland License Holder
On May 23, 2022, CGX Life Sciences, Inc. (“CGX”), a wholly-owned subsidiary of the Company, filed a demand for arbitration (the “CGX Arbitration”) with the American Arbitration Association (“AAA”) against LMS Wellness, Benefit LLC (“LMS”) and its 100% owner, William Huber (“Huber” and together with LMS, the “Defendants”) for various breaches under the option agreements entered into between CGX and LMS, on the one hand, and CGX and Huber on the other (collectively, the “Option Agreements”). Specifically, CGX is seeking: (i) an order finding the Defendants in breach of the Option Agreements and directing specific performance by the Defendants of their obligations under the Option Agreements to complete the sale and transfer of LMS to CGX; (ii) an order either tolling or extending the closing date under the Option Agreements; (ii) an order requiring Huber to restore LMS’ bank account of all sums withdrawn for the payment of contracts entered into in breach of the Option Agreements; and (iii) an order prohibiting Huber from withdrawing any further funds from LMS’ bank account. On June 8, 2022, the Defendants filed an Answering Statement, denying the allegations raised by CGX and sent a notice to CGX, purporting to terminate the Option Agreements.
In addition, on June 8, 2022, LMS filed a demand for arbitration (the “S8 Arbitration”) with the AAA against S8 Management, LLC (“S8”), alleging that S8 breached the Amended and Restated Management Services Agreement (the “MSA”) entered into between LMS and S8 on March 12, 2018. On June 24, 2022, the Defendants filed Motion to Consolidate the CGX Arbitration and S8 Arbitration. On July 5, 2022, CGX filed an opposition to the Defendants’ Motion to Consolidate and a cross-Motion to Stay the S8 Arbitration to allow the CGX Arbitration to proceed first. On July 26, 2022, the parties attended a preliminary conference with the arbitrator, at which conference the arbitrator preliminarily granted the Defendants’ Motion to Consolidate and denied CGX’s cross-Motion to Stay the S8 Arbitration. On October 7, 2022, CGX filed a dispositive motion for specific performance of Defendants’ obligations to complete the sale of LMS to CGX (claims (i) and (ii), above), which Defendants opposed. On October 31, 2022, the arbitrator granted CGX’s dispositive motion and ordered Defendants to complete the sale of LMS to CGX. The remaining claims asserted in the CGX Arbitration (claims (iii) and (iv), above) and the S8 Arbitration remain pending. CGX continues to prosecute its other two claims concerning Defendants’ use of LMS’ funds, and S8 continues to deny and defend against LMS’ contentions that S8 breached the MSA.
ITEM 1A. RISK FACTORS.
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2021(“Annual Report”), as amended by Part II, Item 1A “Risk Factors,” in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 (the “Quarterly Report” and together with the Annual Report, the “Reports”). There have been no material changes in our risk factors from those previously disclosed in our Reports. You should carefully consider the risks described in our Reports, which could materially affect our business, financial condition or future results. The risks described in our Reports are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On August 18, 2022, the Company issued 408 common shares to settle shares to be issued with regards to purchase options assumed by the Company on February 5, 2019 as part of MPX Acquisition.
The foregoing issuance was exempt from registration under Section 4(a)(2) of the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
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| * | Filed herewith. |
| ** | Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| IANTHUS CAPITAL HOLDINGS, INC. | ||||||
| Date: November 8, 2022 | By: | /s/ Robert Galvin | ||||
| Robert Galvin | ||||||
| Interim Chief Executive Officer | ||||||
| (Principal Executive Officer) | ||||||
| Date: November 8, 2022 | By: | /s/ Julius Kalcevich | ||||
| Julius Kalcevich | ||||||
| Chief Financial Officer | ||||||
| (Principal Financial and Accounting Officer) | ||||||
53
Exhibit 31.1
Certification of Chief Executive Officer of iAnthus Capital Holdings, Inc.
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert Galvin, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of iAnthus Capital Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 8, 2022 | /s/ Robert Galvin | |||||
| Robert Galvin | ||||||
| Interim Chief Executive Officer | ||||||
| (Principal Executive Officer) |
Exhibit 31.2
Certification of Chief Financial Officer of iAnthus Capital Holdings, Inc.
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Julius Kalcevich, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of iAnthus Capital Holdings, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: November 8, 2022 | /s/ Julius Kalcevich | |||||
| Julius Kalcevich | ||||||
| Chief Financial Officer | ||||||
| (Principal Financial and Accounting Officer) |
Exhibit 32.1
Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Robert Galvin, Interim Chief Executive Officer of iAnthus Capital Holdings, Inc. (the “Company”), hereby certifies that based on the undersigned’s knowledge:
| 1. | The Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: November 8, 2022 | /s/ Robert Galvin | |||||
| Robert Galvin | ||||||
| Interim Chief Executive Officer | ||||||
| (Principal Executive Officer) |
Exhibit 32.2
Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Julius Kalcevich, Chief Financial Officer of iAnthus Capital Holdings, Inc. (the “Company”), hereby certifies that based on the undersigned’s knowledge:
| 1. | The Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2022 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: November 8, 2022 | /s/ Julius Kalcevich | |||||
| Julius Kalcevich | ||||||
| Chief Financial Officer | ||||||
| (Principal Financial and Accounting Officer) |