iANTHUS CAPITAL HOLDINGS, INC 10-Q for FY2023 Q3
iANTHUS CAPITAL HOLDINGS, INC. (ITHUF)
About this 10-Q
iANTHUS CAPITAL HOLDINGS, INC filed this 10-Q on November 9, 2023, covering the quarter ended September 30, 2023 (FY2023 Q3).
Headline figures
Quarter ended September 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $42.89M
- up 8.9% from $39.37M a year earlier
- Net loss
- $15.57M
- compared with a net loss of $22M a year earlier
- Diluted EPS
- $0.00
- compared with $0.00 a year earlier
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from to
Commission File Number:
(Exact Name of Registrant as Specified in its Charter)
British Columbia, |
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(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
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Toronto, |
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(Address of principal executive offices) |
(Zip Code) |
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(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Number of common shares outstanding as of October 30, 2023 was
Table of Contents
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TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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Item 1. |
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Notes to Unaudited Interim Condensed Consolidated Financial Statements |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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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 Form 10-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.
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Table of Contents
ITEM 1. FINANCIAL STATEMENTS
iANTHUS CAPITAL HOLDINGS, INC.
INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars or shares)
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September 30, |
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December 31, |
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2023 (Unaudited) |
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2022 (Audited) |
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Assets |
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Cash |
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Restricted cash |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Prepaid expenses |
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Inventories, net |
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Other current assets |
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Current Assets |
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Investments |
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Property, plant and equipment, net |
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Operating lease right-of-use assets, net |
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Other long-term assets |
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Intangible assets, net |
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Total Assets |
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$ |
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Liabilities and Shareholders' (Deficit) Equity |
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Accounts payable |
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Accrued and other current liabilities |
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Current portion of long-term debt, net of issuance costs |
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Current portion of operating lease liabilities |
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Current Liabilities |
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Long-term debt, net of issuance costs |
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Deferred income tax |
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Long-term portion of operating lease liabilities |
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Total Liabilities |
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Commitments (Refer to Note 10) |
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Shareholders' (Deficit) Equity |
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Common shares - |
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Additional paid-in capital |
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Accumulated deficit |
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Total Shareholders' (Deficit) Equity |
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Total Liabilities and Shareholders' (Deficit) Equity |
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$ |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
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Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share amounts)
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For the Three Months Ended September 30, |
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For the Nine Months Ended September 30, |
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2023 |
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2022 |
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2023 |
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2022 |
Revenues, net of discounts |
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Costs and expenses applicable to revenues (exclusive of depreciation and amortization expense shown separately below) |
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Gross profit |
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Operating expenses |
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Selling, general and administrative expenses |
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Depreciation and amortization |
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(Recoveries), write-downs and other charges, net |
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Total operating expenses |
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Loss from operations |
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( |
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( |
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Interest and other income |
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Interest expense |
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Accretion expense |
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Provision for debt obligation fee |
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Loss on debt extinguishment (Refer to Note 5) |
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Gains/(losses) from changes in fair value of financial instruments |
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Loss before income taxes |
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( |
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Income tax expense |
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Net loss |
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Net loss per share - basic and diluted |
$ |
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$ |
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$ |
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Weighted average number of common shares outstanding - basic and diluted |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
5
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT) EQUITY
(In thousands of U.S. dollars or shares)
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Three Months Ended September 30, 2023 |
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Number of Common Shares ('000) |
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Additional Paid-in-Capital |
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Accumulated Deficit |
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Total Shareholders’ (Deficit) |
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Balance – June 30, 2023 |
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Share-based compensation |
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— |
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Share settlement for taxes paid related to restricted stock units |
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( |
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— |
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Net loss |
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— |
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— |
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( |
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Balance – September 30, 2023 |
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$ |
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$ |
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Nine Months Ended September 30, 2023 |
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Number of |
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Additional Paid-in-Capital |
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Accumulated Deficit |
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Total Shareholders’ Equity (Deficit) |
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Balance – January 1, 2023 |
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$ |
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$ |
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$ |
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Share-based compensation |
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— |
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Share settlement for taxes paid related to restricted stock units |
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( |
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( |
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— |
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Net loss |
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— |
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— |
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( |
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( |
Balance – September 30, 2023 |
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$ |
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$ |
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$ |
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Three Months Ended September 30, 2022 |
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Number of |
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Shares to be Issued |
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Additional Paid-in-Capital |
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Accumulated Deficit |
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Total Shareholders’ Equity |
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Balance – June 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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Share-based compensation |
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— |
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— |
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— |
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Share issuance - MPX purchase option |
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( |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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Balance – September 30, 2022 |
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$ |
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$ |
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$ |
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$ |
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Nine Months Ended September 30, 2022 |
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Number of |
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Shares to be Issued |
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Additional Paid-in-Capital |
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Accumulated Deficit |
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Total Shareholders’ (Deficit) Equity |
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Balance – January 1, 2022 - (Revised) |
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$ |
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$ |
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$ |
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Share-based compensation |
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— |
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Share issuance - Recapitalization Transaction |
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— |
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Share issuance - MPX purchase option |
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( |
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— |
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Net loss |
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— |
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— |
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— |
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( |
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( |
Balance – September 30, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
6
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
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Nine Months Ended September 30, |
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2023 |
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2022 |
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CASH FLOW FROM OPERATING ACTIVITIES |
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Net loss |
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$ |
( |
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$ |
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Adjustments to reconcile net loss to net cash provided by (used in) operations: |
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Interest income |
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( |
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Interest expense |
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Accretion expense |
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Provision for debt obligation fee |
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Depreciation and amortization |
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Write-downs, (recoveries) and other charges, net |
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Inventory reserve |
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Share-based compensation |
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(Gains)/losses from changes in fair value of financial instruments |
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( |
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Gain from nonmonetary consideration from acquisition (Refer to Note 4) |
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( |
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Loss on debt extinguishment (Refer to Note 5) |
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Change in operating assets and liabilities (Refer to Note 13) |
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NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES |
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$ |
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$ |
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CASH FLOW FROM INVESTING ACTIVITIES |
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Purchase of property, plant and equipment |
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( |
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Acquisition of other intangible assets |
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( |
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Proceeds from sale of property, plant and equipment |
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Issuance of related party promissory note |
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( |
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Cash impact of deconsolidation of subsidiaries |
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Purchase of subsidiaries, net of cash acquired |
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NET CASH USED IN INVESTING ACTIVITIES |
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$ |
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CASH FLOW FROM FINANCING ACTIVITIES |
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Repayment of debt |
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( |
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Proceeds from issuance of debt |
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Taxes paid related to net share settlement of restricted stock units |
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( |
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NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
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$ |
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CASH AND RESTRICTED CASH |
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NET INCREASE IN CASH AND RESTRICTED CASH DURING |
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CASH AND RESTRICTED CASH, BEGINNING OF PERIOD (Refer to Note 13) |
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CASH AND RESTRICTED CASH, END OF PERIOD (Refer to Note 13) |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
7
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Note 1 – Organization and Description of Business
(a) Description of Business
iAnthus Capital Holdings, Inc. (“ICH”), together with its consolidated subsidiaries (the “Company”) was incorporated under the laws of British Columbia, Canada, on November 15, 2013. The Company is a vertically-integrated multi-state owner and operator of licensed cannabis cultivation, processing and dispensary facilities in the United States. Through the Company’s subsidiaries, licenses, interests and contractual arrangements, the Company has the capacity to operate dispensaries and cultivation/processing facilities, and manufacture and distribute cannabis across the states in which the Company operates in the U.S.
The Company’s registered office is located at 1055 West Georgia Street, Suite 1500, Vancouver, British Columbia, V6E 4N7, Canada. The Company is listed on the Canadian Securities Exchange (the “CSE”) under the ticker symbol “IAN” and on the OTCQB Tier of the OTC Markets Group Inc. under the symbol “ITHUF.”
The Company’s business activities, and the business activities of its subsidiaries, which operate in jurisdictions where the use of marijuana has been legalized under state and local laws, currently are illegal under U.S. federal law. The U.S. Controlled Substances Act classifies marijuana as a Schedule I controlled substance. Any proceeding that may be brought against the Company could have a material adverse effect on the Company’s business plans, financial condition and results of operations.
(b) Basis of Presentation
The accompanying unaudited interim condensed consolidated financial statements (the “financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, certain information, footnotes and disclosures normally included in the annual financial statements, prepared in accordance with U.S. GAAP, have been condensed or omitted in accordance with SEC rules and regulations.
The financial data presented herein should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2022, included in the Company’s Annual Report on the Form 10-K filed with the SEC on March 30, 2023. In the opinion of management, the financial data presented includes all adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These unaudited interim condensed consolidated financial statements include estimates and assumptions of management that affect the amounts reported on the unaudited interim condensed consolidated financial statements. Actual results could differ from these estimates.
The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2023, or any other period.
Except as otherwise stated, these unaudited interim condensed consolidated financial statements are presented in U.S. dollars.
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Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
(c) Consummation of Recapitalization Transaction
On June 24, 2022 (the “Closing Date”), the Company completed its previously announced recapitalization transaction (the “Recapitalization Transaction”) pursuant to the terms of the Restructuring Support Agreement (the “Restructuring Support Agreement”) dated July 10, 2020, as amended on June 15, 2021, by and among the Company, all of the holders (the “Secured Lenders”) of the
In connection with the closing of the Recapitalization Transaction, the Company issued an aggregate of
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 $
Secured Debenture Purchase Agreement
In connection with the closing of the Recapitalization Transaction, the Company 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
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Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
The June Secured Debentures accrue interest at a rate of
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
In addition, pursuant to the Secured DPA, the New Secured Lenders purchased an additional $
10
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Unsecured Debenture Purchase Agreement
In connection with the closing of the Recapitalization Transaction, ICH, 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
The June Unsecured Debentures accrue interest at a rate of
Refer to Note 5 for further discussion regarding the Recapitalization Transaction.
(d) Going Concern
These unaudited interim condensed consolidated financial statements have been prepared under the assumption that the Company will be able to continue its operations and will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. For the three and nine months ended September 30, 2023, the Company reported net losses of $
The closing of the Recapitalization Transaction resulted in lower interest rates on the June Secured Debentures and the $
(e) Basis of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of ICH together with its consolidated subsidiaries, except for subsidiaries which ICH has identified as variable interest entities where ICH is not the primary beneficiary.
(f) Use of Estimates
The preparation of the unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of unaudited interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations regarding future events that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates.
11
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Significant estimates made by management include, but are not limited to: economic lives of leased assets; inputs used in the valuation of inventory; allowances for potential uncollectability of accounts receivable, provisions for inventory obsolescence; impairment assessment of long-lived assets; depreciable lives of property, plant and equipment; useful lives of intangible assets; accruals for contingencies including tax contingencies; valuation allowances for deferred income tax assets; estimates of fair value of identifiable assets and liabilities acquired in business combinations; estimates of fair value of derivative instruments; and estimates of the fair value of stock-based payment awards.
(g) Coronavirus Pandemic
The Company may be impacted by business interruptions from pandemics and public health emergencies, including those related to the novel coronavirus, known as COVID-19 (“COVID-19”). In the event of an outbreak of infectious disease, a pandemic, or a similar public health threat, such as the outbreak of COVID-19, or a fear of any of the foregoing, the Company may take actions that alter its business operations as may be required by federal, state or local authorities’ guidance and orders or take other steps that the Company determines are in the best interest of its employees, customers, partners, suppliers, shareholders, and stakeholders.
Any such alterations or modifications could cause substantial interruption to the Company’s business and could have a material adverse effect on the Company’s business, operating results, financial condition, and the trading price of the Company’s common shares. For example, COVID-19 previously resulted in temporary closures of some of the Company’s facilities; labor shortages; adverse impacts on the Company’s supply chain and distribution channels; and increased network vulnerability and risk of data loss resulting from increased use of remote access and removal of data from the Company’s facilities. In addition, a health epidemic, such as COVID-19, could negatively impact capital expenditures and overall economic activity in the impacted regions, which could impact the demand for the Company’s products and services.
It is unknown whether and how the Company may be impacted if the COVID-19 pandemic continues to persist or if there are increases in its breadth or in its severity, including as a result of the waiver of regulatory requirements or the implementation of emergency regulations to which the Company is subject.
The Company may incur expenses or delays relating to such events outside of its control, which could have a material adverse impact on its business, operating results, financial condition and the trading price of its common shares.
(h) Revision of Prior Period Financial Statements
During the three months ended March 31, 2022, the Company determined that it had not appropriately recorded cost of inventory as of December 31, 2021. This resulted in an overstatement of the inventory balance, accrued and other current liabilities, income tax expense and accumulated deficit as of December 31, 2021, and an understatement of costs and expenses applicable to revenues for the year ended December 31, 2021.
Based on an analysis of Accounting Standards Codification (“ASC”) 250 – “Accounting Changes and Error Corrections” (“ASC 250”), Staff Accounting Bulletin 99 – “Materiality” (“SAB 99”) and Staff Accounting Bulletin 108 – “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), the Company determined that these errors were immaterial to the previously issued financial statements, and as such no restatement was necessary. Correcting prior period financial statements for immaterial errors would not require previously filed reports to be amended.
The effect of the adjustments on the line items within the Company’s unaudited interim condensed consolidated statements of changes in shareholders’ deficit for three and nine months ended September 30, 2022 is as follows:
|
|
September 30, 2022 |
|||||||
|
|
As reported |
|
Adjustment |
|
As revised |
|||
Accumulated deficit – Balance January 1, 2022 |
|
$ |
( |
|
$ |
( |
|
$ |
( |
Total shareholders’ deficit – Balance January 1, 2022 |
|
|
( |
|
|
( |
|
|
( |
12
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Note 2 – Leases
The Company mainly leases office space and cannabis cultivation, processing and retail dispensary space. Leases with an initial term of less than 12 months are not recorded on the unaudited interim condensed consolidated balance sheets. The Company recognizes operating lease right-of-use assets and operating lease liabilities based on the present value of future minimum lease payments over the lease term at commencement date and lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The Company has determined that it was reasonably certain that the renewal options on the majority of its cannabis cultivation, processing and retail dispensary space would be exercised based on operating history and knowledge, current understanding of future business needs and the level of investment in leasehold improvements, among other considerations. The incremental borrowing rate used in the calculation of the lease liability is based on the rate available to the parent company. The depreciable life of assets and leasehold improvements are limited by the expected lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Certain subsidiaries of the Company rent or sublease certain office space to/from other subsidiaries of the Company. These intercompany subleases are eliminated on consolidation and have lease terms ranging from less than
Maturities of lease liabilities for operating leases as of September 30, 2023, were as follows:
|
|
|
|
Operating Leases |
|
2024 |
|
|
|
$ |
|
2025 |
|
|
|
|
|
2026 |
|
|
|
|
|
2027 |
|
|
|
|
|
2028 |
|
|
|
|
|
Thereafter |
|
|
|
|
|
Total lease payments |
|
|
|
$ |
|
Less: interest expense |
|
|
|
|
( |
Present value of lease liabilities |
|
|
|
$ |
|
Weighted-average remaining lease term (years) |
|
|
|
|
|
Weighted-average discount rate |
|
|
|
|
|
For the three and nine months ended September 30, 2023, the Company recorded operating lease expenses of $
The Company has entered into multiple sublease agreements pursuant to which it serves as lessor to the sublessees. The gross rental income and underlying lease expense are presented gross on the Company’s unaudited interim condensed consolidated statements of operations. For the three and nine months ended September 30, 2023, the Company recorded sublease income of $
Supplemental balance sheet information related to leases are as follows:
|
|
|
|
September 30, |
|
December 31, |
||
Balance Sheet Information |
|
Classification |
|
2023 |
|
2022 |
||
Operating right-of-use assets, net |
|
Operating leases |
|
$ |
|
$ |
||
Lease liabilities |
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities |
|
Operating leases |
|
$ |
|
$ |
||
Long-term portion of operating lease liabilities |
|
Operating leases |
|
|
|
|
||
Total |
|
|
|
$ |
|
$ |
||
13
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Note 3 - Inventories, net
Inventories are comprised of the following items:
|
|
September 30, |
|
December 31, |
||
|
|
2023 |
|
2022 |
||
|
|
|
|
|
|
|
Supplies |
|
$ |
|
$ |
||
Raw materials |
|
|
|
|
||
Work in process |
|
|
|
|
||
Finished goods |
|
|
|
|
||
Inventory reserve |
|
|
( |
|
|
( |
Total |
|
$ |
|
$ |
||
Inventories are written down for any obsolescence or when the net realizable value considering future events and conditions is less than the carrying value. For the three and nine months ended September 30, 2023, the Company recorded $
Note 4 – Acquisitions
Acquisition of MPX New Jersey LLC
On February 1, 2022, the Company’s wholly-owned subsidiary, INJ, closed on its acquisition of MPX New Jersey LLC (“MPX NJ”), a New Jersey-based entity with a New Jersey medical cannabis permit and, as of April 13, 2023, an expanded cannabis permit to allow for certain adult-use operations. The acquisition consisted of INJ exercising its right to convert the principal balance of a loan and accrued interest owed pursuant to its loan agreement of $
This transaction was treated as an asset acquisition under U.S. GAAP as substantially all of the fair value of the gross assets acquired were deemed to be associated with the acquired cultivation, production and retail licenses recognized as intangible assets in the table below.
The following table summarizes the allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed:
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 |
|
$ |
The Company has determined that this acquisition is an asset acquisition under ASC 805 Business Combinations whereby the total consideration is allocated to the acquired net tangible and intangible assets based on their estimated fair values as of the closing date. The Company determined the fair value of the net identifiable assets received from the asset acquisition was a more reliable
14
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
measurement of the assets exchanged as part of this asset acquisition. The Company concluded that the consideration included a nonmonetary component of $
Operating results have been included in these unaudited interim condensed consolidated financial statements from the date of the acquisition. Supplemental pro forma financial information has not been presented as the impact was not material to the Company’s unaudited interim condensed consolidated financial statements. The Company recorded acquisition costs of $
Note 5 - Long-Term Debt
As discussed in Note 1(c), the Company consummated the Recapitalization Agreement with the Secured Lenders and the Unsecured Lenders on the Closing Date, at which time the Company issued the Shares as well as the June Secured Debentures and June Unsecured Debentures in the aggregate principal amount of $
Background of Recapitalization Transaction
On March 31, 2020, the Company did not make interest payments due to the Secured Lenders and the Unsecured Lenders. Through June 24, 2022, the Company had been in default on the Secured Notes and Unsecured Debentures, which, as of June 24, 2022, consisted of $
As a result of the March 31, 2020 default, the Board of Directors formed a special committee comprised of the Company’s then five independent, non-management directors (the “Special Committee”) to, among other matters, explore and consider strategic alternatives available to the Company in light of the prospective liquidity requirements of the Company, the condition of the capital markets affecting companies in the cannabis industry, and the rapid change in the state of the economy and capital markets generally caused by COVID-19, including, but not limited to:
The Special Committee engaged Canaccord Genuity Corp. as its financial advisor to assist it in analyzing various strategic alternatives to address its capital structure and liquidity challenges.
On June 22, 2020, the Company received notice from the Collateral Agent, as collateral agent holding security for the benefit of the Secured Lenders, with a demand for repayment (the “Demand Letter”) under the Amended and Restated Secured Debenture Purchase Agreement dated October 10, 2019 (the “Secured Notes Purchase Agreement”) of the entire principal amount of the Secured Notes, together with interest, fees, costs and other allowable charges that had accrued or might accrue in accordance with the Secured Notes Purchase Agreement and the other Transaction Agreements (as defined in the Secured Notes Purchase Agreement). The Collateral Agent also concurrently provided the Company with a Notice of Intention to Enforce Security under section 244 of the Bankruptcy and Insolvency Act (Canada).
On July 10, 2020, ICH and certain of its subsidiaries entered into the Restructuring Support Agreement with the Secured Lenders and the Consenting Unsecured Lenders to affect the Recapitalization Transaction. Under the Restructuring Support Agreement, certain of the Secured Lenders agreed to provide interim financing in the amount of $
15
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Subject to compliance with the Restructuring Support Agreement, the Secured Lenders and the Consenting Unsecured Lenders agreed to forbear from further exercising any rights or remedies in connection with any Defaults.
Consummation of the Recapitalization Transaction through the Plan of Arrangement was subject to certain conditions, including obtaining 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.
The following table summarizes long term debt outstanding as of September 30, 2023:
|
|
Secured Notes |
|
June Secured Debentures |
|
Additional Secured Debentures |
|
June Unsecured Debentures |
|
Other |
|
Total |
||||||
As of January 1, 2023 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||
Fair value of financial |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|||||
Accretion of balance |
|
|
|
|
|
|
— |
|
|
|
|
— |
|
|
||||
Debt extinguishment |
|
|
( |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
Deconsolidation |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
( |
Repayment |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
( |
As of September 30, 2023 |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
||||||
Accounting for the Recapitalization Transaction
On the Closing Date, the Company completed its previously announced Recapitalization Transaction pursuant to the terms of the Restructuring Support Agreement. The Recapitalization Transaction closed pursuant to the terms of the Plan of Arrangement under the Business Corporations Act (British Columbia) approved by the Court.
In accordance with debt extinguishment accounting rules outlined in ASC 470-50, Debt-Modifications and Extinguishments, (“ASC 470”), the Company recorded a loss on extinguishment of debt of $
On the Closing Date, the Company fully amortized the debt discount costs related to the old debt that was extinguished. As of September 30, 2023, the total and unamortized debt discount costs related to new debt were $
As of September 30, 2023, the total interest accrued on both current and long-term debt was $
(a) Secured Notes
Tranche One
On May 14, 2018, the Company issued $
For the three and nine months ended September 30, 2023, interest expense of $
16
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
As of June 24, 2022, immediately prior to the consummation of the Recapitalization Transaction, the Company was not in compliance with the market value test, and the Company did not make interest payments, and therefore was in breach of a financial covenant with respect to the Tranche One Secured Notes, Tranche Two Secured Notes (as defined herein), and Tranche Three Secured Notes (as defined herein). Furthermore, the Company was in default on its Secured Notes as of March 31, 2020, and as a result, an event of default occurred on April 4, 2020. This default was triggered on the Company’s long-term debt, which, as of June 24, 2022, consisted of $
For the three and nine months ended September 30, 2023, interest expense of $
Tranche Two
On September 30, 2019, the Company issued an additional $
For the three and nine months ended September 30, 2023, interest expense of $
All terms, restrictions and financial covenants applicable to the Tranche One Secured Notes were also applicable to the Tranche Two Secured Notes. As of June 24, 2022, this debt, related accrued interest and fees were fully satisfied pursuant to the terms of the Restructuring Support Agreement and no default existed with respect to the Tranche Two Secured Notes.
Tranche Three
On December 20, 2019, the Company issued an additional $
For the three and nine months ended September 30, 2023, interest expense of $
All terms, restrictions and financial covenants applicable to the Tranche One Secured Notes and Tranche Two Secured Notes were also applicable to Tranche Three Secured Notes. As of June 24, 2022, this debt, related accrued interest and fees were fully satisfied pursuant to the terms of the Restructuring Support Agreement and no default existed with respect to the Tranche Three Secured Notes.
Tranche Four
On July 13, 2020, as part of the Recapitalization Transaction, the Company issued an additional $
17
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
For the three and nine months ended September 30, 2023, interest expense of $
iAnthus New Jersey, LLC Senior Secured Bridge Notes
On February 2, 2021, INJ issued an aggregate of $
On February 2, 2023, the Company and INJ entered into an amendment (the “Amendment”) to the Senior Secured Bridge Notes with all of the holders of the Senior Secured Bridge Notes. Pursuant to the Amendment, the maturity date of the Senior Secured Bridge Notes was extended until
The amended host debt, classified as a liability using the guidance of ASC 470, was recognized at the fair value of $13.8 million.
Interest is to be paid in kind by adding the interest accrued on the principal amount on the last day of each fiscal quarter (the first such interest payment date being March 31, 2023) and such amount thereafter becoming part of the principal amount, which will accrue additional interest. Interest paid in kind will be payable on the date when all of the principal amount is due and payable.
For the three and nine months ended September 30, 2023, interest expense of $
The Senior Secured Bridge Notes are secured by a security interest in certain assets of INJ. ICH provided a guarantee in respect of all of the obligations of INJ under the Senior Secured Bridge Notes, and the Company is in compliance with the terms of the Senior Secured Bridge Notes as of September 30, 2023. The Senior Secured Bridge Notes are classified as current liabilities on the unaudited interim condensed consolidated balance sheets as they are due on February 2, 2024.
Certain of the Secured Lenders, including Gotham Green Fund II, L.P., Gotham Green Fund II (Q), L.P., Oasis Investments II Master Fund LTD., Senvest Global (KY), LP, Senvest Master Fund, LP and Hadron Healthcare and Consumer Special Opportunities Master Fund, held greater than
(b) March 2019 Debentures
On March 18, 2019, the Company completed a private placement of $
18
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
For the three and nine months ended September 30, 2023, interest expense of $
The terms of the March 2019 Debentures imposed certain restrictions on the Company’s operating and financing activities, including certain restrictions on the Company’s ability to incur certain additional indebtedness at the subsidiary level. As of June 24, 2022, immediately prior to the consummation of the Recapitalization Transaction, the Company was in default on its interest obligations to the holders of the Secured Notes. This default triggered a cross-default on its interest obligations to the holders of the March 2019 Debentures. As a result of this default, the Company classified the debt as a current liability on the unaudited interim condensed consolidated balance sheets as the March 2019 Debentures were due on demand. As of June 24, 2022, this debt, related accrued interest and fees were fully satisfied pursuant to the terms of the Restructuring Support Agreement and no default existed with respect to the March 2019 Debentures.
(c) May 2019 Debentures
On May 2, 2019, the Company completed a private placement of $
For three and nine months ended September 30, 2023, interest expense of $
The terms of the May 2019 Debentures imposed certain restrictions on the Company’s operating and financing activities, including certain restrictions on the Company’s ability to incur certain additional indebtedness at the subsidiary level. As of June 24, 2022, immediately prior to the consummation of the Recapitalization Transaction, the Company was in default on its interest obligations to the holders of the Secured Notes. This default triggered a cross-default on its interest obligations to the holders of the May 2019 Debentures. Further, as a result of this default, the Company classified the debt as a current liability on the unaudited interim condensed consolidated balance sheets as the May 2019 Debentures were due on demand. As of June 24, 2022, this debt, related accrued interest and fees were fully satisfied pursuant to the terms of the Restructuring Support Agreement and no default existed with respect to the May 2019 Debentures.
(d) June Secured Debentures
On June 24, 2022 in connection with the closing of the Recapitalization Transaction, the Company entered into the Secured DPA, pursuant to which ICM issued the June Secured Debentures in the aggregate principal amount of $
The host debt, classified as a liability using the guidance of ASC 470, was recognized at the fair value of $84.5 million.
Interest is to be paid in kind by adding the interest accrued on the principal amount on the last day of each fiscal quarter (the first such interest payment date being June 30, 2022) and such amount thereafter becoming part of the principal amount, which will accrue additional interest. Interest paid in kind will be payable on the date when all of the principal amount is due and payable.
For the three and nine months ended September 30, 2023, interest expense of $
19
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
The terms of the Secured DPA impose certain restrictions on the Company’s operating and financing activities, including certain restrictions on the Company’s ability to: incur certain additional indebtedness; grant liens; make certain dividends and other payment restrictions affecting the Company’s subsidiaries; issue shares or convertible securities; and sell certain assets. The June Secured Debentures are secured by all current and future assets of the Company and ICM. The terms of the Secured DPAs do not have any financial covenants or market value test and ICM is in compliance with the terms of the June Secured Debentures as of September 30, 2023. The June Secured Debentures are classified as long-term liabilities on the unaudited interim condensed consolidated balance sheets.
Certain of the New Secured Lenders that hold the June Secured Debentures, 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), Gotham Green Credit Partners SPV 1, L.P., Gotham Green Partners SPV V, L.P., L.P., and Parallax Master Fund, LP, held greater than
(e) June Unsecured Debentures
On June 24, 2022 in connection with the closing of the Recapitalization Transaction, the Company entered into the Unsecured DPA, pursuant to which ICM issued June Unsecured Debentures in the aggregate principal amount of $
The host debt, classified as a liability using the guidance of ASC 470, was recognized at the fair value of $14.9 million.
Interest is to be paid in kind by adding the interest accrued on the principal amount on the last day of each fiscal quarter (the first such interest payment date being June 30, 2022) and such amount thereafter becoming part of the principal amount, which will accrue additional interest. Interest paid in kind will be payable on the date when all of the principal amount is due and payable.
For the three and nine months ended September 30, 2023, interest expense of $
The terms of the Unsecured DPA impose certain restrictions on the Company’s operating and financing activities, including certain restrictions on the Company’s ability to: incur certain additional indebtedness; grant liens; make certain dividends and other payment restrictions affecting the Company’s subsidiaries; issue shares or convertible securities; and sell certain assets. The terms of the Unsecured DPA do not have any financial covenants or market value test, and ICM is in compliance with the terms of the June Unsecured Debentures as of September 30, 2023. The June Unsecured Debentures are classified as long-term liabilities on the unaudited interim condensed consolidated balance sheets.
Certain of the Secured Lenders and Consenting Unsecured 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., Gotham Green Credit Partners SPV 1, L.P., Gotham Green Partners SPV V, L.P., Oasis Investments II Master Fund LTD., Senvest Global (KY), LP, Senvest Master Fund, LP, Parallax Master Fund, L.P. and Hadron Healthcare and Consumer Special Opportunities Master Fund, held greater than
(f) Additional Secured Debentures
Pursuant to the terms of the Secured DPA, ICM issued the Additional Secured Debentures on June 24, 2022 in the aggregate principal amount of $
The host debt, classified as a liability using the guidance of ASC 470, was recognized at the fair value of $
20
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Interest is to be paid in kind by adding the interest accrued on the principal amount on the last day of each fiscal quarter (the first such interest payment date being June 30, 2022) and such amount thereafter becoming part of the principal amount, which will accrue additional interest. Interest paid in kind will be payable on the date when all of the principal amount is due and payable.
For the three and nine months ended September 30, 2023, interest expense of $
The terms of the Secured DPA impose certain restrictions on the Company’s operating and financing activities, including certain restrictions on the Company’s ability to: incur certain additional indebtedness; grant liens; make certain dividends and other payment restrictions affecting the Company’s subsidiaries; issue shares or convertible securities; and sell certain assets. The Additional Secured Debentures are secured by all current and future assets of the Company and ICM. The terms of the Secured DPAs do not have any financial covenants or market value test, and ICM is in compliance with the terms of the Additional Secured Debentures as of September 30, 2023. The Additional Secured Debentures are classified as long-term liabilities on the unaudited interim condensed consolidated balance sheets.
Certain of the New Secured Lenders that hold Additional Secured Debentures, 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 Investments II Master Fund LTD., Senvest Global (KY), LP, Senvest Master Fund, LP and Hadron Healthcare and Consumer Special Opportunities Master Fund, held greater than
Note 6 - Share Capital
Authorized: Unlimited common shares. The shares have no par value.
The Company’s common shares are voting and dividend-paying. The following is a summary of the common share issuances for the nine months ended September 30, 2023:
21
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
The following is a summary of the common share issuances for the nine months ended September 30, 2022:
The following table summarizes certain information in respect of the Company’s warrants:
|
September 30, 2023 |
|
December 31, 2022 |
|||||||
|
Units |
|
Weighted Average Exercise Price (C$) |
|
Units |
|
Weighted Average Exercise Price (C$) |
|||
Warrants outstanding, beginning |
|
|
$ |
|
|
$ |
||||
Forfeited |
|
|
|
|
( |
|
|
|||
Expired |
|
|
|
|
( |
|
|
|||
Warrants outstanding, ending |
|
|
$ |
|
|
$ |
||||
As per the terms of the Restructuring Support Agreement, all outstanding warrants were forfeited as of the Closing Date of the Recapitalization Transaction, and warrants classified as derivative liabilities were revalued to $
The following table summarizes potentially dilutive securities, and the resulting common share equivalents outstanding as of September 30, 2023 and December 31, 2022:
|
|
September 30, 2023 |
|
December 31, 2022 |
Common share options |
|
|
||
Restricted stock units |
|
|
||
Total |
|
|
All existing options (the “Original Awards”) to purchase common shares of the Company issued to officers were cancelled and extinguished for no consideration on the date of closing the Recapitalization Transaction. On September 19, 2022, the Board awarded stock options to two officers of the Company as replacement awards for the Original Awards under the Company’s Amended and Restated Omnibus Incentive Plan (the “Omnibus Incentive Plan”) dated October 15, 2018. The Original Awards were cancelled on June 24, 2022, as part of the Recapitalization Transaction, and the new stock options were granted on September 19, 2022 (the “Replacement Stock Options”). As the fair value of the Original Awards was $
Share-based compensation expense related to stock options for the three and nine months ended September 30, 2023 was less than $
22
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
The following table summarizes certain information in respect of option activity during the period:
. |
|
Nine Months Ended September 30, 2023 |
|
|
Year Ended December 31, 2022 |
|||||||||||
|
|
Units |
|
|
Weighted Average |
|
|
Weighted Average Contractual Life |
|
|
Units |
|
|
Weighted Average |
|
Weighted Average Contractual Life |
Options outstanding, beginning |
|
|
$ |
|
|
|
|
|
$ |
|
— |
|||||
Granted |
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
— |
||
Cancellations |
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
|
— |
|
Forfeitures |
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
|
— |
|
Expirations |
|
— |
|
|
— |
|
|
— |
|
|
( |
|
|
|
— |
|
Options outstanding, ending (2) |
|
|
$ |
|
|
|
|
|
$ |
|
||||||
The Company used the Black-Scholes option pricing model to estimate the fair value of the options at the grant date using the following assumptions:
|
|
September 30, 2023 |
|
December 31, 2022 |
Risk-free interest rate |
|
|
||
Expected dividend yield |
|
|
||
Expected volatility |
|
|
||
Expected life |
|
— |
|
The expected volatility was estimated by using the historical volatility of the Company. The expected life in years represents the period of time that options granted are expected to be outstanding. In accordance with SAB Topic 14, the Company uses the simplified method for estimating the expected term. The Company believes the use of the simplified method is appropriate due to the employee stock options qualifying as “plain-vanilla” options under the criteria established by SAB Topic 14. The risk-free rate was based on the United States bond yield rate at the time of grant of the award. Expected annual rate of dividends is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
On December 31, 2021, the Board approved a long-term incentive program, pursuant to which, on July 26, 2022, the Company issued certain employees of the Company and its subsidiaries, restricted stock units (“RSUs”), under the Company’s Amended and Restated Omnibus Incentive Plan dated October 15, 2018. RSUs represent a right to receive a single common share that is both non-transferable and forfeitable until certain conditions are satisfied. The allocation of RSUs was contingent on the closing of the Recapitalization Transaction and was subject to approval of the Canadian Securities Exchange and the Board.
On December 31, 2021 and June 23, 2022, the Board approved the allocation of
Certain RSU recipients were also holders of the Original Awards, which were cancelled upon closing the Recapitalization Transaction. The RSUs granted to these employees have been treated as replacement awards (the “Replacement RSUs”) and are accounted for as a modification to the Original Awards. As the fair value of the Original Awards was $
23
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
the incremental compensation cost recognized is equal to the fair value of the Replacement RSUs on the modification date, which shall be recognized over the remaining requisite service period.
On September 19, 2022, the Board awarded
On November 23, 2022, the Board awarded
On December 8, 2022, the Board awarded
On December 23, 2022, the Board awarded
On May 17, 2023, the Board awarded
On June 27, 2023, the Board awarded
On August 31, 2023, the Board awarded
During the three and nine months ended September 30, 2023, the Company recognized $
As of September 30, 2023, there was approximately $
The following table summarizes certain information in respect of RSU activity during the period:
|
|
Nine Months Ended September 30, 2023 |
|
Year Ended December 31, 2022 |
|||||||
|
|
Units |
|
|
Weighted |
|
|
Units |
|
|
Weighted |
Unvested balance, beginning |
|
|
$ |
|
|
|
$ |
||||
Granted |
|
|
|
|
|
|
|
||||
Vested |
|
( |
|
|
|
|
( |
|
|
||
Forfeited |
|
( |
|
|
|
|
( |
|
|
||
Unvested balance, ending |
|
|
$ |
|
|
|
$ |
||||
24
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Note 7 - Income Taxes
The following table summarizes the Company’s income tax expense and effective tax rates for the three and nine months ended September 30, 2023 and 2022:
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
|
|
2023 |
|
2022 |
|
2023 |
|
2022 |
||||
Loss before income taxes |
|
$ |
( |
|
$ |
( |
|
$ |
( |
|
$ |
( |
Income tax expense |
|
|
|
|
|
|
|
|
||||
Effective tax rate |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
For the three and nine months ended September 30, 2023, the Company recorded interest and penalties on unpaid income taxes of $
The effective tax rate may vary significantly from period to period and can be influenced by many factors. These factors include, but are not limited to, changes to the statutory rates in the jurisdictions where the Company has operations and changes in the valuation of deferred tax assets and liabilities. The difference between the effective tax rate and the federal statutory rate of
In general, under Section 382 of the U.S. Internal Revenue Code of 1986, as amended, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating loss carryforwards (“NOLs”) to offset future taxable income. Similarly, where control of a corporation has been acquired by a person or group of persons, subsection 111(5) of the Income Tax Act (Canada), and equivalent provincial income tax legislation restrict the corporation’s ability to carry forward non-capital losses from preceding taxation years. The Company concluded that the Recapitalization Transaction which closed on June 24, 2022 did not qualify as an acquisition of control for Canadian tax purposes; therefore, the Company’s existing Canadian non-capital losses are unlimited and continue to have a full valuation allowance set against its deferred tax assets. The U.S. NOLs will be subject to a substantial annual limitation arising from the Company’s ownership changes. As a result, a full valuation allowance has been recorded by the Company on these deferred tax assets as well as any Section 163(j) interest limitation deduction carryforwards. The Section 382 limitation is increased by recognized built-in gain (“RBIG”) in the five year period following the change date to the extent that the value of the loss corporation’s assets exceed the tax basis of these assets. Under the Section 338 approach, assets are treated as generating RBIG even if these assets are not disposed of during the five year recognition period. The Company is in the process of reviewing the tax basis of their fixed assets so it can compare it to the deemed selling price under Section 382 of the code. The Company is expecting that this calculation may result in a RBIG that would increase the Section 382 limitation available over the next five years.
The Internal Revenue Service filed Notices of Federal Tax Lien against GHHIA Management Inc. (“GHHIA”), Mayflower Medicinals Inc. (“Mayflower”), and ABACA, Inc. (“ABACA”), each a subsidiary of the Company, for $
25
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Note 8 - Segment Information
The below table presents results by segment for the three and nine months ended September 30, 2023 and 2022:
Reportable Segments
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
||||||||
|
2023 |
|
2022 |
|
|
2023 |
|
2022 |
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Region |
$ |
|
$ |
|
|
$ |
|
$ |
||||
Western Region |
|
|
|
|
|
|
|
|
||||
Other(1) |
|
|
|
|
|
|
|
|
||||
Total |
$ |
|
$ |
|
|
$ |
|
$ |
||||
Gross profit (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
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 other intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Region |
$ |
|
$ |
|
|
$ |
|
$ |
||||
Western Region |
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
||||
Total |
$ |
|
$ |
|
|
$ |
|
$ |
||||
26
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
|
|
|
|
|
|
|
|
As of September 30, |
|
As of December 31, |
||
|
|
|
|
|
|
|
|
|
2023 |
|
|
2022 |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Region |
|
|
|
|
|
|
|
$ |
|
$ |
||
Western Region |
|
|
|
|
|
|
|
|
|
|
||
Other |
|
|
|
|
|
|
|
|
|
|
||
Total |
|
|
|
|
|
|
|
$ |
|
$ |
||
Major Customers
Major customers are defined as customers that each individually accounted for greater than
Geographic Information
As of September 30, 2023 and 2022, substantially all of the Company’s assets were located in the United States and all of the Company’s revenues were earned in the United States.
Disaggregated Revenues
The Company disaggregates revenues into categories that depict how the nature, amount, timing and uncertainty of the revenues and cashflows are affected by economic factors.
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
||||||||
|
2023 |
|
2022 |
|
|
2023 |
|
2022 |
||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
iAnthus branded products |
$ |
|
$ |
|
|
$ |
|
$ |
||||
Third party branded products |
|
|
|
|
|
|
|
|
||||
Wholesale/bulk/other products |
|
|
|
|
|
|
|
|
||||
Total |
$ |
|
$ |
|
|
$ |
|
$ |
||||
Note 9 — Financial Instruments
Fair values have been determined for measurement and/or disclosure purposes based on the following methods. The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable. The levels of the fair value hierarchy are as follows:
The carrying values of cash, receivables, payables and accrued liabilities approximate their fair values because of the short-term nature of these financial instruments. Balances due to and due from related parties have no terms and are payable on demand, thus are also considered current and short-term in nature, hence carrying value approximates fair value.
The component of the Company’s long-term debt attributed to the host liability is recorded at amortized cost. Investments in debt instruments that are held to maturity are also recorded at amortized cost.
27
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
The following table summarizes the fair value hierarchy for the Company’s financial assets and financial liabilities that are re-measured at their fair values periodically:
|
|
As of September 30, 2023 |
|
As of December 31, 2022 |
||||||||||||||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
||||||||
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term investments - other (1) |
|
$ |
|
$ |
— |
|
$ |
— |
|
$ |
|
$ |
|
$ |
— |
|
$ |
— |
|
$ |
||||
There were no transfers between Level 1, Level 2, and Level 3 within the fair value hierarchy during the three and nine months ended September 30, 2023 and 2022.
The Company’s other investment as of September 30, 2023 is considered to be a Level 1 instrument because it is comprised of shares of a public company, and there is an active market for the shares and observable market data and inputs available.
All Level 1 investments are comprised of equity investments which are re-measured at fair value using quoted market prices.
The following table summarizes the changes in Level 1 financial assets:
|
|
Financial Assets |
|
Balance as of December 31, 2022 |
|
$ |
|
Revaluations on Level 1 instruments |
|
|
|
Balance as of September 30, 2023 |
|
$ |
|
The derivative liabilities related to the convertible debt instruments and freestanding warrants were recorded at fair value estimated using the Black-Scholes option pricing model, which is therefore considered to be a Level 3 measurement. On June 24, 2022 all warrants were forfeited upon the consummation of the Recapitalization Transaction.
The Company’s financial and non-financial assets such as prepayments, other assets including equity accounted investments, property, plant and equipment, and intangibles, are measured at fair value when there is an indicator of impairment and are recorded at fair value only when an impairment charge is recognized.
The following table summarizes the Company’s long-term debt instruments (Note 5) at their carrying value and fair value:
|
|
As of September 30, 2023 |
|
As of December 31, 2022 |
||||||||
|
|
Carrying Value |
|
Fair Value |
|
Carrying Value |
|
Fair Value |
||||
June Unsecured Debentures |
|
$ |
|
$ |
|
$ |
|
$ |
||||
June Secured Debentures |
|
|
|
|
|
|
|
|
||||
Secured Notes |
|
|
|
|
|
|
|
|
||||
Other |
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
$ |
|
$ |
|
$ |
||||
Note 10 – Commitments
In the ordinary course of business, the Company enters into contractual agreements with third parties that include non-cancelable payment obligations, for which it is liable in future periods. These arrangements can include terms binding the Company to minimum payments and/or penalties if it terminates the agreement for any reason other than an event of default as described in the agreement.
28
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
The following table summarizes the Company’s contractual obligations and commitments as of September 30, 2023:
|
|
2024 |
|
2025 |
|
2026 |
|
2027 |
|
2028 |
|||||
Operating leases |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|||||
Service and other contracts |
|
|
|
|
|
|
|
|
|
|
|||||
Long-term debt |
|
|
|
|
|
|
|
|
|
|
|||||
Total |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|||||
The Company’s commitments include payments to employees, consultants and advisors, as well as leases and construction contracts for offices, dispensaries and cultivation facilities in the U.S. and Canada. The Company has certain operating leases with renewal options extending the initial lease term for an additional to
On February 6, 2023, the Company entered into a membership interest purchase agreement (the "MIPA"), pursuant to which the Company agreed to sell to OG Farms, LLC (the “Purchaser”), its membership interests in Grassroots Vermont Management Services, LLC (“GVMS”), the sole owner of all issued and outstanding authorized common stock of FWR, Inc. (“FWR”). FWR owns and operates a dispensary and cultivation/processing facility in Vermont and is included within the Company's Eastern Region reporting segment. The aggregate proceeds to be received from the sale are $
On May 8, 2023, ICH's wholly-owned subsidiary, iA CBD, LLC ("iA CBD"), entered into an Asset Purchase Agreement (the "Purchase Agreement") with C4L, LLC (the "Buyer"), pursuant to which, iA CBD agreed to sell substantially all of the assets of iA CBD. iA CBD owns and operates the Company's assets associated with its CBD products branded as CBD for Life (the "Business"). The aggregate proceeds to be received from the sale are approximately $
Note 11 - Contingencies and Guarantees
The Company is involved in lawsuits, claims, and proceedings, including those identified below, which arise in the ordinary course of business. In accordance with the Financial Accounting Standards Board ASC Topic 450 Contingencies, the Company will make a provision for a liability when it is both probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company believes it has adequate provisions for any such matters. The Company reviews these provisions in conjunction with any related provisions on assets related to the claims at least quarterly and adjusts these provisions to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other pertinent information related to the case. Should developments in any of these matters outlined below cause a change in the Company’s determination as to an unfavorable outcome and result in the need to recognize a material provision, or, should any of these matters result in a final adverse judgment or be settled for significant amounts, they could have a material adverse effect on the Company’s results of operations, cash flows, and financial position in the period or periods in which such a change in determination, settlement or judgment occurs.
29
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
The Company expenses legal costs relating to its lawsuits, claims and proceedings as incurred. The Company has been named as a defendant in several legal actions and is subject to various risks and contingencies arising in the normal course of business. Based on consultation with counsel, management and legal counsel is of the opinion that the outcome of these uncertainties will not have a material adverse effect on the Company’s financial position.
The events that allegedly gave rise to the following claims, which occurred prior to the Company’s closing of the MPX Bioceutical Corporation (“MPX”) acquisition (the “MPX Acquisition”) in February 2019, are as follows:
In addition, the Company is currently reviewing the following matters with legal counsel and has not yet determined the range of potential losses:
30
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
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 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 Shareholder Representative Agreement forms to GrowHealthy Holdings while reserving their rights to continue challenging the validity and enforceability of the Shareholder Representative Agreement. The Roberts Plaintiffs thereafter amended their complaints to seek monetary damages in the aggregate amount of $
31
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
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 $
32
Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
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 October12, 2022, the parties filed the Joint Stipulation and Proposed Scheduling Order, which the SDNY so ordered on October 19, 2022, ordering that that the Defendants’ answers are due on November 21, 2022; that the parties shall submit a proposed discovery plan by December 12, 2022; and that discovery in the Class Action Lawsuit shall be coordinated with discovery in the Hi-Med action referenced above, to the extent the two actions involved overlapping issues. The parties agreed to submit the matter, together with the Hi-Med action referenced above, to mediation, which took place on January 17, 2023. On January 31, 2023, the parties advised the SDNY that the Defendants and Lead Plaintiff reached a settlement in principle and anticipated filing a motion for preliminary approval of the settlement by March 9, 2023. Accordingly, the parties requested that the SDNY suspend all further deadlines and proceedings in the Class Action Lawsuit pending submission of the motion for preliminary approval. On March 7, 2023, the parties advised the SDNY that the parties required a short extension of the motion for preliminary approval of the settlement and such motion would be filed by March 21, 2023. On March 21, 2023, the parties executed a settlement agreement and filed the motion for preliminary approval of the settlement with the SDNY, which remains pending.
On July 23, 2020, Blue Sky Realty Corporation filed a putative class action against the Company, the Company’s former Chief Executive Officer, and the Company’s Chief Financial Officer in the Ontario Superior Court of Justice ("OSCJ") in Toronto, Ontario. On September 27, 2021, the OSCJ granted leave for the plaintiff to amend its claim (“Amended Claim”). In the Amended Claim, the plaintiff seeks to certify the proposed class action on behalf of two classes. “Class A” consists of all persons, other than any executive level employee of the Company and their immediate families (“Excluded Persons”), who acquired the Company’s common shares in the secondary market on or after April 12, 2019, and who held some or all of those securities until after the close of trading on April 5, 2020. “Class B” consists of all persons, other than Excluded Persons, who acquired the Company’s common shares prior to April 12, 2019, and who held some or all of those securities until after the close of trading on April 5, 2020. Among other things, the plaintiff alleges statutory and common law misrepresentation, and seeks an unspecified amount of damages together with interest and costs. The plaintiff also alleges common law oppression for releasing certain statements allegedly containing misrepresentations inducing Class B members to hold the Company’s securities beyond April 5, 2020. No certification motion has been scheduled. The Amended Claim also changed the named plaintiff from Blue Sky Realty Corporation to Timothy Kwong. The hearing date for the motion for leave to proceed with a secondary market claim under the Securities Act (Ontario) has been vacated. The parties have reached a settlement in principle and are in the process of finalizing a settlement agreement, which would fully resolve the Amended Claim.
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
On August 19, 2021, Arvin Saloum (“Saloum”), a former consultant of the Company, filed a Demand for Arbitration with the American Arbitration Association (the “Arbitration Action”) against The Healing Center Wellness Center, Inc. (“THCWC”) and iAnthus Arizona, LLC (“iA AZ”), claiming a breach of a Consulting and Joint Venture Agreement (the “JV Agreement”) for unpaid consulting fees allegedly owed to Saloum under the JV Agreement. Saloum is claiming damages between $
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
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
On June 20, 2022, Michael Weisser (“Weisser”) commenced a petition (the “Petition”) in the Court against ICH and ICH's former board of directors. In the Petition, Weisser sought: (i) a declaration that the affairs of ICH and its then-board of directors were being conducted or have been conducted in a manner that is oppressive and/or prejudicial to Weisser; (ii) an order that Weisser is entitled to call and hold ICH's annual general meeting for 2020 ( “2020 AGM”) on or before June 30, 2022 or a date set by the Court as soon as reasonably possible; (iii) alternatively, an order that ICH hold the 2020 AGM on or before June 30, 2022 or a date set by the Court as soon as reasonably possible; (iv) an order that ICH set the record date for the 2020 AGM; (v) an order that Weisser is entitled to appoint a chair for the 2020 AGM, or that the Court appoint an independent chair for the 2020 AGM; and (vi) an order that ICH be required to provide Weisser with an opportunity to review all votes and proxies submitted in respect of the 2020 AGM, no later than 24 hours in advance of the 2020 AGM. On June 22, 2022, Weisser was granted a short leave by the Court which permitted a return date for the Petition of June 28, 2022. On June 24, 2022, the Company closed the Recapitalization Transaction and ICH noticed the 2020 AGM, the annual general meeting for 2021 (“2021 AGM”) and the annual general meeting for 2022 (the “2022 AGM” and together with the 2020 AGM and 2021 AGM, the “AGMs”). As a result, Weisser’s Petition was rendered moot. On November 14, 2022, Weisser filed an application (the "Application") in the Petition proceeding, seeking to add the Secured Lenders and Consenting Unsecured Lenders as respondents to the Petition and to amend the Petition. Specifically, Weisser sought to amend the Petition to request: (i) a declaration that the affairs of the Secured Lenders, Consenting Unsecured Lenders, ICH and the powers of its then-directors have been and are continuing to be conducted in a manner that is oppressive and/or prejudicial to Weisser; (ii) an order setting aside and/or unwinding the closing of the Recapitalization Transaction; (iii) an order setting aside the results of ICH's annual general meeting held August 11, 2022; (iv) an order that the 2020 AGM be held by December 31, 2022; (v) an order that ICH set the record date for the 2020 AGM to hold the meeting by December 31, 2022; (vi) an order that for purposes of voting at the 2020 AGM, the shareholdings of ICH be those shareholdings that existed prior to the closing of the Recapitalization Transaction; (vii) an order that Weisser is entitled to appoint a chair for the 2020 AGM, or that the Court appoint an independent chair for the 2020 AGM; (viii) an order that ICH be required to provide Weisser with an opportunity to review all votes and proxies submitted in respect of the 2020 AGM, no later than 24 hours in advance of the 2020 AGM; and (ix) an order that pending the 2020 AGM, ICH's current board of directors be replaced by an interim slate of directors to be nominated by Weisser. On May 2, 2023, ICH and its former directors filed their response to the Petition, opposing all orders sought by Weisser, in part, as the Petition is barred by the releases in the Plan of Arrangement and constitutes a collateral attack on Justice Gomery's order approving the Plan. Weisser has not requested a hearing date on the Petition yet.
On October 29, 2021, the Florida Department of Health, Office of Medical Marijuana Use (the “OMMU”) approved the requested change of ownership and control of McCrory’s Sunny Hill Nursery, LLC ("McCrory's"), a wholly owned subsidiary of the Company (the “Variance Request”), resulting from the closing of the Recapitalization Transaction. On November 19, 2021, Weisser filed a petition (as amended, the “Florida Petition”) with the OMMU, challenging the OMMU’s approval of the Variance Request. On February 3, 2022, the Florida Division of Administrative Hearings (“DOAH”) issued a Recommended Order of Dismissal, recommending that the OMMU enter a final order dismissing the Florida Petition for lack of standing. On May 4, 2022, the OMMU issued a final agency order (the “Final Order”), which accepted the recommendation of the DOAH and dismissed the Florida Petition for lack of standing. Weisser appealed the Final Order with the District Court of Appeal in the First District of Florida ("Court of Appeal") and filed his initial brief on November 9, 2022, which seeks a reversal of the Final Order. On February 3, 2023, McCrory's filed a Motion to Dismiss the appeal, which the Court of Appeal denied on June 16, 2023. On July 6, 2023, McCrory's filed its answer brief in response to Weisser's appeal brief.
On April 5, 2023, Canaccord Genuity Corp. ("Canaccord") filed a Statement of Claim against ICH in the Ontario Superior Court of Justice pursuant to an engagement letter (as amended, the "Engagement Letter") entered into by and between Canaccord and ICH. Specifically, Canaccord alleges that it is owed a cash fee equal to $
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Note 12 -
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September 30, |
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December 31, |
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2023 |
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2022 |
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Financial Statement Line Item |
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Current portion of long-term debt, net of issuance costs (1) |
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Long-term debt, net of issuance costs (1) |
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Accrued and other current liabilities |
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Total |
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$ |
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$ |
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Effective as of May 6, 2022 (the “May Resignation Date”), Randy Maslow, the Company’s then Interim Chief Executive Officer and President and a member of the Board of Directors, resigned from his executive positions, including all positions with the Company’s subsidiaries and its affiliates, and from the Company’s Board of Directors and its committees. In connection with the resignation, Mr. Maslow and the Company executed a separation agreement (the “May Separation Agreement”), 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 received total cash compensation in the amount of approximately $
Effective as of November 14, 2022, Julius Kalcevich, the Company’s then Chief Financial Officer, resigned from his executive positions, including all positions with the Company’s subsidiaries and its affiliates. In connection with the resignation, on December 7, 2022 (the “Execution Date”), Mr. Kalcevich and the Company executed a separation agreement (the “December Separation Agreement”), pursuant to which, Mr. Kalcevich 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. Kalcevich will receive total cash compensation in the amount of approximately $
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Pursuant to the terms of the Secured DPA, the Company has a related party payable of $
Note 13 – Unaudited Interim Condensed Consolidated Statements of Cash Flows Supplemental Information
(a) Cash payments made on account of:
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For the Nine Months Ended September 30, |
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2023 |
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2022 |
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Income taxes (including interest and penalties) |
$ |
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Interest |
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(b) Changes in operating assets and liabilities are comprised of the following:
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For the Nine Months Ended September 30, |
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2023 |
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2022 |
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Decrease (increase) in: |
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Accounts receivables, net |
$ |
( |
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$ |
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Prepaid expenses |
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( |
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( |
Inventories, net |
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Other current assets |
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Other long-term assets |
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( |
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Operating leases |
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( |
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( |
(Decrease) increase in: |
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Accounts payable |
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( |
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Accrued and other current liabilities |
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$ |
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(c) Depreciation and amortization are comprised of the following:
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For the Nine Months Ended September 30, |
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2023 |
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2022 |
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Property, plant and equipment |
$ |
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$ |
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Operating lease ROU assets |
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Intangible assets |
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$ |
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$ |
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
(d) (Recoveries), write-downs and other charges, net are comprised of the following:
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For the Nine Months Ended September 30, |
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2023 |
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2022 |
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Account receivable recoveries |
$ |
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$ |
( |
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Operating lease liabilities |
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( |
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Operating lease ROU assets |
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( |
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Property, plant and equipment |
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( |
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$ |
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$ |
( |
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(e) Significant non-cash investing and financing activities are as follows:
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For the Nine Months Ended September 30, |
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2023 |
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2022 |
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Supplemental Cash Flow Information: |
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Non-cash consideration for paid-in-kind interest |
$ |
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$ |
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Non-cash consideration for asset acquisition |
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Shares issued to settle MPX purchase options assumed from the MPX Acquisition |
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Non-cash issuance of shares from consummation of the Recapitalization Transaction |
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Non-cash debt extinguishment from the consummation of the Recapitalization Transaction |
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( |
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Non-cash issuance of June Secured Debentures and June Unsecured Debentures from the consummation of the Recapitalization Transaction |
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Cash and Restricted Cash
For purposes of the unaudited interim condensed consolidated balance sheets and the statements of cash flows, cash and restricted cash are held primarily in U.S. dollars.
Restricted cash balances are those which meet the definition of cash and cash equivalents but are not available for use by the Company. As of September 30, 2023, the Company held less than $
The following table provides a reconciliation of cash and restricted cash reported on the unaudited interim condensed consolidated balance sheets to such amounts presented in the statements of cash flows:
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September 30, |
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December 31, |
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2023 |
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2022 |
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Cash |
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$ |
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$ |
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Restricted cash |
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Total cash and restricted cash presented in the statements of cash flows |
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$ |
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$ |
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Note 14 - Subsequent Events
Legal Proceedings
Please refer to Note 11 for further discussion.
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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, 2022, 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 in the United States. Although we are committed to creating a national retail brand and portfolio of branded cannabis products recognized in the United States, cannabis currently remains illegal under U.S. federal law.
Through our subsidiaries, we currently own and/or operate 36 dispensaries and 10 cultivation and/or processing facilities in eight 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 12 dispensary licenses and/or dispensary facilities in four states, plus an uncapped number of dispensary licenses in Florida, and up to 20 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 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 packaged flower and 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). 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 or cannabis-derived 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).
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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”). Closing of the Recapitalization Transaction through an amended and restated plan of arrangement (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; approval of the Plan of Arrangement by the Supreme Court of British Columbia (the "Court"); and the receipt of all necessary state regulatory approvals in which we operate that require approval and approval by the Canadian Securities Exchange (the "CSE") (collectively, the “Requisite Approvals”). All Requisite Approvals required to consummate the Recapitalization Transaction were satisfied, conditioned, or waived by us, the Secured Lenders and the Consenting Unsecured Lenders, and on June 24, 2022 (the “Closing Date”), we closed the Recapitalization Transaction pursuant to the Plan of Arrangement under the Business Corporations Act (British Columbia) approved by 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. In August 2021, Gotham Green Partners, LLC and the Collateral Agent filed a Notice of Application with the Ontario Superior Court of Justice, which sought, among other things, a declaration that the outside date for closing the Recapitalization Transaction be extended, which extension was granted by such court and we subsequently appealed. Following the closing of the Recapitalization Transaction, we discontinued the appeal with prejudice.
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 (the "Interim Financing")) 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
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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.
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 |
|
Interim |
|
June Unsecured |
|
Pro Forma |
|||
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% |
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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.
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 ICH, 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:
Pursuant to the IRA, the Secured Lenders appointed Scott Cohen, Michelle Mathews-Spradlin and Kenneth Gilbert to serve on our Board. Mr. Cohen and Ms. Mathews-Spradlin’s appointments were effective as of the Closing Date and Mr. Gilbert’s appointment was effective as of August 11, 2022. The Consenting Unsecured Lenders initially appointed Zachary Arrick, Alexander Shoghi and Marco D’Attanasio to serve on our Board effective as of the Closing Date. On September 15, 2022, Mr. D’Attanasio resigned as a member of our Board and audit committee. On February 21, 2023, Mr. Arrick resigned as a member of our Board, compensation, nominating and corporate governance committees. On April 20, 2023, John Paterson was appointed to our Board. Mr. Paterson was nominated as a replacement director for Mr. D'Attanasio by the Investor that initially nominated Mr. D'Attanasio. As of the date hereof, the Consenting Unsecured Lenders have not filled the vacancies on our Board created by Mr. Arrick’s resignation. The directors appointed by the Secured Lenders and Consenting Unsecured Lenders will serve as our directors until our next annual general meeting of shareholders or until their successors are duly elected or appointed.
Pursuant to the IRA, we are required to hire a chief executive officer (and any successor thereto) who has been unanimously approved by the Investors. Upon the chief executive officer taking office (other than an interim chief executive officer), we are obligated to arrange for the chief executive officer to be appointed to our Board. Accordingly, we appointed Richard Proud as a member of our Board upon his appointment as Chief Executive Officer, which had been unanimously approved by the Investors.
Acquisitions and Sale Transactions
GreenMart of Maryland, LLC, Rosebud Organics, Inc. and Budding Rose, Inc.
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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”) (iii) Elizabeth Stavola (the “GMMD Seller”), our former officer and director and the sole member of GreenMart of Maryland, LLC (“GMMD”); and (iv) William Huber (the "LMS Seller"), the sole member of LMS Wellness, Benefit LLC ("LMS"), pursuant to which, CGX was granted and exercised its options to acquire 100% ownership of Budding Rose, Rosebud, GMMD and LMS on September 16, 2021, April 1, 2021, November 5, 2021 and November 22, 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.
On May 23, 2022, we, through CGX, filed a demand for arbitration with the American Arbitration Association against LMS and the LMS Seller for various breaches under the option agreements entered into between CGX and LMS, on the one hand, and CGX and the LMS Seller on the other (collectively, the “LMS Option Agreements”). The closing of our acquisition of LMS is subject to the resolution of this pending legal matter.
Disposition of Vermont Operations
On February 6, 2023, we entered into a membership interest purchase agreement (the "MIPA"), pursuant to we agreed to sell to OG Farms, LLC (the “Purchaser”), our membership interests in Grassroots Vermont Management Services, LLC (“GVMS”), the sole owner of all issued and outstanding authorized common stock of FWR, Inc. (“FWR”). FWR owns and operates a dispensary and cultivation/processing facility in Vermont and is included in our Eastern Region reporting segment. The aggregate proceeds to be received from the sale are $0.2 million in cash, subject to adjustments to be determined on date of closing. The closing of the MIPA is subject to, among other conditions, a Change of Control Approval from the Vermont Cannabis Control Board (the “CCB”). On February 6, 2023, we also entered into a management agreement (the “Management Agreement”) whereby the Purchaser has been appointed as the sole and exclusive manager of, and will receive all profit earned by, GVMS and FWR, through the date of closing. The Management Agreement became effective on March 8, 2023, upon approval by the CCB (the “Effective Date”). As of the Effective Date, all operational control of GVMS and FWR was transferred to the Purchaser and we determined that we no longer have a controlling financial interest as of the Effective Date. We recognized a loss on deconsolidation of $0.5 million, which is the difference between the aggregate consideration to be received and the book value of the assets as of the Effective Date, which is presented in write-downs and other charges on the unaudited interim condensed consolidated statements of operations for the three and nine months ended September 30, 2023. As of August 14, 2023, all closing conditions of the MIPA were satisfied, including receipt of approval from the CCB and we completed the sale of GVMS as of that date.
Sale of CBD Business
On May 8, 2023, our wholly-owned subsidiary, iA CBD, LLC ("iA CBD"), entered into an Asset Purchase Agreement (the "Purchase Agreement") with C4L, LLC (the "Buyer"), pursuant to which, we agreed to sell substantially all of the assets of iA CBD. iA CBD owns and operates the assets associated with our CBD products branded as CBD for Life (the "Business"). The aggregate proceeds to be received from the sale are $0.2 million in cash. The closing of the Purchase Agreement is subject to, among other customary conditions, the assignment of the United States Small Business Loan held by iA CBD. On May 8, 2023, we also entered into an interim management agreement (the "Management Agreement"), pursuant to which the Buyer assumed full operational and managerial control of the Business as of May 8, 2023 (the "CBD Effective Date"). The Management Agreement will remain in effect until the earlier of the (i) closing of the Purchase Agreement; and (ii) the termination of the Purchase Agreement in accordance with its terms. As of the CBD Effective Date, all operational control of the Business was transferred to the Buyer and we determined that we no longer have a controlling financial interest as of the CBD Effective Date. We recognized a loss on deconsolidation of less than $0.1 million as of the CBD Effective Date, which is presented in write-downs and other charges on the unaudited interim condensed consolidated statements of operations for the three and nine months ended September 30, 2023. As of August 15, 2023, we closed the sale of iA CBD as we satisfied all closing conditions of the Purchase Agreement, including receipt of approval for the assignment of the United States Small Business Loan.
Recent Developments
Maryland - Commencement of Adult-Use Operations
On July 1, 2023, our wholly-owned and/or controlled subsidiaries, GMMD, LMS, Budding Rose and Rosebud commenced adult-use operations in Maryland. GMMD, LMS and Budding Rose each holds licenses to operate a co-located medical and adult-use dispensary and Rosebud holds a license to operate a co-located medical and adult-use processing facility.
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New Jersey - Opening of Third Dispensary Location
On September 25, 2023, our wholly-owned subsidiary, MPX New Jersey LLC ("MPX NJ"), opened a new dispensary in Pennsauken, New Jersey marking our third dispensary in New Jersey. The new Pennsauken dispensary is currently open for medical sales and is pending regulatory approval from the New Jersey Cannabis Regulatory Commission to commence adult-use operations.
Nevada - Sale of Assets
On August 8, 2023, our wholly-owned subsidiary, GreenMart of Nevada NLV, LLC ("GMNV") entered into an Asset Purchase Agreement (the "NV Purchase Agreement") with Phoenix Group Reno, LLC, Phoenix Group Henderson, LLC, Phoenix Group LV, LLC and Hash House Brands, LLC (collectively, the "Buyer"), pursuant to which, GMNV agreed to sell substantially all of the assets of GMNV to the Buyer. GMNV currently operates a co-located medical and adult-use cultivation and production facility in North Las Vegas, Nevada and an adult-use dispensary in Las Vegas, Nevada and holds two conditional adult-use dispensary licenses to be located in Henderson and Reno, Nevada (the "Business"). The aggregate proceeds to be received from the sale were to be $4 million (the "Purchase Price"), subject to adjustments to be determined on the date of approval of the NV Management Agreement (as defined below). The closing of the NV Purchase Agreement was conditioned on, among other customary conditions, receipt of approval of the Nevada Cannabis Compliance Board (the "NV CCB"). On August 8, 2023, GMNV also entered into a Management Agreement (the "NV Management Agreement"), pursuant to which, the Buyer's affiliated entity, KaiZen Group, LLC (the "Manager"), would assume full operational and managerial control of the Business, subject to the approval of the NV CCB. Of the total Purchase Price, $3.5 million was to be paid in cash and the remaining balance of the Purchase Price was to be paid on a monthly basis, beginning ninety (90) days after receipt of approval by the NV CCB of the NV Management Agreement, pursuant to a Promissory Note dated August 8, 2023. On September 21, 2023, GMNV terminated the NV Purchase Agreement, and the sale transaction contemplated thereof,
Results of Operations for the Three and Nine Months ended September 30, 2023 and 2022
Revenues and Gross Profit
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
(in ’000s of U.S. dollars) |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
||
Eastern Region |
|
$ |
30,036 |
|
$ |
23,771 |
|
$ |
76,871 |
|
$ |
74,315 |
Western Region |
|
|
12,854 |
|
|
15,331 |
|
|
41,260 |
|
|
50,476 |
Other |
|
|
- |
|
|
269 |
|
|
227 |
|
|
851 |
Total revenues |
|
$ |
42,890 |
|
$ |
39,371 |
|
$ |
118,358 |
|
$ |
125,642 |
Costs and expenses applicable to revenues (exclusive of depreciation and amortization expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Region |
|
$ |
(17,120) |
|
$ |
(12,558) |
|
$ |
(40,025) |
|
$ |
(32,765) |
Western Region |
|
|
(8,343) |
|
|
(10,453) |
|
|
(26,498) |
|
|
(33,975) |
Other |
|
|
- |
|
|
(179) |
|
|
(506) |
|
|
(561) |
Total Costs and expenses applicable to revenues (exclusive of depreciation and amortization expense) |
|
$ |
(25,463) |
|
$ |
(23,190) |
|
$ |
(67,029) |
|
$ |
(67,301) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Region |
|
$ |
12,916 |
|
$ |
11,213 |
|
$ |
36,846 |
|
$ |
41,550 |
Western Region |
|
|
4,511 |
|
|
4,878 |
|
|
14,762 |
|
|
16,501 |
Other |
|
|
- |
|
|
90 |
|
|
(279) |
|
|
290 |
Total gross profit |
|
$ |
17,427 |
|
$ |
16,181 |
|
$ |
51,329 |
|
$ |
58,341 |
The eastern region includes our operations in Florida, Maryland, Massachusetts, New York, and New Jersey. Results from our Vermont and CBD businesses were included until March 8, 2023 and May 8, 2023, respectively, when they were deconsolidated. The western region includes our operations in Arizona and Nevada as well as our assets and investments in Colorado.
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Expenses
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
||||||||
(in ’000s of U.S. dollars) |
|
2023 |
|
2022 |
|
2023 |
|
2022 |
||||
Total operating expenses |
|
$ |
24,982 |
|
$ |
29,905 |
|
$ |
78,346 |
|
$ |
126,868 |
Total other expenses |
|
|
(4,237) |
|
|
(3,946) |
|
|
(14,278) |
|
|
(322,541) |
Income tax expense |
|
|
3,780 |
|
|
4,325 |
|
|
13,021 |
|
|
14,591 |
Selling, General and Administrative Expenses Details
|
|
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||||
(in ’000s of U.S. dollars) |
|
|
2023 |
|
2022 |
|
2023 |
|
2022 |
|||
Salaries and employee benefits |
|
$ |
7,332 |
|
$ |
9,094 |
|
$ |
23,234 |
|
$ |
28,334 |
Severance |
|
|
128 |
|
|
352 |
|
|
603 |
|
|
12,242 |
Share-based compensation |
|
|
473 |
|
|
4,657 |
|
|
3,555 |
|
|
27,493 |
Legal and other professional fees |
|
|
1,592 |
|
|
2,096 |
|
|
6,615 |
|
|
7,464 |
Deferred professional fees related to the Recapitalization Transaction |
|
|
— |
|
|
— |
|
|
— |
|
|
7,091 |
Facility, insurance and technology costs |
|
|
3,111 |
|
|
3,943 |
|
|
9,570 |
|
|
11,908 |
Marketing expenses |
|
|
1,039 |
|
|
1,129 |
|
|
3,429 |
|
|
3,637 |
Travel and pursuit costs |
|
|
189 |
|
|
197 |
|
|
650 |
|
|
666 |
Interest and penalties on unpaid income taxes |
|
|
3,101 |
|
|
— |
|
|
7,394 |
|
|
(123) |
Amortization on right-of-use assets |
|
|
463 |
|
|
540 |
|
|
1,514 |
|
|
1,748 |
Other general corporate expenditures |
|
|
1,489 |
|
|
1,212 |
|
|
2,433 |
|
|
4,296 |
Total |
|
$ |
18,917 |
|
$ |
23,220 |
|
$ |
58,997 |
|
$ |
104,756 |
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 2023 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 period, 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, 2023 and 2022
Eastern region
For the three months ended September 30, 2023, our sales revenues in the eastern region were $30.0 million as compared to $23.8 million for the three months ended September 30, 2022, which represents an increase of 26.4%. The main drivers for the increase in
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revenues are from the launch of our adult-use programs in both Maryland and New Jersey. Further, retail revenues increased in Massachusetts and New York from increased marketing and promotions offered in these markets during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. This was partially offset by lower retail revenues in Florida from increased competition and price compression.
For the three months ended September 30, 2023, gross profit was $12.9 million, or 43.0% of sales revenues, as compared to a gross profit of $11.2 million, or 47.2% of sales revenues, for the three months ended September 30, 2022. Gross profit margins decreased due to lower selling prices in retail dispensaries in Florida from price compression as a result of increased competition. Further, during the three months ended September 30, 2023, we recorded a $0.6 million inventory reserve on expired inventory in Massachusetts as we continue to optimize the use of our two facilities within the state.
During the three months ended September 30, 2023, approximately 8,565 pounds of plant material was harvested in the eastern region as compared to approximately 10,440 pounds harvested during the three months ended September 30, 2022. The decrease in harvested plant material is due to less harvests in Massachusetts as we continue to optimize production runs across our two facilities. Harvested plant material was comparable in both Florida and New Jersey during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.
Western region
For the three months ended September 30, 2023, our sales revenues in the western region were $12.9 million as compared to $15.3 million for the three months ended September 30, 2022, which represents a decrease of 16.2%. The decrease in revenues in the western region is attributable to lower wholesale revenues in both Arizona and Nevada, as well as a decrease in retail revenues in Arizona during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. This was partially offset by an increase in Nevada retail revenues from our new Las Vegas, Nevada dispensary which opened in September 2022.
For the three months ended September 30, 2023, gross profit was $4.5 million, or 35.1% of sales revenues, as compared to a gross profit of $4.9 million, or 31.8% of sales revenues, for the three months ended September 30, 2022. Gross profit margins have increased as we sold more in-house products, which have higher margins in Arizona during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.
During the three months ended September 30, 2023, approximately 1,480 pounds of plant material was harvested in the western region as compared to approximately 1,590 pounds harvested during the three months ended September 30, 2022. Harvested plant material is comparable between the three months ended September 30, 2023 and 2022.
Other revenues and other gross profits
For the three months ended September 30, 2023, other revenues was $Nil as compared to $0.3 million for the three months ended September 30, 2022. For the three months ended September 30, 2023, other gross profits was $Nil as compared to less than $0.1 million for the three months ended September 30, 2022. This decrease in other revenues and other gross profits is due to the deconsolidation of our CBD business as of May 8, 2023.
Total operating expenses
For the three months ended September 30, 2023, our total operating expenses were $25.0 million as compared to $29.9 million for the three months ended September 30, 2022, which represents a decrease of 16.5%.
The decrease in total operating expenses resulted from a decrease of $4.3 million in our selling, general, and administrative expenses which is attributable to: $4.2 million decrease in share-based compensation from the grant of restricted stock units to employees as the majority of outstanding employee RSUs have fully vested in July 2023; $1.8 million decrease in our salaries and employee expenses from reduced headcount during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022; $1.2 million decrease of general corporate expenditures, legal fees, and facility expenses during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022; and a $0.2 million decrease in severance expenses during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. This was partially offset by a $3.1 million increase in interest and penalties on unpaid income taxes during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022
The decrease in total operating expenses is also attributable to a $1.7 million decrease in our depreciation and amortization expenses during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. We had a lower
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depreciable fixed and intangible asset base due to the impairment of our Vermont and Nevada operations and from the sale of certain properties during the year ended December 31, 2022.
The decrease in total operating expenses was partially offset by recoveries of less than $0.1 million from the sale of certain properties held for sale during three months ended September 30, 2023 as compared to recoveries of $1.1 million from asset disposals during the three months ended September 30, 2022.
Total other income and expenses
For the three months ended September 30, 2023, our total other expenses were $4.2 million as compared to total other expenses of $3.9 million for the three months ended September 30, 2022, which represents an increase of 7.4%.
The increase in total other expenses between the three months ended September 30, 2023 and 2022 is primarily attributable to a $0.6 million increase in interest expense. This increase is a result of the higher interest recognized on the deferred professional fees related to the Recapitalization Transaction and the higher interest rate resulting from the amendment to the $11.0 million senior secured bridge notes in February 2023. The total increase in total other expenses was partially offset from a $0.2 million increase in fair value gains from trading securities held by us during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.
Income tax expense
For the three months ended September 30, 2023, our income tax expense was $3.8 million as compared to $4.3 million for the three months ended September 30, 2022, which represents a decrease of 12.6%. The decrease in income tax expense is a result of lower taxable income during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.
Results of Operations for the Nine Months Ended September 30, 2023 and 2022
Eastern region
For the nine months ended September 30, 2023, our sales revenues in the eastern region were $76.9 million as compared to $74.3 million for the nine months ended September 30, 2022, which represents an increase of 3.4%. The increase in revenues is from the launch of our adult-use programs in both Maryland and New Jersey. Further, retail revenues increased in Massachusetts and New York from increased marketing and promotions offered in these markets during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. This was partially offset by lower retail revenues in Florida from increased competition and price compression.
For the nine months ended September 30, 2023, gross profit was $36.8 million, or 47.9% of sales revenues, as compared to a gross profit of $41.6 million, or 55.9% of sales revenues, for the nine months ended September 30, 2022. Gross profit margins decreased due to lower selling prices in retail dispensaries in Florida and Maryland. This was partially offset with increased gross margins in Massachusetts which had a more favorable sales mix with increased sales of our in-house products during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.
During the nine months ended September 30, 2023, approximately 26,760 pounds of plant material was harvested in the eastern region as compared to approximately 30,360 pounds harvested during the nine months ended September 30, 2022. There was a decrease in harvested plant material in Massachusetts as we continue to optimize production runs across our two facilities, which was offset by an increase in harvested plant material in New Jersey as we now have an operational facility, compared to less harvests during the nine months ended September 30, 2022, as the Pleasantville, New Jersey facility became operational in June 2022.
Western region
For the nine months ended September 30, 2023, our sales revenues in the western region were $41.3 million as compared to $50.5 million for the nine months ended September 30, 2022, which represents a decrease of 18.3%. The decrease in revenues in the western region is attributable to lower retail and wholesale revenues in Arizona and lower wholesale revenue in Nevada during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022. This was partially offset by an increase in Nevada retail revenues from our new Las Vegas, Nevada dispensary which opened in September 2022.
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For the nine months ended September 30, 2023, gross profit was $14.8 million, or 35.8% of sales revenues, as compared to a gross profit of $16.5 million, or 32.7% of sales revenues, for the nine months ended September 30, 2022. Gross profit margins increased in the western region from the sale of more in-house products, which have higher margins during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, which was partially offset by lower selling prices due to increased competition.
During the nine months ended September 30, 2023, approximately 5,720 pounds of plant material was harvested in the western region as compared to approximately 5,260 pounds harvested during the nine months ended September 30, 2022. The increase in harvested plant material is attributable to higher cultivation yields in Arizona and Nevada during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.
Other revenues and other gross profits
For the nine months ended September 30, 2023, other revenues were $0.2 million as compared to $0.9 million for the nine months ended September 30, 2022. This decrease is due to lower sales from our CBD business. For the nine months ended September 30, 2023, other gross profits was negative $0.3 million as compared to $0.3 million for the nine months ended September 30, 2022. This decrease in other gross profits primarily due to a $0.2 million inventory reserve accrued on CBD inventory recognized in costs and expenses applicable to revenues on our unaudited interim condensed consolidated statement of operations during the nine months ended September 30, 2023 as compared to $Nil during the nine months ended September 30, 2022. Further, the CBD business was deconsolidated as of May 8, 2023.
Total operating expenses
For the nine months ended September 30, 2023, our total operating expenses were $78.3 million as compared to $126.9 million for the nine months ended September 30, 2022, which represents a decrease of 38.2%.
The decrease in total operating expenses resulted from a decrease of $45.8 million in our selling, general, and administrative expenses which is attributable to: $23.9 million decrease in share-based compensation from the grant of restricted stock units to employees and the concurrent cancellation of existing stock options with the closing of the Recapitalization Transaction during the nine months ended September 30, 2022; $11.6 million decrease in severance expenses, as the nine months ended September 30, 2022 included a one-time severance payment of $12.0 million to our former Interim Chief Executive Officer, Randy Maslow, partially offset by additional severance payments of $0.4 million during the nine months ended September 30, 2023; $7.1 million decrease in deferred professional fees which related to the closing of the Recapitalization Transaction during the nine months ended September 30, 2022; $5.1 million decrease in our salaries and employee expenses from reduced headcount during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022; $4.4 million decrease of general corporate expenditures and facility expenses during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022; and a $1.1 million decrease in marketing, legal and other professional fees during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. This was partially offset by a $7.5 million increase in interest and penalties on unpaid income taxes during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
The decrease in total operating expenses is also attributable to a $4.2 million decrease in our depreciation and amortization expenses during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. We had a lower depreciable fixed and intangible asset base due to the impairment of our Vermont and Nevada operations and from the sale of certain properties during the year ended December 31, 2022.
The decrease in total operating expenses was partially offset by $0.5 million in write-downs recognized as a result of deconsolidating our Vermont and CBD businesses during the nine months ended September 30, 2023, which is the difference between the aggregate consideration to be received and the book value of the assets as of the effective date of the sale. This compares to $1.1 million of gains from asset disposals recognized during the nine months ended September 30, 2022.
Total other income and expenses
For the nine months ended September 30, 2023, our total other expenses were $14.3 million as compared to total other expenses of $322.5 million for the nine months ended September 30, 2022, which represents a decrease of 95.6%.
The decrease in total other expenses between the nine months ended September 30, 2023 and 2022 is attributable to: $316.6 million loss on debt extinguishment related to the closing of the Recapitalization Transaction on June 24, 2022; lower interest expense of $3.5 million during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 from the closing of the Recapitalization Transaction that extinguished a portion of our total outstanding debt and reduced the interest rates on the June Secured
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Debentures and the Senior Secured Bridge Notes; no interest on the Exit Fee during the nine months ended September 30, 2023 as the Exit Fee was cancelled as part of the Recapitalization Transaction, as compared to $0.8 million during the nine months ended September 30, 2022.
The decrease in total other expenses was partially offset by: $11.3 million decrease in other income primarily attributable to the $10.4 million fair value gain net of tax from the noncash consideration provided as part of our acquisition of MPX New Jersey LLC (“MPX NJ Acquisition”) and a $0.5 million one-time payment received from an Arizona licensing agreement during the nine months ended September 30, 2022; $1.3 million loss on debt extinguishment related to the amendment of the Senior Secured Bridge Notes during the nine months ended September 30, 2023, and from an increase in accretion expense of $0.4 million as we are now accruing accretion on the June Secured Debentures and June Unsecured Debentures as compared to no accretion expense on these debt instruments during the nine months ended September 30, 2022.
Income tax expense
For the nine months ended September 30, 2023, our income tax expense was $13.0 million as compared to $14.5 million for the nine months ended September 30, 2022, which represents a decrease of 10.8%. The decrease in income tax expense is a result of lower taxable income during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.
Liquidity and Capital Resources
As of September 30, 2023, we held unrestricted cash of $15.1 million (December 31, 2022—$14.3 million) and had an accumulated deficit of $1,305.3 million (December 31, 2022—$1,251.0 million) and a working capital deficit of $79.0 million (December 31, 2022—$41.9 million). In assessing our liquidity, we monitor our cash on-hand and our expenditures required to execute our day-to-day operations and our long-term strategic plans. To date, we have financed our operations through equity and debt financings and from our cash flows from operations and we anticipate that we will need to raise additional capital to fund our operations and capital plans in the future. We expect to finance these activities through a combination of additional financings, divestitures of certain assets 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, our outstanding debt instruments impose certain restrictions on our operating and financing activities, including certain restrictions on our ability to incur certain additional indebtedness, grant liens, make certain dividends and other payment restrictions affecting our subsidiaries, issue shares or convertible securities and sell certain assets. Even if we believe we have sufficient funds for our current or future plans, we may seek additional capital due to favorable market conditions and/or for strategic opportunities and 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 and the Senior Secured Bridge Notes, and allows interest to be paid-in-kind. 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.
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.
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Cash Flow for the Nine Months Ended September 30, 2023 as Compared to the Nine Months Ended September 30, 2022
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 provided from operating activities during the nine months ended September 30, 2023 was $4.7 million as compared to net cash used in operating activities of $14.1 million for the nine months ended September 30, 2022. The increase in our net cash provided from operating activities during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022, was due primarily to the following: our net loss of $54.3 million, partially offset by $20.4 million of depreciation and amortization expense, $11.6 million in interest expense, $3.6 million in share-based compensation expense, $2.9 million of accretion expense, $1.3 million in loss on debt extinguishment from the amendment of our Senior Secured Bridge Notes, $0.8 million from inventory reserves, $0.5 million from write-downs related to the deconsolidation of our CBD and Vermont operations, and $18.0 million from changes in operating assets and liabilities items during the nine months ended September 30, 2023.
Changes in other operating assets for the nine months ended September 30, 2023 include an increase in inventory of $2.8 million due to increased production in our New Jersey facility during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022 and from an increase in accounts receivable of $0.9 million from higher wholesale revenues during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.
Changes in other operating liabilities for the nine months ended September 30, 2023 include an decrease in accrued and other current liabilities of $0.5 million due the accrual of deferred professional fees during nine months ended September 30, 2022, partially offset by accrued income taxes and related interest and penalties for the period, interest and recapitalization fees due upon closing of the Recapitalization Transaction on June 24, 2022, and an increase in accounts payable of $7.6 million as compared to the nine months ended September 30, 2022.
As we continue to expand our operations and as these operations become more established, we continue to expect cash flow to be provided from operations, and we intend to place less reliance on financing from other sources to fund our operations. Although we expect to continue to have positive cash flows from operations in 2023, no assurance can be given that we will have positive cash flows in the future.
Investing Activities
Net cash used in investing activities during the nine months ended September 30, 2023, was $3.7 million as compared to $3.6 million during the nine months ended September 30, 2022. The increase in cash used in investing activities was primarily attributable to higher other intangible assets expenditures related to adult-use license application fees in Maryland and New Jersey of $2.3 million during the nine months ended September 30, 2023 as compared to immaterial capitalized intangible asset expenditures during the nine months ended September 30, 2022. Cash flow provided from investing activities during the nine months ended September 30, 2023 included $1.3 million of proceeds from the sale of certain property, plant and equipment compared to $2.4 million during the nine months ended September 30, 2022.
Net cash used in investing activities was partially offset by lower cultivation and dispensary construction expenditures of $2.5 million during the nine months ended September 30, 2023 as compared to $5.8 million during the nine months ended September 30, 2022. In addition, during the nine months ended September 30, 2023, we did not loan any amounts to MPX NJ as compared to $0.1 million during the nine months ended September 30, 2022 prior to the MPX NJ Acquisition.
Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2023 was $0.3 million as compared to net cash provided by financing activities of $23.9 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2023, we paid $0.3 million on our employees' behalf as part of RSUs issuances as compared to $Nil during the nine months ended September 30, 2022. 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 less than $0.3 million from repayment of debt.
Related Party Transactions
Upon the closing of the Recapitalization Transaction, certain of our lenders held greater than 5% of the voting interests in our 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 this Quarterly Report on Form 10-Q for the quarter ended September 30, 2023.
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Effective as of May 6, 2022 (the “May Resignation Date”), Randy Maslow, our then 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 its committees. In connection with the resignation, we executed a separation agreement (the “May Separation Agreement”), 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 received total cash compensation in the amount of approximately $12.2 million (the “May 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 $0.3 million). The remainder of the May Separation Payment was to be paid out in equal installments of approximately $0.9 million per month over the next eight months following the May Resignation Date, which was accelerated upon the closing of the Recapitalization Transaction. The total outstanding balance of the May Separation Payment owed to Mr. Maslow was paid in full as of July 15, 2022. Under the terms of the May 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 May Resignation Date. Mr. Maslow’s compensation and benefits under the May Separation Agreement included the extension of exercise period of options to acquire our common shares, until the earlier of (i) five years from the May 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 May Separation Agreement, Mr. Maslow’s options to acquire our common shares expired as of the Closing Date of the Recapitalization Transaction. Mr. Maslow served in a consulting role for six months following the May Resignation Date at a base compensation of $25,000 per month. As of November 6, 2022, the term of Mr. Maslow’s consultancy terminated and we did not elect to extend the term. During the nine months ended September 30, 2023 and 2022, we paid $Nil and $0.1 million, respectively to Mr. Maslow in relation to consulting services provided.
Effective as of November 14, 2022, Julius Kalcevich, our then Chief Financial Officer, resigned from his executive positions, including all positions with our subsidiaries and its affiliates. In connection with the resignation, on December 7, 2022 (the “Execution Date”), we executed a separation agreement (the “December Separation Agreement”), pursuant to which, Mr. Kalcevich 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. Kalcevich will receive total cash compensation in the amount of approximately $1.1 million, which is payable in equal installments of approximately $0.1 million per month over a period of 10 months following the Execution Date. As of September 30, 2023, the total balance owed to Mr. Kalcevich was $Nil (December 31, 2022 - $0.9 million).
Pursuant to the terms of 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, Senvest Master Fund, LP and Hadron Healthcare and Consumer Special Opportunities Master Fund, 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”). Certain of these New Secured Lenders held greater than 5.0% of our outstanding common shares upon the closing of the Recapitalization Transaction and are therefore considered to be related parties. We had 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 accrued 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, 2023, the outstanding related party portion of the Deferred Professional Fees including accrued interest was $7.7 million (December 31, 2022 – $6.7 million). 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, 2022 filed with the SEC on March 30, 2023 which describes the significant accounting policies and methods used in the preparation of our consolidated financial statements.
There have been no material changes to our critical accounting policies and estimates from the date upon which we filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 with the SEC.
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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.
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, with respect to (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 $1.235 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the first sale of our common equity securities under an effective registration statement under the Securities Act; (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 Chief Executive Officer and our Chief Financial Officer, have 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 Chief Executive Officer and our Chief Financial Officer have concluded that as of September 30, 2023, our disclosure controls and procedures were not effective due to material weaknesses, which could adversely affect our ability to record, process, summarize, and report financial data. Such weaknesses include: (1) our internal controls relating to inventory valuation, estimated useful lives and depreciation of long-lived assets, expense cutoff for certain subsidiaries, business combinations, impairment of long-lived assets, and debt modification and extinguishment were not effective; (2) information technology general controls related to access security were not designed and implemented for all financially relevant applications, and we did not perform reviews of relevant Service Organization Control Reports for key third party service providers; (3) we did not perform an effective risk assessment or effectively monitor internal controls over financial reporting, we did not have written documentation of internal control policies and procedures, and we lacked sufficient resources to adequately perform and monitor account reconciliation and review controls; and (4) we misclassified certain employees as contractors based on the rules and regulations of the IRS.
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.
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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 in this Item 1 of Part II or in Item 1 of Part I, "Financial Statements Note 11 - Contingencies and Guarantees", or in Item 3 of Part I, "Legal Proceedings", of our 2022 Annual Report on Form 10-K, as Item 1 of Part II, "Legal Proceedings", of our Quarterly Reports on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023, 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.
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’ replies 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 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. On January 17, 2023, the parties submitted the matter, together with the Class Action Lawsuit referenced below, to mediation. On January 31, 2023, the parties advised the SDNY that the defendants and Hi-Med remain in ongoing settlement discussions. Accordingly, the parties requested that the SDNY suspend all further deadlines and proceedings in the Hi-Med action until February 21, 2023, to allow for continued settlement discussions between the parties, which the SDNY granted on February 7, 2023. On February 16, 2023, the parties advised the SDNY that the parties remained in ongoing settlement discussions and requested that SDNY extend the parties’ deadlines further until March 21, 2023, which the SDNY granted on February 21, 2023. On March 16, 2023, the parties requested another extension of the parties’ deadlines until April 11, 2023 to continue settlement discussions, which the SDNY granted on March 17, 2023. On April 6, 2023, the parties again advised the SDNY that settlement discussions remained ongoing and requested another extension of the applicable deadlines until May 2, 2023, which the SDNY granted. On April 28, 2023, another extension of the deadlines until May 16, 2023 was requested due to ongoing settlement discussions, which the SDNY granted. The parties have reached a settlement in principle and are in the process of finalizing a settlement agreement, which would fully resolve all of Hi-Med's claims. While the parties finalize the settlement agreement, all deadlines in the matter have been stayed until November 14, 2023.
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Walmer Matter
On May 29, 2019, Walmer Capital Limited (“Walmer”) and Island Investments Holdings Limited (“Island”) filed a statement of claim in the Ontario Superior Court of Justice against MPX. The claim arose from the debentures (the “MPX Debentures”) issued by MPX Bioceutical Corporation (“MPX Corporation”) in May 2018, the majority of which debentures were redeemed on April 24, 2019 by MPX, a wholly-owned subsidiary of the Company and the successor entity to MPX Corporation following the MPX Acquisition. MPX withheld the redemption of approximately $1,250,000 of the original subscription amount of the MPX Debentures as MPX was unable to confirm valid payment of such debentures (the “Disputed Debentures”). The plaintiffs’ statement of claim alleged that the plaintiffs were entitled to the Disputed Debentures and sought immediate conversion of such debentures into the Company’s common shares. In addition, the plaintiffs sought damages including, but not limited to, for breach of the Disputed Debentures and related indenture in the amount of $111,000,000 and breach of a security subordination agreement in the amount of $3,500,000. On July 2, 2019, Walmer, Island, Walmer’s principal, Alastair Crawford (“Crawford”), Broughton Limited (“Broughton”) and Puddles 8 Limited (“Puddles”) filed a petition in British Columbia against the Company and its then directors based on the same facts as alleged in the statement of claim filed by Walmer and Island in the Ontario Superior Court of Justice and seeking a declaration that the respondents engaged in oppressive or unfairly prejudicial conduct and resulting damages. In September 2019, the parties to the Ontario action and the British Columbia petition agreed to consolidate the two proceedings into one action that addresses all issues in the British Columbia petition and agreed to discontinue the separate proceedings. On August 23, 2019, Walmer, Island, Crawford, Broughton and Puddles filed a notice of civil claim in the Supreme Court of British Columbia against MPX, the Company and its then directors consolidating the allegations made in the previously commenced Ontario action and British Columbia petition and seeking, among other things: (i) a mandatory order compelling MPX and the Company to convert the Disputed Debentures into common shares of the Company; (ii) damages for breach of the Disputed Debentures (and indentures) and breach of fiduciary obligations in the amount of $111,000,000; (iii) damages for breach of a security subordination agreement in the amount of $3,500,000; (iv) damages for breach of a consultancy agreement in the amount of $440,000 plus $150,000 plus certain warrants; and (v) damages for breach of the duty of good faith in the amount of $1,000,000. On October 31, 2019, the Company and MPX served the plaintiffs with a response and counterclaim. On December 3, 2019, the plaintiffs served (i) a notice of application seeking an order to strike the Company’s and MPX’s counterclaim against Timothy Childs, Island’s principal, in his personal capacity, on the basis that it alleges no cause of action against him and (ii) a notice of application for summary judgment. On February 11, 2020, the Company’s directors filed a defense to the plaintiffs’ claim with the Supreme Court of British Columbia. On August 22, 2023, Walmer, Island, Broughton, Crawford and Puddles filed a Notice of Intention to Proceed with their claim.
Claim by Former Financial Advisor
On April 5, 2023, Canaccord Genuity Corp. ("Canaccord") filed a Statement of Claim against ICH in the Ontario Superior Court of Justice pursuant to an engagement letter (as amended, the "Engagement Letter") entered into by and between Canaccord and ICH. Specifically, Canaccord alleges that it is owed a cash fee equal to $2,236,000 (the "Alleged Fee") pursuant to the Engagement Letter as a result of the closing of the Recapitalization Transaction. ICH filed its Statement of Defense on May 17, 2023 in which, ICH disputes that it owes the Alleged Fee on the basis that the Recapitalization Transaction closed outside of the tail period of the Engagement Letter, which expired on November 4, 2021. ICH also filed a counterclaim against Canaccord, seeking the repayment of a $250,000 payment mistakenly made by ICH towards the Alleged Fee in October 2022. On November 3, 2023, Canaccord filed a Motion for Summary Judgment, requesting that the court grant Canaccord's claim for the Alleged Fee. ICH is reviewing Canaccord's Motion for Summary Judgment and will file an opposition in due course
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, 2022 (“Annual Report”). There have been no material changes in our risk factors from those previously disclosed in our Annual Report. 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.
None.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
Exhibit No. |
Description |
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31.1* |
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31.2* |
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32.1** |
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32.2** |
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101.INS* |
Inline XBRL Instance Document |
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101.SCH* |
Inline XBRL Taxonomy Extension Schema Document |
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101.CAL* |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF* |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB* |
Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE* |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104* |
Cover Page Interactive Data File—the cover page from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 is formatted in Inline XBRL |
* Filed herewith.
** Furnished herewith.
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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.
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IANTHUS CAPITAL HOLDINGS, INC. |
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Date: November 9, 2023 |
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By: |
/s/ Richard Proud
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Richard Proud |
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Chief Executive Officer |
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(Principal Executive Officer) |
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Date: November 9, 2023 |
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By: |
/s/ Philippe Faraut
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Philippe Faraut |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
58
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, Richard Proud, certify that:
Date: November 9, 2023 |
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/s/ Richard Proud
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Richard Proud |
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Chief Executive Officer |
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(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, Philippe Faraut, certify that:
Date: November 9, 2023 |
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/s/ Philippe Faraut
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Philippe Faraut |
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Chief Financial Officer |
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(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, Richard Proud, Chief Executive Officer of iAnthus Capital Holdings, Inc. (the “Company”), hereby certifies that based on the undersigned’s knowledge:
Date: November 9, 2023 |
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/s/ Richard Proud
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Richard Proud |
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Chief Executive Officer |
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(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, Philippe Faraut, Chief Financial Officer of iAnthus Capital Holdings, Inc. (the “Company”), hereby certifies that based on the undersigned’s knowledge:
Date: November 9, 2023 |
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/s/ Philippe Faraut
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Philippe Faraut |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |