UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________to ___________
Commission File Number: 000-56228
(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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(Address of principal executive offices) |
(Zip Code) | |
(646 ) 518-9411
(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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
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 |
☐ |
Accelerated filer |
☐ | |||
Non-accelerated filer |
☒ | Smaller reporting company | ||||
| 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 May 12, 2022 was
Table of Contents
Page No. |
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| PART I. FINANCIAL INFORMATION |
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| PART II. OTHER INFORMATION |
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| Item 1A. |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form
10-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. ITEM 1. |
FINANCIAL STATEMENTS |
iANTHUS CAPITAL HOLDINGS, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands of U.S. dollars or shares)
March 31, |
December 31, |
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2022 |
2021 |
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(Revised) |
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Assets |
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Cash |
$ | $ | ||||||
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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Right-of-use |
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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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Liabilities and Shareholder’s Deficit |
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Accounts payable |
$ | $ | ||||||
Accrued and other current liabilities |
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Current portion of long-term debt, net of issuance costs |
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Derivative liabilities |
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Current portion of 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 lease liabilities |
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Total Liabilities |
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Commitments and Contingencies |
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Shareholders’ Deficit |
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Common shares— d |
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Shares to be issued |
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Additional paid-in capital |
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Accumulated deficit |
( |
) | ( |
) | ||||
Total Shareholders’ Deficit |
$ |
( |
) | $ |
( |
) | ||
Total Liabilities and Shareholders’ Deficit |
$ |
$ |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
1
iANTHUS CAPITAL HOLDINGS, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share amounts)
For the Three Months Ended March 31, |
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2022 |
2021 |
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| Revenues, net of discounts |
$ |
$ |
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| Costs and expenses applicable to revenues |
( |
) | ( |
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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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| Write-downs, recoveries and other charges, net |
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| Total operating expenses |
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| Loss from operations |
( |
) | ( |
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| Interest income |
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| Other income |
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| Interest expense |
( |
) | ( |
) | ||||
| Accretion expense |
( |
) | ( |
) | ||||
| Provision for debt obligation fee |
( |
) | ( |
) | ||||
| Losses from change in fair value of financial instruments |
( |
) | ( |
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| Loss before income taxes |
( |
) | ( |
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| Income tax expense |
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| Net loss |
$ |
( |
) | $ |
( |
) | ||
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| Net loss per share—basic and diluted |
$ |
( |
) | $ |
( |
) | ||
| 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.
2
iANTHUS CAPITAL HOLDINGS, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT) EQUITY
(In thousands of U.S. dollars or shares)
Three Months Ended March 31, 2022 |
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Number of Common Shares (‘000) |
Shares to be Issued |
Additional Paid- in-Capital |
Accumulated Deficit |
Total Shareholders’ Deficit |
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| Balance – January 1, 2022 – (Revised) |
$ |
$ |
$ |
( |
) | $ |
( |
) | ||||||||||||
| Share-based compensation |
— | — | — | |||||||||||||||||
| Net loss |
— | — | — | ( |
) | ( |
) | |||||||||||||
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| Balance – March 31, 2022 |
$ |
$ |
$ |
( |
) | $ |
( |
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Three Months Ended March 31, 2021 |
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Number of Common Shares (‘000) |
Shares to be Issued |
Additional Paid- in-Capital |
Accumulated Deficit |
Total Shareholders’ Equity |
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| Balance – January 1, 2021 – (Revised) |
$ |
$ |
$ |
( |
) |
$ |
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| Share-based compensation |
— | — | — | |||||||||||||||||
| Net loss |
— | — | — | ( |
) | ( |
) | |||||||||||||
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| Balance – March 31, 2021 |
$ |
$ |
$ |
( |
) |
$ |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
3
iANTHUS CAPITAL HOLDINGS, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Three Months Ended March 31, |
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2022 |
2021 |
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| CASH FLOW FROM OPERATING ACTIVITIES |
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| Net loss |
$ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to cash provided by operations: |
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| Interest income |
( |
) | ( |
) | ||||
| Interest expense |
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| Accretion expense |
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| Debt obligation fees |
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| Depreciation and amortization |
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| Write-downs, recoveries and other charges, net |
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| Share-based compensation |
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| Losses from change in fair value of financial instruments |
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| Gain from nonmonetary consideration from acquisition (Refer to Note 4) |
|
|
( |
) |
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|
— |
|
| Deferred income taxes |
— | |||||||
| Change in operating assets and liabilities ( Refer to Note 13) |
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| NET CASH FLOW PROVIDED BY OPERATING ACTIVITIES |
$ |
$ |
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| CASH FLOW FROM INVESTING ACTIVITIES |
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| Purchase of property, plant and equipment |
( |
) | ( |
) | ||||
| Acquisition of other intangible assets |
( |
) | — | |||||
| Proceeds from sale of property, plant and equipment |
— | |||||||
| Issuance of related party promissory note |
( |
) | ( |
) | ||||
| Purchase of subsidiaries, net of cash acquired |
— | |||||||
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| NET CASH USED IN INVESTING ACTIVITIES |
$ |
( |
) |
$ |
( |
) | ||
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| CASH FLOW FROM FINANCING ACTIVITIES |
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| Proceeds from issuance of debt |
— | |||||||
| Debt issuance costs |
— | ( |
) | |||||
| Repayment of debt |
( |
) | ( |
) | ||||
| NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES |
$ |
( |
) |
$ |
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| CASH AND RESTRICTED CASH: |
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| NET INCREASE IN CASH AND RESTRICTED CASH DURING THE YEAR |
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| CASH AND RESTRICTED CASH, BEGINNING OF YEAR ( Refer to Note 13 ) |
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| CASH AND RESTRICTED CASH, END OF YEAR ( Refer to Note 13 ) |
$ |
$ |
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The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
4
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”, or “iAnthus”), 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, and developer, producer and distributor of innovative branded cannabis and cannabidiol (“CBD”) products 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. Additionally, the Company distributes CBD products online and to retail locations across the United States.
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, 2021, included in the Company’s Annual Report on the Form
10-K
filed with the SEC on March 18, 2022. 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 condensed consolidated financial statements. Actual results could differ from these estimates. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2022, or any other period.
Except as otherwise stated, these unaudited interim condensed consolidated financial statements are presented in U.S. dollars.
(c)
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 in the foreseeable future. For the three months ended March 31, 2022, the Company reported a net loss of $10.1 million, operating cash inflows of $1.8 million and an accumulated deficit of $811.7 million as of March 31, 2022. These material circumstances cast substantial doubt on the Company’s ability to continue as a going concern for a period at least 12 months from the date of this report and ultimately on the appropriateness of the use of the accounting principles applicable to a going concern.
During the three months ended March 31, 2022, due to liquidity constraints, the Company did not make interest payments due to the lenders (the “Secured Lenders”) of the Company’s
senior secured convertible debentures (the “Secured Notes”) and the lenders (the “Unsecured Lenders” and together with the Secured Lenders, the “Lenders”) of the Company’s 8 % convertible unsecured debentures (the “Unsecured Debentures”). The Company is currently in default with respect to certain of its long-term debt, which, as of March 31, 2022,
$consists of
5
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 a result of the March 31, 2020 default, the Board of Directors of the Company (the “Board” or the “Board of Directors”) formed a special committee comprised of the Company’s then five independent,
non-management
directors of the Company (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 the novel coronavirus known as COVID-19
(“COVID-19”),
including, but not limited to: • |
renegotiation of existing financing arrangements and other material contracts, including any amendments, waivers, extensions or similar agreements with the Lenders and/or stakeholders of the Company and/or its subsidiaries that the Special Committee determines are in the best interest of the Company and/or its subsidiaries; |
• |
managing available sources of capital, including equity investments or debt financing or refinancing and the terms thereof; |
• |
implementing the operational and financial restructuring of the Company and its subsidiaries and their respective businesses, assets and licensure and other rights; and |
• |
implementing other potential strategic transactions. |
The Special Committee engaged Canaccord Genuity Corp. as its financial advisor to assist the Special Committee in analyzing various strategic alternatives to address its capital structure and liquidity challenges.
On June 22, 2020, the Company received notice from Gotham Green Admin 1, LLC (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 (the “BIA Notice”) under section 244 of the Bankruptcy and Insolvency Act (Canada) (the “BIA”).
On July 10, 2020, the Company and certain of its subsidiaries entered into a restructuring support agreement (as amended, the “Restructuring Support Agreement”) with the Secured Lenders and certain of the Unsecured Lenders (the “Consenting Unsecured Lenders”) to affect a proposed recapitalization transaction (the “Recapitalization Transaction”). Under the Restructuring Support Agreement, certain of the Secured Lenders agreed to provide interim financing in the amount of $14.7 million (the “Tranche Four Secured Notes”). Refer Note 14 for further details regarding the proposed transaction.
Subject to compliance with the Restructuring Support Agreement, the Secured Lenders and the Consenting Unsecured Lenders will forbear from further exercising any rights or remedies in connection with any events of default of the Company occurring under their respective agreements and will stop any current or pending enforcement actions with respect to the same, including as set forth in the Demand Letter.
Pursuant to the terms of the Restructuring Support Agreement, the Recapitalization Transaction would be implemented pursuant to arrangement proceedings (“Arrangement Proceedings”) commenced under the British Columbia Business Corporations Act, or, only if necessary, the Companies’ Creditors Arrangement Act (Canada) (“CCAA”). Completion of the Recapitalization Transaction through the Arrangement Proceedings is subject to, among other things, requisite stakeholder approval of the plan of arrangement (the “Plan of Arrangement”).
6
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 September 14, 2020, the Company held meetings at which the stakeholders approved the Plan of Arrangement. Following the stakeholder vote, on September 25, 2020, the Company attended a court hearing before the Supreme Court of British Columbia (the “Court”) to receive approval of the Plan of Arrangement. On October 5, 2020, the Company received final approval from the Court for the Plan of Arrangement. On November 5, 2020, the Company received a notice of appeal with respect to the final approval for the Plan of Arrangement by the Court, and on January 29, 2021, the appeal was dismissed by the British Columbia Court of Appeal. Because the Company received the necessary approvals of the Plan of Arrangement from the Court, Secured Lenders, Unsecured Lenders and the holders of the Company’s common shares, options and warrants, the Recapitalization Transaction will be implemented through the British Columbia Business Corporations Act and not the CCAA.
The Company may be required to obtain other necessary approvals with respect to the Plan of Arrangement, including approvals by state-level regulators and the Canadian Securities Exchange (collectively, the “Requisite Approvals”). Specifically, certain of the transactions contemplated by the Recapitalization Transaction have triggered the requirement for an approval by state-level regulators in certain U.S. states with jurisdiction over the licensed cannabis operations of entities owned, in whole or in part, or controlled, directly or indirectly, by the Company in such states. On February 23, 2021, the Nevada Cannabis Compliance Board approved the proposed change of ownership and control of the Company’s wholly-owned subsidiary, GreenMart of Nevada NLV, LLC (“GMNV”), contemplated by the Recapitalization Transaction. On June 17, 2021, the Massachusetts Cannabis Control Commission (the “CCC”) approved the proposed change of ownership and control of the current licenses held by the Company’s wholly-owned subsidiaries, Mayflower Medicinals, Inc. (“Mayflower”) and Cannatech Medicinals, Inc. (“Cannatech”), contemplated by the Recapitalization Transaction (the “June 17 Approval”). On June 15, 2021, the Company and the Lenders agreed to amend the date by which the Recapitalization Transaction pursuant to the Plan of Arrangement is required to be implemented by from June 30, 2021 to August 31, 2021 (the “Outside Date”).
On August 12, 2021, Mayflower’s pending application for a Marijuana Establishment retail license for its Allston, Massachusetts retail location (the “Allston Retail License”) was approved by the CCC at its August 2021 public meeting. As a result of such August 12, 2021 approval, Mayflower was required to submit a new change of ownership and control application to the CCC in connection with the Recapitalization Transaction with respect to the Allston Retail License (the “New COC Application”). The New COC Application was submitted by Mayflower on November 10, 2021 and is currently pending before the CCC. The New COC Application must be approved by the CCC before the June 17 Approval can be effectuated.
On August 20, 2021, Gotham Green Partners, LLC and Gotham Green Admin 1, LLC (the “Applicants”) filed a Notice of Application (the “Application”) with the Ontario Superior Court of Justice Commercial List (“OSCJ”), which sought, among other things, a declaration that the Outside Date be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On August 24, 2021, the Company and Applicants appeared for a case conference before the OSCJ at which the OSCJ issued an endorsement (the “Stay Order”) that required the parties to the Restructuring Support Agreement to maintain the status quo until the hearing on September 23, 2021. Specifically, the Stay Order provided that the parties shall remain bound by the Restructuring Support Agreement and not take any steps to advance or impede the regulatory approval process for the closing of the Recapitalization Transaction or otherwise have any communication with the applicable state-level regulators concerning the Recapitalization Transaction or the other counterparties to the Restructuring Support Agreement. On September 23, 2021, the parties appeared before the OSCJ for a hearing on the Application. Following this hearing, the OSCJ issued an endorsement that extended the Stay Order from September 23, 2021 until 48 hours after the release of the OSCJ’s decision on the merits of the Application. On October 12, 2021, the OSCJ issued its decision granting the Applicant’s relief sought in the Application (the “Decision”). Specifically, the OSCJ granted the declaration sought by the Applicants and ordered that the Outside Date be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On November 10, 2021, the Company filed a Notice of Appeal with the Ontario Court of Appeal and a hearing on the appeal is scheduled for June 9, 2022.
On August 20, 2021, the Vermont Department of Public Safety (the “DPS”) confirmed that the DPS does not require prior approval of the Recapitalization Transaction, except for background checks of the prospective new directors and Interim Chief Executive Officer of the Company to be appointed upon the closing of the Recapitalization Transaction, which background checks have been completed.
On October 29, 2021, the Florida Department of Health, Office of Medical Marijuana Use (the “OMMU”) approved the proposed change of ownership and control of the Company’s wholly-owned subsidiary, McCrory’s Sunny Hill Nursery, LLC (“McCrory’s”) contemplated by the Recapitalization Transaction (the “Variance Request”). On November 19, 2021, a petition (as amended, the “Petition”) was filed by certain petitioners (the “Petitioners”) with the OMMU challenging the OMMU’s approval of the Variance Request and requesting a formal administrative hearing before an administrative law judge (“ALJ”) at the Florida Division of Administrative Hearings. As a result of the Petition, the OMMU informed the Company that the OMMU’s prior approval of the Variance Request is not an enforceable agency order until such time that there is a final resolution of the Petition and a final agency order is issued by the OMMU. On May 4, 2022, the OMMU issued a final agency order, accepting the recommendation of the ALJ and dismissing the Petition.
7
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 1, 2022, the Maryland Medical Cannabis Commission (the “MMCC”) approved the proposed change of ownership and control of the Company’s wholly-owned subsidiary, S8 Management, LLC (“S8”), contemplated by the Recapitalization Transaction. S8 currently controls
State-level regulatory approvals remain outstanding in Massachusetts, New Jersey, and New York. On January 7, 2022, the New Jersey Cannabis Regulatory Commission (“CRC”) approved the Company’s acquisition
The Company believes that the financing transactions received to date should provide the necessary funding for the Company to continue as a going concern. However, there can be no assurance that capital, when needed, will be available on terms acceptable to the Company, or at all. As such, these material circumstances cast substantial doubt on the Company’s ability to continue as a going concern for a period no less than 12 months from the date of this report. These unaudited interim condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
(d)
Basis of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the Company together with its consolidated subsidiaries, except for subsidiaries which the Company has identified as variable interest entities where the Company is not the primary beneficiary.
(e)
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 judgements 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.
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 and notes 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.
(f)
Change in Estimates
In January 2021, the Company completed an assessment of the yield per gram that is used as an input to value the Company’s inventory. The timing of this review was based on a combination of factors accumulating over time that provided the Company with updated information to make a better estimate on the yield of its products. These factors included enhanced data gathering of crop production and yields into inventory. The assessment resulted in a revision of the Company’s production yield estimates that are used to value ending inventory. The effect of this change was an increase in costs and expenses applicable to revenues of approximately $2.9 million in the first quarter of 2021.
8
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO
UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
(g) Coronavirus Pandemic
In March 2020, the World Health Organization declared the global emergence of the
COVID-19
pandemic. The Company continues to monitor guidance and orders issued by federal, state, and local authorities with respect to COVID-19.
As a result, the Company may take actions that alter its business operations as may be required by such 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, and could include temporary closures of one or more of the Company’s facilities; temporary or long-term labor shortages; temporary or long-term adverse impacts on the Company’s supply chain and distribution channels; and the potential of 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,
COVID-19
could negatively impact capital expenditures and overall economic activity in the impacted regions or depending on the severity, globally, 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 for an extended period of time or it 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 COVID-19
pandemic poses a risk that the Company or its employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period. Although, the Company has been deemed essential and/or has been permitted to continue operating its facilities in the states in which it cultivates, processes, manufactures, and sells cannabis during the pendency of the
COVID-19
pandemic, subject to the implementation of certain restrictions on adult-use
cannabis sales in both Massachusetts and Nevada, which have since been lifted, there is no assurance that the Company’s operations will continue to be deemed essential and/or will continue to be permitted to operate. 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 the common shares of the Company. (h) Reclassification
Certain prior year amounts have been reclassified to conform with the current year’s presentation. These reclassifications adjustment had no effect on the Company’s previously reported unaudited interim condensed consolidated statement of operations.
The following table summarizes the effects of reclassification adjustment on the line items within the Company’s unaudited interim condensed consolidated statements of operations:
| Prior Year’s Line item |
Reclassified Amount |
Current Year’s Line item | ||||
| Depreciation and amortization |
$ | Selling, general and administrative expenses | ||||
| Depreciation and amortization |
( |
) | Depreciation and amortization | |||
(i) 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.
9
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 effect of the adjustments on the line items within the Company’s consolidated balance sheet as of December 31, 2021 is as follows:
December 31, 2021 |
||||||||||||
As previously reported |
Adjustment |
As adjusted |
||||||||||
| Inventories |
$ |
$ |
( |
) |
$ |
|||||||
| Current assets |
( |
) |
||||||||||
| Total assets |
( |
) |
||||||||||
| Accrued and other current liabilities |
( |
) |
||||||||||
| Current liabilities |
( |
) |
||||||||||
| Total liabilities |
( |
) |
||||||||||
| Accumulated deficit |
( |
) |
( |
) |
( |
) | ||||||
| Total shareholders’ deficit |
( |
) |
( |
) |
( |
) | ||||||
| Total liabilities and shareholders’ deficit |
( |
) |
||||||||||
The effect of the adjustments on the line items within the Company’s consolidated statement of operations as of December 31, 2021 is as follows:
Year Ended December 31, 2021 |
||||||||||||
As previously reported |
Adjustment |
As adjusted |
||||||||||
| Costs and expenses applicable to revenues |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) | |||
| Gross profit |
( |
) |
||||||||||
| Loss from operations |
( |
) |
( |
) |
( |
) | ||||||
| Loss from operations before income tax |
( |
) |
( |
) |
( |
) | ||||||
| Income tax expense |
( |
) |
||||||||||
| Net loss |
( |
) |
( |
) |
( |
) | ||||||
| Earnings per share |
( |
) |
( |
) |
( |
) | ||||||
The effect of the adjustments on the line items within the Company’s interim condensed consolidated statements of changes in shareholders’ deficit for the three months ended March 31, 2022 is as follows:
March 31, 2022 |
||||||||||||
As previously reported |
Adjustment |
As adjusted |
||||||||||
| Accumulated deficit – Balance January 1, 2022 |
$ |
( |
) |
$ |
( |
) |
$ |
( |
) | |||
| Total Shareholders’ deficit – Balance January 1, 2022 |
( |
) |
( |
) |
( |
) | ||||||
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 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 1 year to 15 years.
10
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO
UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Maturities of lease liabilities for operating leases as of March 31, 2022, were as follows:
Operating Leases |
||||
| 2023 |
$ | |||
| 2024 |
||||
| 2025 |
||||
| 2026 |
||||
| 2027 |
||||
| Thereafter |
||||
| |
|
|||
| Total lease payments |
$ | |||
| Less: interest expense |
( |
) | ||
| |
|
|||
| Present value of lease liabilities |
$ | |||
| Weighted-average remaining lease term (years) |
||||
| Weighted-average discount rate |
% | |||
| |
|
|||
For the three months ended March 31, 2022, the Company recorded operating lease expenses of $2.2 million (March 31, 2021—$2.4 million), which are included in selling, general and administrative expenses on the unaudited interim condensed consolidated statements of operations.
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 balance sheets. For the three months ended March 31, 2022, the Company recorded sublease income of $0.2 million (March 31, 2021—$Nil ), which is included in other income on the unaudited interim condensed consolidated statements of operations.
Supplemental balance sheet information related to leases are as follows:
| Balance Sheet Information |
Classification |
March 31, 2022 |
December 31, 2021 |
|||||||
| Right-of-use |
Operating leases |
$ | $ | |||||||
| |
|
|
|
|||||||
| Lease Liabilities |
||||||||||
| Current portion of lease liabilities |
Operating leases |
$ | $ | |||||||
| Long-term lease liabilities |
Operating leases |
|||||||||
| |
|
|
|
|||||||
| Total |
$ |
$ |
||||||||
| |
|
|
|
|||||||
Note 3—Inventories
Inventories
are
comprised of the following items: March 31, 2022 |
December 31, 2021 |
|||||||
(Revised) |
||||||||
| Supplies |
$ | $ | ||||||
| Raw materials |
||||||||
| Work in process |
||||||||
| Finished goods |
||||||||
| |
|
|
|
|||||
| 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 months ended March 31, 2022, the Company recorded $0.3 million (March 31, 2021 – $0.2 million), related to spoiled inventory in costs and expenses applicable to revenues on the unaudited interim condensed consolidated statements of operations.
1
1
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 4 – Acquisitions
Acquisition of MPX New Jersey LLC
On February 1, 2022, the Company’s wholly-owned subsidiary, iAnthus New Jersey, LLC (“INJ”), closed on its acquisition of MPX NJ, a New Jersey-based entity with a New Jersey medical cannabis permit.
,
permit
to build-out
cultivation, production and retail operations within the state of New Jersey. The Company expects this acquisition to help establish a larger national footprint within the United States. 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 14.5 million as noncash consideration exchanged for the net identifiable assets received from MPX NJ. The related tax impact of $4.1 million was netted against this gain. As a result, the Company recorded a $10.5 million gain within other income on the unaudited interim condensed consolidated statement of operations for the three months ended March 31, 2022.
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 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 $0.2 million and $Nil within selling, general and administrative expenses on the unaudited interim condensed consolidated statement of operations for the three months ended March 31, 2022 and 2021, respectively.
1
2
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 5—Long-Term Debt
Secured Notes (1) |
May 2019 Debentures |
March 2019 Debentures |
Other |
Total |
||||||||||||||||
| As of January 1, 2022 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Fair value of financial liabilities issued |
— | — | ||||||||||||||||||
| Accretion of balance |
||||||||||||||||||||
| Repayment |
— | — | — | ( |
) | ( |
) | |||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| As of March 31, 2022 |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | This amount includes the Company’s obligation to pay an exit fee of $ |
As of March 31, 2022, the total and unamortized discount costs were $30.3 million and $2.7 million, respectively (December 31, 2021—$30.3 million and $3.2 million, respectively). As of March 31, 2022, the total and unamortized debt issuance costs were $7.7 million and $2.2 million, respectively (December 31, 2021—$7.7 million and $2.5 million, respectively).
As of March 31, 2022, the total interest accrued on both current and long-term debt was $51.1 million (December 31, 2021—$45.6 million).
(a)
Secured Notes
Tranche One
On May 14, 2018, the Company issued $40.0 million secured notes (the “Tranche One Secured Notes”) with a maturity date of May 14, 2021 . The principal amount of such notes will remain outstanding until the closing of the Recapitalization Transaction. Interest on the Tranche One Secured Notes will continue to accrue at the default rate of 16.0 % per annum until such time. Due to the conversion price of $3.08 being less than the Company’s closing stock price on the date of issuance, this gave rise to a beneficial conversion feature valued at $7.9 million. The Company recognized this beneficial conversion feature as a debt discount and additional paid in capital on the closing date. The discount to the Tranche One Secured Notes Nil (March 31, 2021—$0.7 million) on the unaudited interim condensed consolidated statement of operations. The terms also contain a financial covenant requiring the Company’s asset value to be 1.75 times the total net debt at each quarter end and requires that the Company maintain a minimum cash balance of $1.0 million while the Tranche One Secured Notes remain outstanding (the “market value test”) .
was
being amortized to accretion expense until maturity or its earlier repayment or conversion. For the three months ended March 31, 2022, the amount of amortization recorded in accretion expense was $For the three months ended March 31, 2022, interest expense and accretion expense of $1.7 million and $Nil , respectively, (March 31, 2021—$1.7 million and $2.3 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations.
As of March 31, 2020, the Company was not in compliance with the market value test and the Company did not make interest payments, therefore in breach of a financial covenant for 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 March 31, 2022, consisted of $97.5 million and $60.0 million of principal amount and $34.8 million and $10.8 million in accrued interest on the Secured Notes and the Unsecured Debentures, respectively. As a result of the default, the Company is classifying the Tranche One Secured Notes, Tranche Two Secured Notes, and Tranche Three Secured Notes as current liabilities on the unaudited interim condensed consolidated balance sheets. As of March 31, 2022, the Company is still in default on the Tranche One Secured Notes, Tranche Two Secured Notes, and Tranche Three Secured Notes. Further details on the default are disclosed in Note 14.
1
3
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 months ended March 31, 2022, interest expense of $0.4 million (March 31, 2021 – $0.4 million), was recorded in relation to the Exit Fee on the unaudited interim condensed consolidated statements of operations. As of March 31, 2022, the Company accrued $15.8 million (March 31, 2021—$14.2 million) related to the Exit Fee, comprised of an aggregate principal amount of $10.3 million and $5.5 million in accrued interest (March 31, 2021 – an aggregate principal amount of $10.3 million and $3.9 million in accrued interest). Furthermore, as a result of this default, the Company is classifying the Exit Fee as a current liability on the unaudited interim condensed consolidated balance sheets as of March 31, 2022.
Tranche Two
On September 30, 2019, the Company issued an additional $20.0 million of secured notes (the “Tranche Two Secured Notes”). The Tranche Two Secured Notes accrue interest at 13.0 % per annum and had an original maturity date of May 14, 2021 . The principal amount of such notes will remain outstanding until the closing of the Recapitalization Transaction. Interest on the Tranche Two Secured Notes will continue to accrue at the default rate of 16.0% per annum until such time.
For the three months ended March 31, 2022, interest expense and accretion expense of $0.8 million and $Nil , respectively, (March 31, 2021—$0.8 million and $0.5 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations.
All terms, restrictions and financial covenants applicable to the Tranche One Secured Notes are also applicable to Tranche Two Secured Notes.
Tranche Three
On December 20, 2019, the Company issued an additional $36.2 million of secured notes (the “Tranche Three Secured Notes”). The Tranche Three Secured Notes accrue interest at 13.0 % per annum and had an original maturity date of May 14, 2021 . The principal amount of such notes will remain outstanding until the closing of the Recapitalization Transaction. Interest on the Tranche Three Secured Notes will continue to accrue at default rate of 16.0% per annum until such time.
For the three months ended March 31, 2022, interest expense and accretion expense of $1.4 million and $Nil , respectively, (March 31, 2021—$1.4 million and $1.1 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations.
All terms, restrictions and financial covenants applicable to the Tranche One Secured Notes and Tranche Two Secured Notes are also applicable to Tranche Three Secured Notes.
Tranche Four
On July 13, 2020, as part of the Recapitalization Transaction, the Company issued an additional $14.7 million as the Tranche Four Secured Notes. The Tranche Four Secured Notes accrue interest at 8.0 % per annum and mature on July 13, 2025 .
For the three months ended March 31, 2022, interest expense and accretion expense of $0.3 million and $0.1 million, respectively, (March 31, 2021—$0.3 million and $0.1 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations.
All terms, restrictions, and financial covenants applicable to the Tranche One Secured Notes, Tranche Two Secured Notes, and Tranche Three Secured Notes discussed above, are also applicable to the Tranche Four Secured Notes. The Company remains in default with respect to the Tranche One Secured Notes, Tranche Two Secured Notes and Tranche Three Secured Notes, due to failure to remit applicable interest payments between March 2020 and March 2022. Therefore, all amounts owing on the Tranche One Secured Notes, Tranche Two Secured Notes and Tranche Three Secured Notes are classified as current liabilities on the unaudited interim condensed consolidated balance sheets. As interest on the Tranche Four Secured notes is paid in kind by adding the accrued amount to the principal amount, the Company is currently in compliance with the Tranche Four Secured Notes as of March 31, 2022. Therefore, the Tranche Four Secured Notes are classified as long-term liabilities on the unaudited interim condensed consolidated balance sheets.
1
4
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO
UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
iAnthus New Jersey, LLC Senior Secured Bridge Notes
On February 2, 2021, INJ issued an aggregate
The host debt, classified as a liability, was recognized at the fair value of $10.3 million, net of issuance costs of $0.7 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, 2021) and such amount thereafter becoming part of the principal amount and will accrue interest. Interest paid in kind will be payable on the date that all of the principal amount is due and payable.
For the three months ended March 31, 2022, interest expense and accretion expense of $0.4 million and $0.1 million, respectively, (March 31, 2021—$0.2 million and $0.1 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations. As of March 31, 2022, the Company held $2.6 million (December 31, 2021—$3.3 million) of restricted cash in escrow from the Senior Secured Bridge Notes. Refer to Note 13 for further discussion.
The Senior Secured Bridge Notes are secured by a security interest in certain assets of INJ. The Company 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 Senior Secured Bridge Notes as of March 31, 2022. The Senior Secured Bridge Notes are classified as current liabilities on the unaudited interim condensed consolidated balance sheets as they are set expire on February 2, 2023.
(b)
March 2019 Debentures
On March 18, 2019, the Company completed a private placement of $35.0 million of unsecured convertible debentures (the “March 2019 Debentures”) and corresponding warrants to purchase 2,177,291 common shares of the Company at an exercise price of $6.43 expired on March 15, 2022. The March 2019 Debentures bear interest at a rate of 8.0 %, per annum, payable quarterly on the last business day of each fiscal quarter, beginning on March 31, 2019. Interest is paid in cash, shares, or a combination of cash and shares, up to 50 %, at the Company’s election. The March 2019 Debentures mature on March 15, 2023 .
per share (“March 2019 Equity Warrants”).
All of the March 2019 Equity Warrants
For the three months ended March 31, 2022, interest expense and accretion expense of $0.7 million and $0.4 million, respectively, (March 31, 2021—$0.7 million and $0.4 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations.
The terms of the March 2019 Debentures impose certain restrictions on its operating and financing activities, including certain restrictions on the Company’s ability to incur certain additional indebtedness at the subsidiary level. As of March 31, 2022, the Company is still 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. Further, as a result of this default the Company is classifying the debt as a current liability on the unaudited interim condensed consolidated balance sheets as the Unsecured Debentures are due on demand. The event of default is applicable to all amounts outstanding under the Unsecured Debentures.
1
5
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) May 2019 Debentures
On May 2, 2019, the Company completed a private placement of $25.0 million of unsecured convertible debentures (the “May 2019 Debentures”) and corresponding warrants to purchase 1,555,207 common shares of the Company at an exercise price of $6.43 March 15, 2022 . The May 2019 Debentures bear interest at a rate of 8.0 %, per annum, payable quarterly on the last business day of each fiscal quarter, beginning on June 30, 2019. Interest is paid in cash, shares, or a combination of cash and shares, up to 50 %, at the Company’s election. The May 2019 Debentures mature on March 15, 2023 .
per common share (“May 2019 Equity Warrants”). All of the May 2019 Equity Warrants expired on
For the three months ended March 31, 2022, interest expense and accretion expense of $0.5 million and $0.2 million, respectively, (March 31, 2021—$0.5 million and $0.2 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations.
The terms of the May 2019 Debentures impose certain restrictions on its operating and financing activities, including certain restrictions on the Company’s ability to incur certain additional indebtedness at the subsidiary level. As of March 31, 2022 the Company is still in default on its interest obligations to the holders of the Secured Notes. This default triggered a cross-default on its interest obligations to the holders of the May 2019 Debentures. Further, as a result of this default the Company is classifying the debt as a current liability on the unaudited interim condensed consolidated balance sheets as the Unsecured Debentures are due on demand. The event of default is applicable to all amounts outstanding under the Unsecured Debentures.
Note 6—Share Capital
(a) Share Capital
Authorized: Unlimited common shares. The shares have no par value.
The Company’s common shares are voting and dividend-paying. There were no common share issuances for the three months ended March 31, 2022 and 2021.
(b) Warrants
The following table summarizes certain information in respect of the Company’s warrants:
March 31, 2022 |
||||||||
Units |
Weighted Average Exercise Price (C$) |
|||||||
| Warrants outstanding, beginning | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Expired | ( |
) | ||||||
| Warrants outstanding, ending | $ |
|||||||
As of March 31, 2022 and December 31, 2021, warrants classified as derivative liabilities on the unaudited interim condensed consolidated balance sheets were revalued with the following inputs:
March 31, 2022 |
December 31, 2021 |
|||||||
Risk-free interest rate |
% | % | ||||||
Expected dividend yield |
% | % | ||||||
Expected volatility |
% | % | ||||||
Expected life |
||||||||
1
6
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 uses an expected volatility based on its historical trading data.
The revaluation of the warrants classified as derivative liabilities resulted in a fair value of less than $0.1 million for these instruments as of March 31, 2022 (December 31, 2021 – less than $0.1 million). As a result of the revaluation, the Company recognized a gain of less than $0.1 million for the three months ended March 31, 2022 (March 31, 2021 – loss of less than $0.1 million), on the unaudited interim condensed consolidated statements of operations.
Full share equivalent warrants outstanding and exercisable are as follows:
March 31, 2022 |
December 31, 2021 |
|||||||||||||||
Year of expiration |
Number Outstanding |
Weighted Average Exercise Price (C$) |
Number Outstanding |
Weighted Average Exercise Price (C$) |
||||||||||||
| 2022 | ||||||||||||||||
| 2023 | ||||||||||||||||
| Warrants outstanding | $ |
$ |
||||||||||||||
(c) Potentially Dilutive Securities
The following table summarizes potentially dilutive securities, and the resulting common share equivalents outstanding as of March 31, 2022 and December 31, 2021:
March 31, 2022 |
December 31, 2021 |
|||||||
| Common share options | ||||||||
| Warrants | ||||||||
| Secured notes | ||||||||
| Debentures | ||||||||
| MPX dilutive instruments (1) |
||||||||
| Total | ||||||||
(1) |
Prior to the acquisition of MPX Bioceutical Corporation (“MPX”) on February 5, 2019 (the “MPX Acquisition”), MPX had instruments outstanding that were potentially dilutive and as a result of the MPX Acquisition, the Company assumed certain of these instruments. |
Total potentially dilutive securities does not include the shares that would potentially be issued upon conversion of the accrued interest on the Company’s long-term debt. As of March 31, 2022, this would amount to 18.4 million common shares (December 31, 2021 – 16.4 million common shares).
(d) Stock Options
The following table summarizes certain information in respect of option activity under the Company’s stock option plan:
March 31, 2022 |
December 31, 2021 |
|||||||||||||||||||||||
Units |
Weighted Average Exercise Price (C$) |
Weighted Average Contractual Life |
Units |
Weighted Average Exercise Price (C$) |
Weighted Average Contractual Life |
|||||||||||||||||||
| Options outstanding, beginning | $ | |
— | $ | |
— | ||||||||||||||||||
| Granted | — | — | ||||||||||||||||||||||
| Exercised | — | — | ||||||||||||||||||||||
| Forfeited/Expired | ( |
) | — | ( |
) | — | ||||||||||||||||||
| Options outstanding, ending | $ |
$ |
||||||||||||||||||||||
1
7
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 related share-based compensation expense for the three months ended March 31, 2022 was $1.5 million (March 31, 2021—$1.6 million), and is presented in selling, general and administrative expenses on the unaudited interim condensed consolidated statements of operations.
As of March 31, 2022, the weighted average period over which compensation cost on 0.5 years and the unrecognized expense is 0.4 million.
non-vested
stock options is expected to be recognized is $
Note 7—Income Taxes
The following table summarizes the Company’s income tax expense and effective tax rates for the three months ended March 31, 2022 and 2021:
Three Months Ended March 31, |
||||||||
2022 |
2021 |
|||||||
| Loss before income taxes |
$ | ( |
) | $ | ( |
) | ||
| Income tax expense |
||||||||
| |
|
|
|
|||||
| Effective tax rate |
( |
)% | ( |
)% | ||||
| |
|
|
|
|||||
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 21 % primarily relates to certain
non-deductible
items, state and local income taxes and the valuation allowance for deferred tax assets of non-cultivator
entities.The Internal Revenue Service filed a Notice of Federal Tax Lien against GHHIA Management Inc. on February 23, 2022. The lien is for corporate income taxes, penalties and interest owed by the Company for its tax year ended December 31, 2020.
1
8
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 revenues by segment for the three months ended March 31, 2022 and 2021:
Reportable Segments
Three Months Ended March 31, |
||||||||
2022 |
2021 |
|||||||
| 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 |
$ |
$ |
||||||
| |
|
|
|
|||||
| Write-downs, (recoveries) and other charges, net |
||||||||
| Eastern Region | $ | $ | ||||||
| Western Region | ||||||||
| Other | ( |
) | ||||||
| |
|
|
|
|||||
| Total |
$ |
$ |
||||||
| |
|
|
|
|||||
| Net income (loss) |
||||||||
| Eastern Region | $ | $ | ||||||
| Western Region | ( |
) | ||||||
| Other | ( |
) | ( |
) | ||||
| |
|
|
|
|||||
| Total |
$ |
( |
) |
$ |
( |
) | ||
| |
|
|
|
|||||
| Purchase of property, plant and equipment |
||||||||
| Eastern Region | $ | $ | ||||||
| Western Region | ||||||||
| Other | ||||||||
| |
|
|
|
|||||
| Total |
$ |
$ |
||||||
| |
|
|
|
|||||
| Purchase of intangibles |
||||||||
| Eastern Region | $ | — | $ | — | ||||
| Western Region | — | — | ||||||
| Other | — | |||||||
| |
|
|
|
|||||
| Total |
$ |
$ |
||||||
| |
|
|
|
|||||
1
9
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO
UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
| (1) | Revenues from segments below the quantitative thresholds are attributable to an operating segment of the Company that includes revenue from the sale of CBD products throughout the United States. This segment has never met any of the quantitative thresholds for determining reportable segments nor does it meet the qualitative criteria for aggregation with the Company’s reportable segments. |
March 31, |
December 31, |
|||||||
2022 |
2021 (Revised) |
|||||||
| Assets |
||||||||
| Eastern Region | $ | $ | ||||||
| Western Region | ||||||||
| Other | ||||||||
| |
|
|
|
|||||
| Total |
$ |
$ |
||||||
| |
|
|
|
|||||
Major Customers
Major customers are defined as customers that each individually accounted for greater
Geographic Information
As of March 31, 2022 and 2021, 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. For the three months ended March 31, 2022 and 2021, the Company disaggregated its revenues as follows:
Three Months Ended March 31, |
||||||||
2022 |
2021 |
|||||||
| 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:
| • | Level 1 – fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; |
| • | Level 2 – fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and |
| • | Level 3 – fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). |
20
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 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.
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: March 31, 2022 |
December 31, 2021 |
|||||||||||||||||||||||||||||||
Level 1 |
Level 2 |
Level 3 |
Total |
Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||||||||||||||
| Financial Assets |
||||||||||||||||||||||||||||||||
| Long term investments—other 1 |
$ | |
$ | — | $ | — | $ |
$ | |
$ | — | $ | — | $ |
||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Financial Liabilities |
||||||||||||||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Derivative liabilities | $ | — | $ | — | $ | $ |
$ | — | $ | — | $ | $ |
||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| (1) | Long-term investments – other are included in the investments balance on the unaudited interim condensed consolidated balance sheets. |
There were no transfers between Level 1, Level 2, and Level 3 within the fair value hierarchy during the three months ended March 31, 2022 and 2021.
The Company’s other investment as of March 31, 2022 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, 2021 |
$ |
|||
| Revaluations on Level 1 instruments |
( |
) | ||
| |
|
|||
| Balance as of March 31, 2022 |
$ |
|||
| |
|
|||
The derivative liabilities related to the convertible debt instruments and freestanding warrants are recorded at fair value estimated using the Black-Scholes option pricing model and is therefore considered to be a Level 3 measurement.
The following table summarizes the changes in Level 3 financial assets and liabilities:
Derivative Liabilities |
||||
| Balance as of December 31, 2021 |
$ |
|||
| Revaluations on Level 3 instruments |
( |
) | ||
| |
|
|||
| Balance as of March 31, 2022 |
$ |
|||
| |
|
|||
21
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’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:
March 31, 2022 |
December 31, 2021 |
|||||||||||||||
Carrying Value |
Fair Value |
Carrying Value |
Fair Value |
|||||||||||||
| Unsecured 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. The following table summarizes the Company’s contractual obligations and commitments as of March 31, 2022:
For the twelve months ended March 31, |
2023 |
2024 |
2025 |
2026 |
2027 |
|||||||||||||||
| Operating leases |
$ | $ | $ | $ | $ | |||||||||||||||
| Service contracts |
||||||||||||||||||||
| Long-term debt, principal (1) |
||||||||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ |
$ |
$ |
$ |
$ |
|||||||||||||||
| |
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | The payment schedule above shows amounts payable if the conversion options are not exercised by the lender of the Company’s convertible debt instruments. |
The Company’s commitments include 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 15 years.
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.
2
2
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 occurred prior to the Company’s closing of the MPX Acquisition in February 2019 are as follows:
| • | There is a claim from a former consultant against the Company, with respect to alleged consulting fees owed by MPX to the consultant, claiming the right to receive approximately $ |
| • | There is a claim from two former noteholders against the Company and MPX Bioceutical ULC (“MPX ULC”) , with respect to alleged payments of $ |
| • | There is a claim against the Company, MPX ULC and MPX, with respect to a prior acquisition made by MPX in relation to a subsidiary that was not acquired by the Company as part of the MPX Acquisition, claiming $ |
In addition, the Company is currently reviewing the following matters with legal counsel and has not yet determined the range of potential losses:
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 iAnthus 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 iAnthus 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 $22.0 million plus treble damages. On May 21, 2019, the court issued an interlocutory order directing the Company to deliver the share certificates to the Roberts Plaintiffs, which the Company delivered on June 17, 2019, in accordance with the court’s order. On December 19, 2019, the Company appealed the court’s order directing delivery of the share certificates to the Florida Fourth District Court of Appeal, which appeal was denied per curiam. On October 21, 2019, the Roberts Plaintiffs were granted leave by the Circuit Court of Palm Beach County to amend their complaints in order to add purported claims for civil theft and punitive damages, and on November 22, 2019, the Company moved to dismiss the Roberts Plaintiffs’ amended complaints. On May 1, 2020, the Circuit Court of Palm Beach County heard arguments on the motions to dismiss, and on June 11, 2020, the court issued a written order granting in part and denying in part the Company’s motion to dismiss. Specifically, the order denied the Company’s motion to dismiss for lack of jurisdiction and improper venue; however, the court granted the Company’s motion to dismiss the Roberts Plaintiffs’ claims for specific performance, conversion and civil theft without prejudice. With respect to the claim for conversion and civil theft, the Circuit Court of Palm Beach County provided the Roberts Plaintiffs with leave to amend their respective complaints. On July 10, 2020, the Roberts Plaintiffs filed further amended complaints in each action against the Company including claims for conversion, breach of contract and civil theft including damages in the aggregate amount of $22.0 million plus treble damages, and on August 13, 2020, the Company filed a consolidated motion to dismiss such amended complaints. On October 26, 2020, Circuit Court of Palm Beach County heard argument on the consolidated motion to dismiss, denied the motion and entered an order to that effect on October 28, 2020. Answers on both actions were filed on November 20, 2020 and the parties have commenced discovery. On September 9, 2021, the Roberts Plaintiffs filed a motion to consolidate the two separate actions, which motion was granted on October 14, 2021. On August 6, 2020,
the Roberts filed a lawsuit against Randy Maslow, the Company’s now former Interim Chief Executive Officer, President, and Director
,
in his individual capacity (the “Maslow Complaint”), alleging a single count of purported conversion. The Maslow Complaint was not served on Randy Maslow until November 25, 2021, and the allegations in the Maslow Complaint are substantially similar to those allegations for purported conversion in the complaints filed against the Company. On March 28, 2022, the court consolidated the action filed against Randy Maslow with the Roberts Plaintiffs’ action for discovery and trial purposes. As a result, the court vacated the matter’s current trial date of May 9, 2022. The case has not been reset for trial yet. On April 22, 2022, the parties attended a court required mediation, which was unsuccessful. On May 6, 2022, the Circuit Court of Palm Beach County granted Randy Maslow’s motion to dismiss the Maslow Complaint. The Roberts have 30 days from the date of the court’s order, or until June 6, 2022, to file a second amended complaint. 2
3
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 19, 2020, Hi-Med LLC (“Hi-Med”), an equity holder and one of the Lenders holding an Unsecured Debenture of the Company in the principal amount
“Hi-Med
Complaint”). 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 Exchange Act and common law fraud relating to alleged false and misleading statements regarding certain proceeds from the issuance of long-term debt that were held in escrow to make interest payments in the event of a default thereof. On July 9, 2020, the court issued an order consolidating the class action matter with the shareholder class action referenced below. On July 23, 2020, Hi-Med
and the defendants filed a stipulation and proposed scheduling and coordination order to coordinate the pleadings for the consolidated actions. On September 4, 2020, Hi-Med
filed an amended complaint (the “Hi-Med
Amended Complaint”). On October 14, 2020, the SDNY issued a stipulation and scheduling and coordination order, which required that the defendants answer, move, or otherwise respond to the Hi-Med
Amended Complaint no later than November 20, 2020. On November 20, 2020, the Company and certain of its current officers and directors filed a Motion to Dismiss the Hi-Med
Amended Complaint. On January 8, 2021, Hi-Med
filed an opposition to the Motion to Dismiss. The Company and certain of its current officers and directors’ reply were filed on February 22, 2021. In a memorandum of opinion dated August 30, 2021, the SDNY granted the Company’s and certain of its officers and directors’ Motion to Dismiss the Hi-Med
Amended Complaint. The SDNY indicated that Hi-Med
may move for leave to file a proposed second amended complaint by September 30, 2021. On September 30, 2021, Hi-Med
filed a motion for leave to amend the Hi-Med
Amended Complaint. On October 28, 2021, the parties filed a Stipulation and Proposed Scheduling Order Regarding Hi-Med’s
Motion for Leave to File a Second Amended Complaint (the “Stipulation”). On November 3, 2021, the SDNY so-ordered
the Stipulation and Hi-Med’s
Second Amended Complaint was deemed filed as of this date. On December 20, 2021, the Company and its current named officers and directors filed a Motion to Dismiss Hi-Med’s
Second Amended Complaint. Hi-Med’s
opposition to the Company’s and its current named officers and directors’ Motion to Dismiss was filed on February 3, 2022. The Company and its current named officers and directors’ reply to Hi-Med’s
opposition was filed on March 21
, 2022. The Motion to Dismiss Hi-Med’s
Second Amended Complaint remains pending before the SDNY. On June 29, 2020, Hi-Med
filed a claim in the Court, which mirrors the Hi-Med
Complaint. Refer to Note 5 for further discussion on the Unsecured Debentures. 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. The Motion to Dismiss the Lead Plaintiff’s Second Amended Complaint remains pending before the SDNY. 2
4
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 July 13, 2020, the Company announced the proposed Recapitalization Transaction. On September 14, 2020, at the meetings of Secured Lenders, Unsecured Lenders and the holders of the Company’s common shares, options and warrants (collectively, the “Securityholders”), the Securityholders voted in support of the Recapitalization Transaction. On October 5, 2020, the Company received final approval from the Court for the Plan of Arrangement. Completion of the Recapitalization Transaction is subject to the Company obtaining the Requisite Approvals. As such, no amounts have been accrued with respect to the Recapitalization Transaction. On January 29, 2021, the notice of appeal with respect to the final approval for the Plan of Arrangement received by the Company on November 5, 2020 was dismissed by the British Columbia Court of Appeal. On June 15, 2021, the Company and the Lenders agreed to amend the date by which the Recapitalization Transaction pursuant to the Plan of Arrangement is required to be implemented by from June 30, 2021 to August 31, 2021. On August 20, 2021, the Applicants filed the Application with the OSCJ, which sought, among other things, a declaration that the Outside Date be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On August 24, 2021, the Company and Applicants appeared for a case conference before the OSCJ. At this conference, the OSCJ issued a Stay Order that required the parties to the Restructuring Support Agreement to maintain the status quo until the hearing on September 23, 2021. Specifically, the Stay Order provided that the parties shall remain bound by the Restructuring Support Agreement and not take any steps to advance or impede the regulatory approval process for the closing of the Recapitalization Transaction or otherwise have any communication with the applicable state-level regulators concerning the Recapitalization Transaction or the other counterparties to the Restructuring Support Agreement. On September 23, 2021, the parties appeared before the OSCJ for a hearing on the Application. Following this hearing, the OSCJ issued an endorsement that extended the Stay Order from September 23, 2021 until 48 hours after the release of the OSCJ’s decision on the merits of the Application. On October 12, 2021, the OSCJ issued the Decision. Specifically, the OSCJ granted the declaration sought by the Applicants and ordered that the Outside Date in the Restructuring Support Agreement be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On November 10, 2021, the Company filed a Notice of Appeal with the Ontario Court of Appeal and a hearing on the appeal is currently scheduled for June 9, 2022.
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 OSCJ in Toronto. 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.
During the year ended December 31, 2020, the Company filed a statement of claim against Oasis Investments II Master Fund Ltd. (“Oasis”), an Unsecured Lender,
2
5
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 against The Healing Center Wellness Center, Inc. (“THCWC”) and iAnthus Arizona, LLC (“iA AZ”),
Maricopa County (“Arizona Superior Court”), seeking declarations that: (i) the JV Agreement is void, against public policy and terminable at will; (ii) the JV Agreement is unenforceable and not binding; and (iii) the JV Agreement only applies to sales under the Arizona Medical Marijuana Act. On January 21, 2022, Saloum filed an Answer with Counterclaims in response to the Declaratory Judgment Complaint. The Declaratory Judgment Complaint remains pending before the Arizona Superior Court. The Arbitration Action is stayed, pending resolution of the Declaratory Judgment Complaint.
Note 12—Related Party Transactions
March 31, 2022 |
December 31, 2021 |
|||||||
| Financial Statement Line Item |
||||||||
| Other long-term assets |
||||||||
| |
|
|
|
|||||
| Total |
$ |
$ |
||||||
| |
|
|
|
|||||
As part of the MPX Acquisition, the Company acquired a related party receivable of $0.7 million due from a company owned by a former director and officer of the Company, Elizabeth Stavola. The related party receivable was converted into a loan facility of up to $10.0 million, which accrues interest at the rate of 16.0 %, compounded annually. Interest is due upon maturity of the loan on December 31, 2021 . During the year ended December 31, 2021, the Company exercised its right to convert the principal balance of the loan and accrued interest into a 99 % equity interest in MPX NJ and exercised its option to acquire the remaining 1 % of MPX NJ, . On January 7, 2022, the CRC approved the Company’s acquisition of 100 the equity interests in MPX NJ. The Company recorded acquisition costs of $0.2 million and $Nil within selling, general and administrative expenses on the unaudited interim condensed consolidated statement of operations for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the balance of such facility was $Nil (December 31, 2021 – $4.6 million), which includes accrued interest of $0.9 million). The related party balances are presented in other long-term assets on the unaudited interim condensed consolidated balance sheets.
which conversion and option exercise were subject to certain regulatory approvals
% of
On June 30, 2017, the Company entered into a loan facility with a former director and officer of the Company, Hadley Ford (“Ford”). The total loan facility was up to C$0.5 million (equivalent to $0.4 million) and accrued interest at the rate of 2.5 %. Interest was due upon maturity of the loan on June 30, 2021 . As part of Ford’s termination agreement, the total loan facility was offset by compensation owed to Ford of $0.5 million during the first quarter of 2021. As of March 31, 2022, the outstanding balance of the facility including accrued interest was $Nil (December 31, 2021 – $Nil ).
Note 13 – Unaudited Interim Condensed Consolidated Statements of Cash Flows Supplemental Information
(a) Cash payments made on account of:
For the Three Months Ended March 31, |
||||||||
2022 |
2021 |
|||||||
| Income taxes |
$ | $ | ||||||
| Interest |
||||||||
2
6
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
(b) Changes in other
non-cash
operating assets and liabilities are comprised of the following: For the Three Months Ended March 31, |
||||||||
2022 |
2021 |
|||||||
| Decrease (increase) in: |
||||||||
| Accounts receivables |
$ | ( |
$ | ( |
) | |||
| Prepaid expenses |
( |
) | ( |
) | ||||
| Inventories |
( |
) | ( |
) | ||||
| Other current assets |
( |
) | ||||||
| Other long-term assets |
( |
) | ||||||
| Operating leases |
( |
) | ( |
) | ||||
| Increase in: |
||||||||
| Accounts payable |
||||||||
| Accrued and other current liabilities |
||||||||
| |
|
|
|
|||||
$ |
$ |
|||||||
| |
|
|
|
|||||
(c) Depreciation and amortization are comprised of the following:
For the Three Months Ended March 31, |
||||||||
2022 |
2021 |
|||||||
| Property, plant and equipment |
$ | $ | ||||||
| Operating lease right-of-use |
||||||||
| Intangible assets |
||||||||
| |
|
|
|
|||||
$ |
$ |
|||||||
| |
|
|
|
|||||
(d) Write-downs and other charges are comprised of the following:
For the Three Months Ended March 31, |
||||||||
2022 |
2021 |
|||||||
| Write-downs : |
||||||||
| Account receivable recoveries |
$ | ( |
) | $ | ||||
| Operating lease right-of-use |
— | |||||||
| Property, plant and equipment |
— | |||||||
| |
|
|
|
|||||
$ |
$ |
|||||||
| |
|
|
|
|||||
(e) Significant
non-cash
investing and financing activities are as follows: For the Three Months Ended March 31, |
||||||||
2022 |
2021 |
|||||||
| Supplemental Cash Flow Information: |
||||||||
| Non-cash consideration for paid-in-kind |
||||||||
| Non-cash consideration for asset acquisition |
|
|
|
|
|
|
— |
|
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.
2
7
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENT
S
(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
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 March 31, 2022, the Company held $2.6 million as restricted cash (December 31, 2021—$3.3 million), which is mainly related to funds held in escrow from the Senior Secured Bridge Notes. The net proceeds from the Senior Secured Bridge Notes were placed in escrow, and the availability of the funds is subject to drawdown requests that must be approved by the Secured Lenders.
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:
March 31, 2022 |
December 31, 2021 |
|||||||
Cash |
$ | $ | ||||||
Restricted cash |
||||||||
Total cash and restricted cash presented in the statements of cash flows |
$ |
$ |
||||||
Note 14—Subsequent Events
Legal Proceedings
Please refer to Note 11 for further discussion.
Event of Default and Financial Restructuring
The Company is currently in default of the obligations under the Company’s long-term debt as discussed in Note 1.
As part of the Restructuring Support Agreement with the Secured Lenders and a majority of the Unsecured Lenders, dated July 10, 2020, the Secured Lenders, the Unsecured Lenders and the existing holders of the Company’s common shares at the closing of the Recapitalization Transaction (“Existing Shareholders”) are to be allocated and issued, approximately, the amounts of Restructured Senior Debt (as defined below), Interim Financing (as defined below), 8% Senior Unsecured Debentures (as defined below) and percentage of the pro forma common equity, as presented in the following table:
(in ’000s of U.S. dollars) |
Restructured Senior Debt 1 |
Interim Financing 2 |
8% Senior Unsecured Debentures 3 |
Pro Forma Common Equity 4 |
||||||||||||
Secured Lenders |
$ | $ | $ | % | ||||||||||||
Unsecured Lenders |
— | — | % | |||||||||||||
Existing Shareholders |
— | — | — | % | ||||||||||||
Total |
$ |
$ |
$ |
% | ||||||||||||
| (1) | The principal balance of the Secured Notes will be reduced to $ non-convertible and non-callable for three years and includes payment in kind at an interest rate of |
| (2) | The Secured Lenders provided $ |
| (3) | The senior unsecured de include payment in kind at an interest rate of 8% per annum, a maturity date which will be bentures non-callable for three years and are subordinate to the Restructured Senior Debt but senior to the Company’s common shares(the “ |
| (4) | On January 6, 2022, the Company’s Board of Directors approved the terms of a Long-Term Incentive Program recommended by the Board of Director’s compensation committee and, pursuant to which, the Company will allocate to certain of its employees (including executive officers) restricted stock units and option awards up to, in the aggregate, |
2
8
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO
UNAUDITED INTERIM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
Upon consummation of the Recapitalization Transaction, a new board of directors (the “New Board”) will be composed of the following members: (i) three nominees will be designated by the Secured Lenders; (ii) three nominees will be designated by the Consenting Unsecured Lenders; and (iii) one nominee will be designated by the director nominees of the Secured Lenders and Consenting Unsecured Lenders to serve as a member of the Company’s New Board and the Company’s Chief Executive Officer.
Pursuant to the terms of the proposed Recapitalization Transaction, 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 now exist or may in the future arise under any of the purchase agreements with respect of the Secured Notes and all other agreements delivered in connection therewith, the purchase agreements with respect of the Unsecured Lenders 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”) and shall take such steps as are necessary to stop any ongoing enforcement efforts in relation thereto. Upon consummation of the Recapitalization Transaction, the Collateral Agent, Secured Lenders and Consenting Unsecured Lenders are also expected to irrevocably waive all Defaults and take all steps required to withdraw, revoke and/or terminate any enforcement efforts in relation thereto.
State-level regulatory approvals remain outstanding in Massachusetts, New Jersey and New York. On January 7, 2022, the New Jersey CRC approved the Company’s acquisition
Completion of the Recapitalization Transaction is subject to receipt of the Requisite Approvals. If the Requisite Approvals are obtained, the Plan of Arrangement will bind all Secured Lenders, Unsecured Lenders and Existing Shareholders. The Plan of Arrangement was approved by the Court on October 5, 2020. On January 29, 2021, a notice of appeal with respect to the final approval for the Plan of Arrangement received by the Company on November 5, 2020 was dismissed by the British Columbia Court of Appeal. The Company is in progress of obtaining the remaining Requisite Approvals. Specifically, certain of the transactions contemplated by the Recapitalization Transaction have triggered the requirement for an approval by state-level regulators in certain U.S. states with jurisdiction over the licensed cannabis operations of entities owned, in whole or in part, or controlled, directly or indirectly, by the Company in such states. On February 23, 2021, the Nevada Cannabis Compliance Board approved the proposed change of ownership and control of the Company’s wholly-owned subsidiary, GMNV, contemplated by the Recapitalization Transaction. On June 17, 2021, the CCC issued the June 17 Approval. On June 15, 2021, the Company and the Lenders agreed to amend the Outside Date by which the Recapitalization Transaction pursuant to the Plan of Arrangement is required to be implemented by from June 30, 2021 to August 31, 2021.
On August 12, 2021, Mayflower’s pending application for its Allston Retail License was approved by the CCC at its August, 2021 public meeting. As a result of this August 12, 2021 approval, Mayflower was required to submit the New COC Application, which was submitted on November 10, 2021 and is currently pending before the CCC. The New COC Application must be approved by the CCC before the June 17 Approval can be effectuated.
29
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 20, 2021, the Vermont DPS confirmed that it does not require prior approval of the Recapitalization Transaction, except for background checks of the prospective new directors and Interim Chief Executive Officer of the Company to be appointed upon the closing of the Recapitalization Transaction, which background checks have been completed.
On October 29, 2021, the OMMU approved the proposed change of ownership and control of the Company’s wholly-owned subsidiary, McCrory’s, contemplated by the Recapitalization Transaction. On November 19, 2021, the Petition was filed by the Petitioners with the OMMU challenging the OMMU’s approval of the Variance Request and requesting a formal administrative hearing before an ALJ at the Florida Division of Administrative Hearings. As a result of the Petition, the OMMU informed the Company that the OMMU’s prior approval of the Variance Request is not an enforceable agency order until such time that there is a final resolution of the Petition and a final agency order is issued by the OMMU. On May 4, 2022, the OMMU issued a final agency order, accepting the recommendation of the ALJ and dismissing the Petition.
On August 20, 2021, the Applicants filed the Application with the OSCJ, which sought, among other things, a declaration that the Outside Date be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On October 12, 2021, the OSCJ issued his decision granting the Applicant’s relief sought in the Decision. Specifically, the OSCJ granted the declaration sought by the Applicants and ordered that the Outside Date in the Restructuring Support Agreement be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On November 10, 2021, the Company filed a Notice of Appeal with the Ontario Court of Appeal and a hearing on the appeal is currently scheduled for June 9, 2022. See Note 11 for further discussion.
On April 1, 2022, the MMCC approved the proposed change of ownership and control of the Company’s wholly-owned subsidiary, S8, contemplated by the Recapitalization Transaction. S8 currently controls 4 licensed entities in Maryland through management services agreements.
For
Resignation of Interim Chief Executive Officer
Effective as of May 6, 2022 (the “Resignation Date”), Randy Maslow, the Company’s Interim Chief Executive Officer and President and a member of the Board of Directors, resigned from his executive positions with the Company, including all positions with the Company’s subsidiaries and its affiliates, and from the Company’s Board of Directors and committees. In connection with the resignation, Mr. Maslow and the Company executed a separation agreement (the “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 will receive total cash compensation in the amount of approximately
$million (the “Separation Payment”), of which approximately
$million was paid out on May 6, 2022 (made up, in part of a portion of severance payment of approximately $4.8 million, and unpaid 2021 bonus of $300,000 ). The remainder of the Separation Payment will be paid out in equal installments of approximately $0.9 million per month over the next eight months following the Resignation Date, which shall be accelerated upon the closing of the Recapitalization Transaction, a Material Financing or in the event of a Board Change, as such terms are described in the Separation Agreement. In addition, the Company shall pay the monthly premium for Mr. Maslow’s continued participation in the Company’s health and dental insurance benefits pursuant to COBRA for one year from May 6, 2022. Furthermore, Mr. Maslow’s compensation and benefits includes, among other items, an extension of exercise period of options to acquire the Company’s common shares which were held by Mr. Maslow until the earlier of (i) five years from the Resignation Date; (ii) the original expiration dates of the applicable option; or (iii) the closing of the Recapitalization Transaction. Finally, under the Separation Agreement, Mr. Maslow agreed to relinquish all entitlements to his right to receive a grant of restricted stock units under the long-term incentive plan that was announced on January 7, 2022, the issuance of which was contingent on the closing of the Recapitalization Transaction. Mr. Maslow will continue to serve the Company in a consulting role for a period of six months following the Resignation Date (provided that such period may be extended by additional six months by the Company) at a base compensation of $25,000 per month. Under the Separation Agreement, it was agreed that Mr. Maslow’s non-competition covenant will expire upon termination of the consulting term. In consideration for receipt of these compensation and benefits, Mr. Maslow provided a release to the Company (and the Company provided a release to Mr. Maslow), agreed to provide certain cooperation to the Company, agreed to a certain confidentiality and return of property covenants, to mutual non-disparagement covenants and to negotiate in good faith a potential extension of Mr. Maslow’s non-competition covenants.
Appointment of Interim Chief Executive Officer
The Board appointed Robert Galvin as the Company’s Interim Chief Executive Officer and a member of the Board, effective May 6, 2022. Mr. Galvin has served as the Company’s Interim Chief Operating Officer since November 2020. In addition, since February 2019, Mr. Galvin has served as an operations and administrative advisor to the Company. From February 2019 to December 2019, Mr. Galvin also served as a member of the Board. Prior to the Company, Mr. Galvin served as a member of the board of directors and as audit committee chair of MPX Bioceutical Corporation (“MPX”) from November 2017 until the MPX Acquisition. Mr. Galvin will serve as Interim Chief Executive Officer of the Company pursuant to his employment agreement dated October 12, 2019 and effective as of January 1, 2019, as subsequently amended on April 4, 2020.
30
ITEM 2. |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited interim condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form
10-Q.
In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2021, as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise note. Overview
We are a vertically-integrated, multi-state owner and operator of licensed cannabis cultivation, processing and dispensary facilities, and a developer, producer and distributor of innovative branded cannabis and CBD products in the United States. Although we are committed to creating a national retail brand and portfolio of branded cannabis and cannabidiol (“CBD”) products recognized in the United States, cannabis currently remains illegal under U.S. federal law.
Through our subsidiaries, we currently own and/or operate 32 dispensaries and 10 cultivation and/or processing facilities in eight U.S. states. In addition, we distribute cannabis and CBD products to over 200 dispensaries and CBD products to over 1,500 retail locations throughout the United 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 14 dispensary licenses and/or dispensary facilities in six states, plus an uncapped number of dispensary licenses in Florida, and up to 25 cultivation, manufacturing and/or processing facilities, and we have the right to manufacture and distribute cannabis products in nine U.S. states, all subject to the necessary regulatory approvals.
Our multi-state operations encompass the full spectrum of medical and
adult-use
cannabis and CBD enterprises, including cultivation, processing, product development, wholesale-distribution and retail. Cannabis products offered by us include flower and trim, products containing cannabis flower and trim (such as pre-rolls),
cannabis infused products (such as topical creams and edibles) and products containing cannabis extracts (such as vape cartridges, concentrates, live resins, wax products, oils and tinctures). Our CBD products include topical creams, tinctures and sprays and products designed for beauty and skincare (such as lotions, creams, haircare products, lip balms and bath bombs). Under U.S. federal law, cannabis is classified as a Schedule I controlled substance under the U.S. Controlled Substances Act. A Schedule I controlled substance is defined as a substance that has no currently accepted medical use in the United States, a lack of safety use under medical supervision and a high potential for abuse. Other than Epidiolex (cannabidiol), a cannabis-derived product, and three synthetic cannabis-related drug products (Marinol (dronabinol), Syndros (dronabinol) and Cesamet (nabilone), to our knowledge, the U.S. Food and Drug Administration has not approved a marketing application for cannabis for the treatment of any disease or condition and has not approved any cannabis, cannabis-derived or CBD products.Financial Restructuring
The significant disruption of global financial markets, and specifically, the decline in the overall public equity cannabis markets due to the
COVID-19
pandemic negatively impacted our ability to secure additional capital, which caused liquidity constraints. In early 2020, due to the liquidity constraints, we attempted to negotiate temporary relief of our interest obligations with the lenders (the “Secured Lenders”) of our 13% 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% convertible unsecured debentures (the “Unsecured Debentures”). We are in default of our obligations pursuant to the Secured Notes and Unsecured Debentures which, as of March 31, 2022, consists of $97.5 million and $60.0 million in principal amount plus accrued interest thereon of $34.8 million and $10.8 million with respect to the Secured Notes and Unsecured Debentures, respectively. As a result of the default, all amounts, including principal and accrued interest, became immediately due and payable to the Lenders. Furthermore, as a result of the default, we also became obligated to pay an exit fee of $10.0 million that initially accrued interest at a rate of 13% annually and has since increased to 16% annually in relation to the Secured Notes (the “Exit Fee”), which Exit Fee as of March 31, 2022, is $15.8 million. Upon payment of the Exit Fee, the holders of our $40 million secured notes with a maturity date of May 14, 2021 (the “Tranche One Secured Notes”) are required to transfer the 3,891,051 common shares issued under the $10.0 million equity financing that closed concurrently with the Tranche One Secured Notes to us. As of March 31, 2022, we have not paid the Exit Fee and such shares have not been transferred to us.
31
On June 22, 2020, we received a notice demanding repayment under the Amended and Restated Debenture Purchase Agreement dated October 19, 2019 of the entire principal amount of the Secured Notes, together with interest, fees, costs and other charges that have accrued or may accrue from Gotham Green Admin 1, LLC (the “Collateral Agent”) holding security for the benefit of the Secured Notes. The Collateral Agent concurrently provided us with the Notice of Intention to Enforce Security under section 244 of the Bankruptcy and Insolvency Act (Canada).
On July 10, 2020, we entered into a restructuring support agreement (as amended, the “Restructuring Support Agreement”) with the Secured Lenders and certain of our Unsecured Lenders (the “Consenting Unsecured Lenders”) to effectuate a proposed recapitalization transaction (the “Recapitalization Transaction”). Pursuant to the terms of the Restructuring Support Agreement, the Recapitalization Transaction is to be implemented pursuant to arrangement proceedings (“Arrangement Proceedings”) commenced under the British Columbia Business Corporations Act (“BCBCA”), or only if necessary, through the Companies’ Creditors Arrangement Act (“CCAA”). Completion of the Recapitalization Transaction through the Arrangement Proceedings is subject to, among other things, approval by the Secured Lenders, Unsecured Lenders and existing holders of our common shares, warrants and options (collectively, the “Existing Securityholders”) of the plan of arrangement (the “Plan of Arrangement”). Pursuant to Section 288(1) of the BCBCA, a company may propose an arrangement to its security holders (including shareholders and noteholders). To be effective, the arrangement must first be approved by security holders of the company and then by the Supreme Court of British Columbia (the “Court”) pursuant to a final arrangement approval order. On September 14, 2020, our securityholders voted in support of the Recapitalization Transaction. Specifically, all of the Secured Lenders and Unsecured Lenders voted in favor of the Plan of Arrangement. In addition, Existing Securityholders voted in favor of the Plan of Arrangement. On October 5, 2020, the Plan of Arrangement was approved by the Court, subject to the receipt of the other necessary approvals with respect to the Plan of Arrangement, including approvals by state-level regulators and the Canadian Securities Exchange (collectively the “Requisite Approvals”). On November 3, 2020, Walmer Capital Limited, Island Investments Holdings Limited and Alastair Crawford collectively served and filed a Notice of Appeal with respect to the Court’s approval of the Plan of Arrangement, which appeal was dismissed by the British Columbia Court of Appeal on January 29, 2021. Because we received the necessary approvals of the Plan of Arrangement from the Court and Existing Securityholders, the Recapitalization Transaction will be implemented under the BCBCA and not through CCAA proceedings.
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”) are to be allocated and issued, approximately, such amounts of Restructured Senior Debt (as defined below), Interim Financing (as defined below), 8% Senior Unsecured Debentures (as defined below), and percentage of our pro forma common shares, as presented in the following table:
| (in ’000s of U.S. dollars) |
Restructured Senior Debt 1 |
Interim Financing 2 |
8% Senior Unsecured Debentures 3 |
Pro Forma Common Equity 4 |
||||||||||||
| Secured Lenders |
$ | 85,000 | $ | 14,737 | $ | 5,000 | 48.625 | % | ||||||||
| Unsecured Lenders |
— | — | 15,000 | 48.625 | % | |||||||||||
| Existing Shareholders |
— | — | — | 2.75 | % | |||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total |
$ |
85,000 |
$ |
14,737 |
$ |
20,000 |
100 |
% | ||||||||
| (1) | The principal balance of the Secured Notes will be reduced to $85.0 million, which will be increased by the amount of the Interim Financing, which has a first lien, senior secured position over all of our assets, is non-convertible and non-callable for three years and includes payment in kind at an interest rate of 8% per year and a maturity date which will be five years after the consummation of the Recapitalization Transaction (the “Restructured Senior Debt”). |
| (2) | The Secured Lenders provided $14.7 million of interim financing (the “Interim Financing”) to ICM on substantially the same terms as the Restructured Senior Debt, net of a 5% original issue discount. The amounts of the Interim Financing along with any accrued interest thereon is expected to be converted into, and the original principal balance will be added to, the Restructured Senior Debt upon consummation of the Recapitalization Transaction. |
| (3) | The senior unsecured debentures include payment in kind at an interest rate of 8% per annum, a maturity date which will be five years after the consummation of the Recapitalization Transaction, are non-callable for three years and are subordinate to the Restructured Senior Debt but senior to our common shares (the “8% Senior Unsecured Debentures”). |
| (4) | On January 6, 2022, our Board of Directors approved the terms of a Long-Term Incentive Program (“LTIP”) recommended by the Board of Directors compensation committee and, pursuant to which, we will allocate to certain of our employees (including executive officers) restricted stock units and option awards up to, in the aggregate, 5.75% of our fully diluted equity under our Amended and Restated Omnibus Incentive Plan dated October 15, 2018 in order to attract and retain such employees. The allocations of the LTIP Awards are contingent upon, and will occur within ten days following, the closing of the Recapitalization Transaction contemplated by the Restructuring Support Agreement. All of our existing warrants and options will be cancelled, and our common shares may be consolidated pursuant to a consolidation ratio which has yet to be determined. |
Upon consummation of the Recapitalization Transaction a new board of directors (the “New Board”) will be composed of the following members: (i) three nominees will be designated by Gotham Green Partners, LLC and each of its affiliates and subsidiaries on behalf of the Secured Lenders; (ii) three nominees will be designated by each of the Consenting Unsecured Lenders as follows: one by Oasis Investments II Master Fund Ltd., one by Senvest Global (KY), LP and Senvest Master Fund, LP, and one by Hadron Healthcare and Consumer Special Opportunities Master Fund; and (iii) one nominee will be designated by the director nominees of the Secured Lenders and Consenting Unsecured Lenders to serve as a member of the New Board and our Chief Executive Officer.
32
Pursuant to the terms of the proposed Recapitalization Transaction, 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 now exist or may in the future arise under any of the purchase agreements with respect of the Secured Notes and all other agreements delivered in connection therewith, the purchase agreements with respect of the Unsecured Lenders 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”) and shall take such steps as are necessary to stop any current or pending enforcement efforts in relation thereto. Upon consummation of the Recapitalization Transaction, the Collateral Agent, Secured Lenders and Consenting Unsecured Lenders are also expected to irrevocably waive all Defaults and take all steps required to withdraw, revoke and/or terminate any enforcement efforts in relation thereto.
Consummation of the Recapitalization Transaction through the Plan of Arrangement is subject to certain conditions, including: approval of the Existing Securityholders, which has been obtained; approval of the Plan of Arrangement by the Court, which has been obtained; and the receipt of all the Requisite Approvals. Specifically, certain of the transactions contemplated by the Recapitalization Transaction have triggered the requirement for an approval by state-level regulators in the following U.S. states with jurisdiction over the licensed cannabis operations of entities owned, in whole or in part, or controlled, directly or indirectly, by us in such states. Specifically, we need approvals from Florida, Nevada, Maryland, Massachusetts, New Jersey, and New York.
On February 23, 2021, the Nevada Cannabis Compliance Board approved the proposed change of ownership and control of our wholly-owned subsidiary, GreenMart of Nevada, LLC, contemplated by the Recapitalization Transaction.
On June 17, 2021, the Massachusetts Cannabis Control Commission (the “CCC”) approved the proposed change of ownership and control of the current licenses held by our wholly-owned subsidiaries, Mayflower Medicinals, Inc. (“Mayflower”) and Cannatech Medicinals, Inc., contemplated by the Recapitalization Transaction (the “June 17 Approval”).
On August 12, 2021, Mayflower’s pending application for a Marijuana Establishment retail license for its Allston, Massachusetts retail location (the “Allston Retail License”) was approved by the CCC at its August 2021 public meeting. As a result of this August 12, 2021 approval, Mayflower was required to submit a new change of ownership and control application to the CCC in connection with the Recapitalization Transaction with respect to the Allston Retail License (the “New COC Application”). The New COC Application was submitted on November 10, 2021, and its currently pending before the CCC. The New COC Application must be approved by the CCC before the June 17 Approval can be effectuated.
On August 20, 2021, the Vermont Department of Public Safety confirmed that it does not require prior approval of the Recapitalization Transaction, except for background checks of the prospective new directors and our Interim Chief Executive Officer to be appointed upon the closing of the Recapitalization Transaction, which background checks have been completed.
On October 29, 2021, the Florida Department of Health, Office of Medical Marijuana Use (the “OMMU”) approved the proposed change of ownership and control of our wholly-owned subsidiary, McCrory’s Sunny Hill Nursery, LLC (“McCrory’s”) contemplated by the Recapitalization Transaction (the “Variance Request”). On November 19, 2021, a petition (as amended, the “Petition”) was filed by certain petitioners (the “Petitioners”) with the OMMU challenging the OMMU’s approval of the Variance Request and requesting a formal administrative hearing before an administrative law judge (“ALJ”) at the Florida Division of Administrative Hearings. As a result of the Petition, the OMMU informed us that the OMMU’s prior approval of the Variance Request is not an enforceable agency order until such time that there is a final resolution of the Petition and a final agency order is issued by the OMMU. On May 4, 2022, the OMMU issued a final agency order, accepting the recommendation of the ALJ and dismissing the Petition.
On August 20, 2021, Gotham Green Partners, LLC and Gotham Green Admin 1, LLC (the “Applicants”) filed a Notice of Application (the “Application”) with the Ontario Superior Court of Justice Commercial List (the “OSCJ”), which sought, among other things, a declaration that the Outside Date for closing the pending Recapitalization Transaction be extended from August 31, 2021 to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On August 24, 2021, we and Applicants appeared for a case conference before the OSCJ at which the OSCJ issued an endorsement (the “Stay Order”) that required the parties to the Restructuring Support Agreement to maintain the status quo until the hearing on September 23, 2021. Specifically, the Stay Order provided that the parties shall remain bound by the Restructuring Support Agreement and not take any steps to advance or impede the regulatory approval process for the closing of the Recapitalization Transaction or otherwise have any communication with the applicable state-level regulators concerning the Recapitalization Transaction or the other counterparties to the Restructuring Support Agreement. On September 23, 2021, the parties appeared before the OSCJ for a hearing on the Application. Following this hearing, the OSCJ issued an endorsement that extended the Stay Order from September 23, 2021 until 48 hours after the release of the OSCJ’s decision on the merits of the Application. On October 12, 2021, the OSCJ issued its decision granting the Applicant’s relief sought in the Application (the “Decision”). Specifically, the OSCJ granted the declaration sought by the Applicants and ordered that the Outside Date be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On November 10, 2021, we appealed the Decision to the Ontario Court of Appeal and a hearing is scheduled for June 9, 2022.
On April 1, 2022, the Maryland Medical Cannabis Commission approved the proposed change of ownership and control of the Company’s wholly-owned subsidiary, S8 Management, LLC (“S8”), contemplated by the Recapitalization Transaction. S8 currently controls 4 licensed entities in Maryland through management services agreements.
State-level regulatory approvals remain outstanding in Massachusetts, New Jersey and New York. On January 7, 2022, the New Jersey Cannabis Regulatory Commission (the “CRC”) approved our acquisition of 100% of the equity interest in New Jersey license holder MPX New Jersey LLC (“MPX NJ”). On February 1, 2022, we closed our acquisition of MPX NJ, which resulted in a requirement for prior regulatory approval for the change of beneficial ownership of MPX NJ that would result from the Recapitalization Transaction.
Pursuant to the terms of the Recapitalization Transaction and subject to the closing thereof, we are required to issue an aggregate of 6,072,579,699 common shares upon the extinguishment of (i) $22.5 million of Secured Notes (including the Exit Fees) plus interest accrued thereon, (ii) $40.0 million of Unsecured Debentures plus interest accrued thereon, and (iii) interest accrued above the principal amount of $14.7 million of the Interim Financing provided by certain of the Secured Lenders.
33
Recent Developments
Resignation of Interim Chief Executive Officer
Effective as of May 6, 2022 (the “Resignation Date”), Randy Maslow, our Interim Chief Executive Officer and President and a member our Board of Directors (the “Board”), resigned from his executive positions with our Company, including all positions with our Company’s subsidiaries and our affiliates, and from the Board and all committees. In connection with the resignation, we entered into a separation agreement (the “Separation Agreement”) with Mr. Maslow, pursuant to which, Mr. Maslow will receive certain compensation and benefits valued to substantially equal the value of entitlements he would have received under Section 4(g) of his employment agreement effective as of January 1, 2019, as amended on April 4, 2020, which includes two years of salary continuance and an additional option grant, which we have agreed to pay the value of in a lump sum payment of cash and cash installments. Specifically, Mr. Maslow will receive total cash compensation in the amount of $12.2 million (the “Separation Payment”), of which $5.1 million was paid out on May 6, 2022. The remainder of the Separation Payment will be paid out in equal installments of $0.9 million over the next eight months following the Resignation Date, which may be accelerated upon the occurrence of certain events. In addition, under the Separation Agreement, Mr. Maslow agreed to relinquish all entitlements to his restricted stock units under the LTIP, the issuance of which was contingent on the closing of the Recapitalization Transaction. Furthermore, Mr. Maslow’s compensation and benefits includes, among other items, an extension of exercise period of options to acquire our common shares which were held by Mr. Maslow until the earlier of (i) five years from the Resignation Date; (ii) the original expiration dates of the applicable option; or (iii) the closing of the Recapitalization Transaction. Mr. Maslow will continue to serve the Company in a consulting role for a period of six months following the Resignation Date.
Appointment of Interim Chief Executive Officer
The Board appointed Robert Galvin as our Interim Chief Executive Officer and a member of the Board, effective May 6, 2022. Mr. Galvin has served as our Company’s Interim Chief Operating Officer since November 2020. In addition, since February 2019, Mr. Galvin has served as an operations and administrative advisor to our Company. From February 2019 to December 2019, Mr. Galvin also served as a member of the Board. Prior to joining us, Mr. Galvin served as a member of the board of directors and as audit committee chair of MPX from November 2017 until our acquisition of MPX on February 5, 2019 (the “MPX Acquisition”). Mr. Galvin will serve as our Interim Chief Executive Officer pursuant to his employment agreement dated October 10, 2019 and effective as of January 1, 2019, as subsequently amended on April 4, 2020.
Results of Operations for the Three Months Ended March 31, 2022 and 2021
Revenues and Gross Profit
Three Months Ended March 31, |
||||||||
| (in ’000s of U.S. dollars) |
2022 |
2021 |
||||||
| Revenues |
||||||||
| Eastern Region |
$ | 24,785 | $ | 33,056 | ||||
| Western Region |
17,716 | 18,302 | ||||||
| Other |
289 | 447 | ||||||
| |
|
|
|
|||||
| Total revenues |
$ |
42,790 |
$ |
51,805 |
||||
| |
|
|
|
|||||
| Cost of sales applicable to revenues |
||||||||
| Eastern Region |
$ | (8,717 | ) | $ | (11,894 | ) | ||
| Western Region |
(11,305 | ) | (9,723 | ) | ||||
| Other |
(276 | ) | (467 | ) | ||||
| |
|
|
|
|||||
| Total cost of sales applicable to revenues |
$ |
(20,298 |
) |
$ |
(22,084 |
) | ||
| |
|
|
|
|||||
| Gross profit |
||||||||
| Eastern Region |
$ | 16,068 | $ | 21,162 | ||||
| Western Region |
6,411 | 8,580 | ||||||
| Other |
13 | (21 | ) | |||||
| |
|
|
|
|||||
| Total gross profit |
$ |
22,492 |
$ |
29,721 |
||||
| |
|
|
|
|||||
The eastern region includes our operations in Florida, Maryland, Massachusetts, New York, New Jersey and Vermont. The western region includes our operations in Arizona and Nevada as well as our assets and investments in Colorado.
Eastern region
For the three months ended March 31, 2022, our sales revenues in the eastern region were $24.8 million as compared to $33.1 million for the three months ended March 31, 2021, which represents a decrease of 25.0%. The main drivers for the decrease in revenues are attributable to lower retail revenues in Florida, Maryland and Massachusetts from increased competition and pricing pressures. This was offset by an increase in retail revenues in New York attributable to the sale of whole flower which was recently approved for sale in the state of New York in October 2021.
For the three months ended March 31, 2022, gross profit was $16.1 million, or 64.9% of sales revenues, as compared to a gross profit of $21.2 million, or 64.0% of sales revenues, for the three months ended March 31, 2021. Gross profit has remained relatively consistent between the three months ended March 31, 2022 and 2021 in the eastern region.
During the three months ended March 31, 2022, approximately 8,860 pounds of plant material was harvested in the eastern region as compared to approximately 11,700 pounds harvested during the three months ended March 31, 2021. The decrease in harvests of plant material was due to lower yields in Florida due to poor weather conditions and introduction of new strains, partially offset by an increase in harvests in Massachusetts from the ramp up of our Fall River facility during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.
34
Western region
For the three months ended March 31, 2022, our sales revenues in the western region were $17.7 million as compared to $18.3 million for the three months ended March 31, 2021, which represents a decrease of 3.3%. The decrease in revenue in the western region is attributable to lower wholesale revenues in Nevada during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. Sales revenues in Arizona have remained consistent between the three months ended March 31, 2022 and 2021.
For the three months ended March 31, 2022, gross profit was $6.4 million, or 36.2% of sales revenues, as compared to a gross profit of $8.6 million, or 47.0% of sales revenues, for the three months ended March 31, 2021. Gross margins decreased due to higher sales discounts offered in Arizona and from higher cultivation costs incurred in Nevada during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.
During the three months ended March 31, 2022, approximately 1,660 pounds of plant material was harvested in the western region as compared to approximately 1,700 pounds harvested during the three months ended March 31, 2021. The slight decrease in harvests is attributable to smaller cultivation yields in Nevada during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.
Other revenues
For the three months ended March 31, 2022, other revenues were $0.3 million as compared to $0.4 million for the three months ended March 31, 2021. This decrease is due lower sales from our CBD business.
Expenses
Three Months Ended March 31, |
||||||||
| (in ’000s of U.S. dollars) |
2022 |
2021 |
||||||
| Total operating expenses |
$ | 31,869 | $ | 31,319 | ||||
| Total other (income) expenses |
(4,150 | ) | 10,563 | |||||
| Income tax expense |
4,875 | 7,291 | ||||||
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. However, we expect total operating expenses to continue to increase as we continue to invest in our operations and capital projects, attract and retain top talent, and implement robust technology systems in our corporate, retail and cultivation and manufacturing facilities. For the three months ended March 31, 2022, our total operating expenses were $31.9 million as compared to $31.3 million for the three months ended March 31, 2021, which represents an increase of 1.8%.
The increase in total operating expenses between the three months ended March 31, 2022 and 2021 is primarily attributable to an increase in our depreciation and amortization expenses of $1.6 million as our depreciable fixed asset base has increased from $105.5 million as of March 31, 2021, to $140.7 million as of March 31, 2022. Further, salaries and employee expenses increased $0.3 million as we now employ approximately 1,000 employees as of March 31, 2022, as compared to approximately 960 as of March 31, 2021. We also increased our marketing expenditures by $0.1 million during the three months ended March 31, 2022, as compared to March 31, 2021. These increases in operating expenses are offset by a decrease in our legal and other professional fees totaling $1.6 million as there were fewer ongoing litigation matters and settlements during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021.
35
For the three months ended March 31, 2022, excise taxes were $0.1 million as compared to $0.2 million for the three months ended March 31, 2021. Excise taxes are included as part of the selling, general, and administrative expenses on the unaudited interim condensed consolidated statements of operations.
Total other income and expenses
Total other income and expenses include income and expenses that are not included in the ordinary activities of our business. This includes 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 delivery of cannabis products.
day-to-day
For the three months ended March 31, 2022, our total other income was $4.2 million as compared to total other expenses of $10.6 million for the three months ended March 31, 2021, which represents an increase of 139%.
The increase in total other income and expenses between the three months ended March 31, 2022 and 2021 is primarily attributable to a fair value gain net of tax of $10.5 million from the noncash consideration provided as part of the MPX NJ acquisition. Further, accretion expense decreased by $4.1 million as our Tranche One Secured Notes, the additional $20.0 million of secured notes issued on September 30, 2019 and the additional $36.2 million of secured notes issued on December 20, 2019 have been fully accreted as of May 2021, as compared to full accretion expense for these instruments taken during the three months ended March 31, 2021. Furthermore, during the three months ended March 31, 2022, we received a payment of $0.4 million in Arizona from an early cancellation of a cultivation services agreement, which was recorded as other income on our unaudited interim condensed consolidated statement of operations. This was partially offset by an increase in interest expense of $0.2 million as we are now accruing three months of interest expense on the February 2021 financing as compared to two months of interest expense during the three months ended March 31, 2021.
Income tax expense
As a result of operating in the federally illegal cannabis industry, we are subject to the limitations of Internal Revenue Code Section 280E (“Section 280E”) under which taxpayers are only allowed to deduct expenses directly related to sales of product and no other ordinary business expenses. Our effective tax rate differs from the statutory tax rate and varies from year to year primarily as a result of numerous permanent differences, the provision for income taxes at different rates in foreign and domestic jurisdictions, including changes in enacted statutory tax rate increases or reductions in the year, changes in our valuation allowance based on our recoverability assessments of deferred tax assets and favorable or unfavorable resolution of various tax examinations.
For the three months ended March 31, 2022, our income tax expense was $4.9 million as compared to $7.3 million for the three months ended March 31, 2021, which represents a decrease of 33.1%. The decrease in income tax expense is a result of our lower taxable income during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.
Liquidity and Capital Resources
As of March 31, 2022, we held unrestricted cash of $14.1 million (December 31, 2021—$13.2 million), an accumulated deficit of $811.7 million (December 31, 2021—$801.6 million), and a working capital deficit of $255.7 million (December 31, 2021—$231.7 million). In assessing our liquidity, we monitor our cash operations and our long-term strategic plans. To date, we have financed our operations primarily through equity and debt financings and our cash flows from operations and anticipate that we will need to raise additional capital to fund our operations in the future. We expect to finance our operating activities through a combination of additional financings and cash flows from our operations. However, we may be unable to raise additional funds when needed on favorable terms, or at all, which may have a negative impact on our financial condition and could force us to curtail or cease our operations. Furthermore, the terms of certain of our debt instruments impose certain restrictions on our operating and financing activities, including, but not limited to, our ability to incur certain additional indebtedness and our ability to issue shares or convertible securities. Even if we believe we have sufficient funds for our current or future operating plans, we may seek additional capital due to favorable market conditions or strategic considerations.
on-hand
and our operating expenditure commitments required to execute our day-to-day
36
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 are currently in default with respect to our Secured Notes and Unsecured Debentures which, as of March 31, 2022, amounted to $218.9 million, including interest accrued thereon. In February 2021, our wholly-owned subsidiary, iAnthus New Jersey, LLC issued $11.0 million of senior secured bridge notes. While we believe that we have funding necessary for us to continue as a going concern, we may need to raise additional capital and there can be no assurance that such capital will be available to us on favorable terms, if at all. As such, these material circumstances cast substantial doubt on our ability to continue as a going concern for a period of no less than 12 months from the date of this report, and our unaudited interim condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently plan due to incorrect assumptions or due to a decision to expand our activities beyond those currently planned.
Cash Flow for the Three Months Ended March 31, 2022 as Compared to the Three Months Ended March 31, 2021
Operating Activities
Our net cash flows from operating activities are affected by a number of factors, including revenues generated by operations, increases or decreases in our operating expenses, including expenses related to new capital projects and development of newly acquired businesses and the level of cash collections received from our customers.
Net cash provided by operating activities during the three months ended March 31, 2022 was $1.8 million as compared to $5.5 million for the three months ended March 31, 2021. Net cash provided from operating activities was primarily attributable to our net loss of $10.1 million, partially offset by $10.5 million gain from nonmonetary consideration provided for the MPX NJ acquisition, $9.0 million of depreciation and amortization expense, $5.9 million in interest expense, $1.5 million in share-based compensation, $0.8 million of accretion expense, and $4.7 million from changes in operating assets and liabilities items during the three months ended March 31, 2022.
Changes in other operating assets for the three months ended March 31, 2022 include an increase in inventory of $3.2 million due to lower sales during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021, and an increase of $2.1 million related to the recognition of assets during the three months ended March 31, 2022.
right-of-use
Changes in other operating liabilities for the three months ended March 31, 2022 include an increase in accrued and other current liabilities of $6.4 million due to additional interest and income taxes accrued in the current period and increase of accounts payable of $3.6 million.
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 2022, 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 three months ended March 31, 2022, was $1.6 million as compared to $5.1 million during the three months ended March 31, 2021. The decrease in cash used in investing activities was primarily attributable to fewer cultivation and dispensary construction expenditures of $3.2 million compared to the three months ended March 31, 2022. In addition, during the three months ended March 31, 2022, we loaned $0.1 million to MPX NJ as compared to $0.4 million during the three months ended March 31, 2021.
There was a cash flow from investing activities during the three months ended March 31, 2022, from the sale of certain property, plant and equipment of $0.1 million. This is compared to $Nil from the sale of certain property, plant and equipment during the three months ended March 31, 2021.
37
Financing Activities
Net cash used in financing activities for the three months ended March 31, 2022, was less than $0.1 million as compared to net cash provided from financing activities of $10.3 million for the three months ended March 31, 2021. During the three months ended March 31, 2022, we had very minimal financing activities, including less than $0.1 million on repayment of debt. This compares to the issuance of the senior secured bridge notes in the principal amount of $11.0 million, offset by related debt issuance costs of $0.7 million during the three months ended March 31, 2021.
Related Party Transactions
As part of the MPX Acquisition, we acquired a related party receivable of $0.7 million due from a company owned by a former director and officer of the Company, Elizabeth Stavola. The related party receivable was converted into a loan facility of up to $10.0 million, which accrues interest at the rate of 16.0%, compounded annually. Interest is due upon maturity of the loan on December 31, 2021. During the year ended December 31, 2021, we exercised our right to convert the principal balance of the loan and accrued interest into a 99% equity interest in MPX NJ and exercised our option to acquire the remaining 1% of MPX NJ, which conversion and option exercise were subject to certain regulatory approvals. On January 7, 2022, the CRC approved our acquisition of 100% of the equity interests in MPX NJ. We recorded acquisition costs of $0.2 million and $Nil within selling, general and administrative expenses on the unaudited interim condensed consolidated statement of operations for the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the balance of such facility was $Nil (December 31, 2021 – $4.6 million), which includes accrued interest of $Nil (December 31, 2021—$0.9 million). The related party balances are presented in other long-term assets on the unaudited interim condensed consolidated balance sheets.
On June 30, 2017, we entered into a loan facility with a former director and officer of the Company, Hadley Ford (“Ford”). The total loan facility was up to C$0.5 million (equivalent to $0.4 million) and accrued interest at the rate of 2.5%. Interest was due upon maturity of the loan on June 30, 2021. As part of Ford’s termination agreement, the total loan facility was offset by compensation owed to Ford of $0.5 million during the first quarter of 2021. As of March 31, 2022, the outstanding balance of the facility including accrued interest was $Nil (December 31, 2021 – $Nil).
38
Critical Accounting Policies and Accounting Estimates
The preparation of our unaudited interim condensed consolidated financial statements and related disclosures in conformity with GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
Our significant accounting policies and estimates are described in Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements in Part II, Item 8 of our Annual Report on Form
10-K
for the fiscal year ended December 31, 2021 filed with the SEC on March 18, 2022 which describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We believe the following critical accounting policies govern the more significant judgments, estimates and assumptions that have the most significant effect on the amounts recognized in the consolidated financial statements are described below. 39
Other than those noted below, there have been no material changes to our critical accounting policies and estimates as from the date upon which we filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 with the SEC.
Business Combinations
In accordance with the FASB ASC Topic 805 (“ASC 805”), we allocate the fair value of the purchase consideration to the tangible and intangible asset purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets acquired and liabilities assumed requires estimates and the use of valuation techniques when a market value is not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. If we obtain new information about the facts and circumstances that existed as of the acquisition date during the measurement period, which may be up to one year from the acquisition date, we may record an adjustment to the assets acquired and liabilities assumed.
Business Combinations
Classification of an acquisition as a business combination or an asset acquisition depends on whether the assets acquired constitute a business, which can be a complex judgment. Whether an acquisition is classified as a business combination or asset acquisition can have a significant impact on the accounting considerations on and after acquisition.
JOBS Act
On April 5, 2012, the 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, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of our initial public offering; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.
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ITEM 3. |
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule
12b-2
of the Exchange Act. ITEM 4. |
CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rule
13a-15(e)
and Rule 15d-15(e)
under the Exchange Act that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to its management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our management, with the participation of our Interim Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e)
and 15d-15(e)
under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q.
Based on such evaluation, our Interim Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2022, our disclosure controls and procedures were not effective due material weakness, which could adversely affect our ability to record, process, summarize, and report financial data. Such weaknesses include valuation of inventory, sales and expense cutoff for certain subsidiaries, accounting for business combinations, and our provisioning of user access rights, password lengths, certain backup/recovery controls and change management controls. We have developed a plan to remediate the material weaknesses, which includes implementing improved processes and internal controls to ensure the proper application of accounting practices and guidance. We also intend to increase our accounting staff as soon as economically feasible and sustainable to remediate this material weakness.
Changes in Internal Control
Over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. |
LEGAL PROCEEDINGS. |
From time to time, we may become involved in various lawsuits and legal proceedings. Litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth herein, we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
Roberts Matter
In October 2018, Craig Roberts and Beverly Roberts (the “Roberts”) and the Gary W. Roberts Irrevocable Trust Agreement I, Gary W. Roberts Irrevocable Trust Agreement II, and Gary W. Roberts Irrevocable Trust Agreement III (the “Roberts Trust” and together with the Roberts, the “Roberts Plaintiffs”) filed two separate but similar declaratory judgment actions in the Circuit Court of Palm Beach County, Florida against GrowHealthy Holdings, LLC (“GrowHealthy Holdings”) and the Company in connection with the acquisition of substantially all of GrowHealthy Holdings’ assets by the Company in early 2018. The Roberts Plaintiffs sought a declaration that the Company must deliver certain share certificates to the Roberts without requiring them to deliver a signed Shareholder Representative Agreement (“SRA”) to GrowHealthy Holdings, which delivery was a condition precedent to receiving the iAnthus share certificates and required by the acquisition agreements between GrowHealthy Holdings and the Company. In January 2019, the Circuit Court of Palm Beach County denied the Roberts Plaintiffs’ motion for injunctive relief, and the Roberts Plaintiffs signed and delivered the SRA forms to GrowHealthy Holdings while reserving their rights to continue challenging the validity and enforceability of the SRA. The Roberts Plaintiffs thereafter amended their complaints to seek monetary damages in the aggregate amount of $22.0 million plus treble damages. On May 21, 2019, the court issued an interlocutory order directing the Company to deliver the share certificates to the Roberts Plaintiffs, which the Company delivered on June 17, 2019, in accordance with the court’s order. On December 19, 2019, the Company appealed the court’s order directing delivery of the share certificates to the Florida Fourth District Court of Appeal, which appeal was denied per curiam. On October 21, 2019, the Roberts Plaintiffs were granted leave by the Circuit Court of Palm Beach County to amend their complaints in order to add purported claims for civil theft and punitive damages, and on November 22, 2019, the Company moved to dismiss the Roberts Plaintiffs’ amended complaints. On May 1, 2020, the Circuit Court of Palm Beach County heard arguments on the motions to dismiss, and on June 11, 2020, the court issued a written order granting in part and denying in part the Company’s motion to dismiss. Specifically, the order denied the Company’s motion to dismiss for lack of jurisdiction and improper venue; however, the court granted the Company’s motion to dismiss the Roberts Plaintiffs’ claims for specific performance, conversion and civil theft without prejudice. With respect to the claim for conversion and civil theft, the Circuit Court of Palm Beach County provided the Roberts Plaintiffs with leave to amend their respective complaints. On July 10, 2020, the Roberts Plaintiffs filed further amended complaints in each action against the Company including claims for conversion, breach of contract and civil theft including damages in the aggregate amount of $22.0 million plus treble damages, and on August 13, 2020, the Company filed a consolidated motion to dismiss such amended complaints. On October 26, 2020, Circuit Court of Palm Beach County heard argument on the consolidated motion to dismiss, denied the motion and entered an order to that effect on October 28, 2020. Answers on both actions were filed on November 20, 2020 and the parties commenced discovery. On September 9, 2021, the Roberts Plaintiffs filed a motion to consolidate the two separate actions, which motion was granted on October 14, 2021. On August 6, 2020, the Roberts filed a lawsuit against Randy Maslow, the Company’s now former Interim Chief Executive Officer, President and director, in his individual capacity (the “Maslow Complaint”), alleging a single count of purported conversion. The Maslow Complaint was not served on Randy Maslow until November 25, 2021, and the allegations in the Maslow Complaint are substantially similar to those allegations for purported conversion in the complaints filed against the Company. On March 28, 2022, the court consolidated the action filed against Randy Maslow with the Roberts Plaintiffs’ action for discovery and trial purposes. As a result, the court vacated the matter’s current trial date of May 9, 2022. The case has not been reset for trial yet. On April 22, 2022, the parties attended a court required mediation, which was unsuccessful. On May 6, 2022, the Circuit Court of Palm Beach County granted Randy Maslow’s motion to dismiss the Maslow Complaint. The Roberts have 30 days from the date of the court’s order, or until June 6, 2022, to file a second amended complaint.
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U.S. Shareholder Class Action
On April 20, 2020, Donald Finch, a shareholder of the Company, filed a putative class action lawsuit with the United States District Court for the Southern District of New York (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 (as defined below) 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. The Motion to Dismiss the Lead Plaintiff’s Second Amended Complaint remains pending before the SDNY. U.S.
Hi-Med
Matter On April 19, 2020,
Hi-Med
LLC (“Hi-Med”),
an equity holder and one of the Lenders holding an Unsecured Debenture of the Company in the principal amount of $5.0 million, filed a complaint with the SDNY against the Company and certain of the Company’s current and former directors and officers and other defendants (the “Hi-Med
Complaint”). 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 Exchange Act 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 above. On July 23, 2020, Hi-Med
and the defendants filed a stipulation and proposed scheduling and coordination order to coordinate the pleadings for the consolidated actions. On September 4, 2020, Hi-Med
filed an amended complaint (the “Hi-Med
Amended Complaint”). On October 14, 2020, the SDNY issued a stipulation and scheduling and coordination order, which required that the defendants answer, move, or otherwise respond to the Hi-Med
Amended Complaint no later than November 20, 2020. On November 20, 2020, the Company and certain of its current officers and directors filed a Motion to Dismiss the Hi-Med
Amended Complaint. On January 8, 2021, Hi-Med
filed an opposition to the Motion to Dismiss. The Company and certain of its current officers and directors’ reply were filed on February 22, 2021. In a memorandum of opinion dated August 30, 2021, the SDNY granted the Company’s and certain of its officers and directors’ Motion to Dismiss the Hi-Med
Amended Complaint. The SDNY indicated that Hi-Med
may move for leave to file a proposed second amended complaint by September 30, 2021. On September 30, 2021, Hi-Med
filed a motion for leave to amend the Hi-Med
Amended Complaint. On October 28, 2021, the parties filed a Stipulation and Proposed Scheduling Order Regarding Hi-Med’s
Motion for Leave to File a Second Amended Complaint (the “Stipulation”). On November 3, 2021, the SDNY so-ordered
the Stipulation and Hi-Med’s
Second Amended Complaint was deemed filed as of this date. On December 20, 2021, the Company and its current named officers and directors filed a Motion to Dismiss Hi-Med’s
Second Amended Complaint. Hi-Med’s
opposition to the Company’s and its current named officers and directors’ Motion to Dismiss was filed on February 3, 2022. The Company and its current named officers and directors’ reply to Hi-Med’s
opposition was filed on March 21, 2022. The Motion to Dismiss Hi-Med’s
Second Amended Complaint remains pending before the SDNY. Claim by Former Consultant
On August 19, 2021, Arvin Saloum (“Saloum”), a former consultant of the Company, filed a Demand for Arbitration with the American Arbitration Association 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 $1.0 million and $10.0 million. On September 7, 2021, THCWC and iA AZ filed Objections and Answering Statement to Saloum’s Demand for Arbitration. On November 18, 2021, THCWC and iA AZ filed a Complaint for Declaratory Judgment (“Declaratory Judgment Complaint”) with the Arizona Superior Court, Maricopa County (“Arizona Superior Court”), seeking declarations that: (i) the JV Agreement is void, against public policy and terminable at will; (ii) the JV Agreement is unenforceable and not binding; and (iii) the JV Agreement only applies to sales under the Arizona Medical Marijuana Act. On January 21, 2022, Saloum filed an Answer with Counterclaims in response to the Declaratory Judgment Complaint. The Declaratory Judgment Complaint remains pending before the Arizona Superior Court. The Arbitration Action is stayed, pending resolution of the Declaratory Judgment Complaint.
Plan of Arrangement
On August 20, 2021, the Applicants filed the Application with the OSCJ, which sought, among other things, a declaration that the Outside Date be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On August 24, 2021, the Company and Applicants appeared for a case conference before the OSCJ at which the OSCJ issued the Stay Order that required the parties to the Restructuring Support Agreement to maintain the status quo until the hearing on September 23, 2021. Specifically, the Stay Order provided that the parties shall remain bound by the Restructuring Support Agreement and not take any steps to advance or impede the regulatory approval process for the closing of the Recapitalization Transaction or otherwise have any communication with the applicable state-level regulators concerning the Recapitalization Transaction or the other counterparties to the Restructuring Support Agreement. On September 23, 2021, the parties appeared before the OSCJ for a hearing on the Application. Following this hearing, the OSCJ issued an endorsement that extended the Stay Order from September 23, 2021 until 48 hours after the release of the OSCJ’s decision on the merits of the Application. On October 12, 2021, the OSCJ issued its decision granting the Applicant’s relief sought in the Application. Specifically, the OSCJ granted the declaration sought by the Applicants and ordered that the Outside Date be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On November 10, 2021, the Company filed a Notice of Appeal with the Ontario Court of Appeal, and a hearing on the appeal is scheduled for June 9, 2022.
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ITEM 1A. |
RISK FACTORS. |
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form
10-K
for the year ended December 31, 2021(“Annual Report”). 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 Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report 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.
ITEM 3. |
DEFAULTS UPON SENIOR SECURITIES. |
See Part I, Item 2, “Financial Restructuring” for information regarding the Company’s default upon senior securities.
ITEM 4. |
MINE SAFETY DISCLOSURES. |
Not applicable.
ITEM 5. |
OTHER INFORMATION. |
None.
ITEM 6. |
EXHIBITS. |
| * | Filed 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.
| IANTHUS CAPITAL HOLDINGS, INC. | ||||||
| By: | /s/ Robert Galvin | |||||
| Robert Galvin | ||||||
| Interim Chief Executive Officer and Director | ||||||
| (Principal Executive Officer) | ||||||
| Date: May 12, 2022 | By: |
/s/ Julius Kalcevich | ||||
| Julius Kalcevich | ||||||
| Chief Financial Officer | ||||||
| (Principal Financial and Accounting Officer) |
45
TABLE OF CONTENTS
Item 1. Financial StatementsNote 1 Organization and Description Of BusinessNote 2 LeasesNote 3 InventoriesNote 4 AcquisitionsNote 5 Long-term DebtNote 6 Share CapitalNote 7 Income TaxesNote 8 Segment InformationNote 9 Financial InstrumentsNote 10 CommitmentsNote 11 Contingencies and GuaranteesNote 12 Related Party TransactionsNote 13 Unaudited Interim Condensed Consolidated Statements Of Cash Flows Supplemental InformationNote 14 Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits