Acreage Holdings Inc.
11/14/2024 | Press release | Distributed by Public on 11/14/2024 16:05
Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)
acrg-20240930
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2024
OR
| ☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number 000-56021
ACREAGE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| British Columbia, Canada | 98-1463868 | ||
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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366 Madison Ave, 14thfloor
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New York | New York | 10017 |
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(Address of Principal Executive Offices)
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(Zip Code)
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(646) 600-9181
Registrant's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to section 12(g) of the Act: Class D Subordinate Voting Shares, no par value; Class E Subordinate Voting Shares, no par value.
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 x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
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 |
o
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Accelerated filer |
o
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| Non-accelerated filer |
☒
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Smaller reporting company |
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| Emerging growth company |
☒
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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 Act). Yes ☐ No x
The registrant has three classes of issued and outstanding shares: the Fixed Shares, the Floating Shares and the Class F multiple voting shares (the "Fixed Multiple Shares"). The Fixed Shares and Floating Shares each entitle the holders to notice of and to attend at any meeting of the shareholders of the registrant, except a meeting of which only holders of another particular class or series of shares of the registrant have the right to vote. Each Fixed Share is entitled to one vote per Fixed Share, each Floating Share is entitled to one vote per Floating Share and each Fixed Multiple Share is entitled to 4,300 votes per Fixed Multiple Share on all matters upon which the holders of shares are entitled to vote. As of November 14, 2024, there were 80,946,416 Fixed shares, 40,963,782 Floating Shares, and 117,600 Fixed Multiple Shares, in each case, issued and outstanding.
TABLE OF CONTENTS
Acreage Holdings, Inc.
Form 10-Q
For the Three and Nine Months Ended September 30, 2024
| PART I | Financial Information | |
| Item 1. |
Condensed Consolidated Statements of Financial Position as of September 30, 2024 (unaudited) and December 31, 2023
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1
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Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023
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3
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Unaudited Condensed Consolidated Statements of Shareholders' Equity (Deficit) for the three and nine months ended September 30, 2024 and 2023
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4
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Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and 2023
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6
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Notes to the Unaudited Condensed Consolidated Financial Statements
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8
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| Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations
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36
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| Item 3. |
Quantitative and Qualitative Disclosures About Market Risk
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49
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| Item 4. |
Controls and Procedures
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49
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| PART II | Other Information | |
| Item 1. |
Legal Proceedings
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50
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| Item 1A. |
Risk Factors
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50
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| Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds
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50
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| Item 3. |
Defaults Upon Senior Securities
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51
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| Item 4. |
Mine Safety Disclosures
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51
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| Item 5. |
Other Information
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51
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| Item 6. |
Exhibits
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51
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SIGNATURES
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52
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PART I
Item 1. Financial Statements and Supplementary Data.
| ACREAGE HOLDINGS, INC. |
| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION |
| (in thousands) | September 30, 2024 | December 31, 2023 | ||
| (unaudited) | ||||
| ASSETS | ||||
| Cash and cash equivalents | $ | 13,780 | $ | 13,631 |
| Restricted cash | 65 | 3,984 | ||
| Accounts receivable, net | 10,226 | 8,459 | ||
| Inventory | 32,909 | 47,675 | ||
| Assets held-for-sale | 15,255 | 6,028 | ||
| Other current assets | 2,446 | 2,136 | ||
| Total current assets | 74,681 | 81,913 | ||
| Long-term investments | 33,170 | 33,170 | ||
| Capital assets, net | 128,761 | 141,732 | ||
| Operating lease right-of-use assets | 13,516 | 17,531 | ||
| Intangible assets, net | 27,910 | 31,044 | ||
| Goodwill | 13,761 | 13,346 | ||
| Other non-current assets | 1,349 | 1,558 | ||
| Total non-current assets | 218,467 | 238,381 | ||
| TOTAL ASSETS | $ | 293,148 | $ | 320,294 |
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LIABILITIES AND SHAREHOLDERS' DEFICIT
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| Accounts payable and accrued liabilities | $ | 31,893 | $ | 29,936 |
| Taxes payable | 7,566 | 11,395 | ||
| Interest payable | 5,451 | 5,539 | ||
| Operating lease liability, current | 1,959 | 2,457 | ||
| Debt, current | 2,437 | 4,132 | ||
| Liabilities related to assets held for sale | 15,772 | 2,253 | ||
| Other current liabilities | 182 | 2,011 | ||
| Total current liabilities | 65,260 | 57,723 | ||
| Debt, non-current | 272,225 | 232,810 | ||
| Operating lease liability, non-current | 14,138 | 17,293 | ||
| Deferred tax liability | 9,925 | 10,584 | ||
| Liability on unrecognized tax benefits | 50,571 | 39,859 | ||
| Warrant liability | 7,133 | - | ||
| Other liabilities | 4 | 1,054 |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-1
| ACREAGE HOLDINGS, INC. |
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CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
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| Total non-current liabilities | 353,996 | 301,600 | ||
| TOTAL LIABILITIES | 419,256 | 359,323 | ||
| Commitments and contingencies | ||||
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Common stock, no par value - unlimited authorized, 121,186 and 120,344 issued and outstanding as of September 30, 2024. 115,995 and 115,153 issued and outstanding as of December 31, 2023.
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- | - | ||
| Additional paid-in capital | 776,489 | 759,698 | ||
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Treasury stock, 842 common stock held in treasury
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(21,054) | (21,054) | ||
| Accumulated deficit | (824,441) | (747,550) | ||
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Total Acreage Shareholders' deficit
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(69,006) | (8,906) | ||
| Non-controlling interests | (57,102) | (30,123) | ||
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TOTAL DEFICIT
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(126,108) | (39,029) | ||
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TOTAL LIABILITIES AND DEFICIT
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$ | 293,148 | $ | 320,294 |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-2
| ACREAGE HOLDINGS, INC. |
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| (in thousands, except per share amounts) | 2024 | 2023 | 2024 | 2023 | ||||
| REVENUE | ||||||||
| Retail revenue, net | $ | 27,435 | $ | 43,857 | $ | 85,620 | $ | 130,651 |
| Wholesale revenue, net | 12,188 | 12,645 | 38,302 | 39,845 | ||||
| Other revenue, net | 1 | - | 1 | 84 | ||||
| Total revenues, net | 39,624 | 56,502 | 123,923 | 170,580 | ||||
| Cost of goods sold, retail | (14,995) | (23,247) | (47,538) | (67,145) | ||||
| Cost of goods sold, wholesale | (10,715) | (11,981) | (47,046) | (34,454) | ||||
| Total cost of goods sold | (25,710) | (35,228) | (94,584) | (101,599) | ||||
| Gross profit | 13,914 | 21,274 | 29,339 | 68,981 | ||||
| OPERATING EXPENSES | ||||||||
| General and administrative | 7,516 | 8,036 | 22,814 | 25,621 | ||||
| Compensation expense | 11,746 | 13,524 | 35,614 | 38,930 | ||||
| Equity-based compensation expense | (212) | 745 | 1,939 | 2,423 | ||||
| Marketing | 603 | 542 | 1,721 | 1,942 | ||||
| Loss on disposals of construction in process | 2,072 | - | 2,072 | - | ||||
| Write down of assets held-for-sale, net | - | - | - | 3,557 | ||||
| Depreciation and amortization | 853 | 928 | 2,642 | 2,919 | ||||
| Total operating expenses | 22,578 | 23,775 | 66,802 | 75,392 | ||||
| Net operating loss | $ | (8,664) | $ | (2,501) | $ | (37,463) | $ | (6,411) |
| Income from investments, net | - | 248 | - | 228 | ||||
| Interest income from loans receivable | - | - | - | 10 | ||||
| Interest expense | (8,128) | (9,207) | (25,423) | (26,143) | ||||
| Other income (loss), net | (983) | 10,021 | (7,320) | 9,823 | ||||
| Total other income (loss) | (9,111) | 1,062 | (32,743) | (16,082) | ||||
| Loss before income taxes | $ | (17,775) | $ | (1,439) | $ | (70,206) | $ | (22,493) |
| Income tax expense | (4,465) | (6,420) | (9,482) | (19,763) | ||||
| Net loss | $ | (22,240) | $ | (7,859) | $ | (79,688) | $ | (42,256) |
| Less: net loss attributable to non-controlling interests | (2,732) | (234) | (11,177) | (3,885) | ||||
| Net loss attributable to Acreage Holdings, Inc. | $ | (19,508) | $ | (7,625) | $ | (68,511) | $ | (38,371) |
| Net loss per share attributable to Acreage Holdings, Inc. - basic and diluted: | $ | (0.16) | $ | (0.07) | $ | (0.58) | $ | (0.34) |
| Weighted average shares outstanding - basic and diluted | 119,965 | 114,171 | 117,422 | 113,181 |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-3
| ACREAGE HOLDINGS, INC. |
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
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| Attributable to shareholders of the parent | ||||||||||||||
| (in thousands) | LLC Membership Units | Pubco Shares (as converted) | Share Capital | Treasury Stock | Accumulated Deficit | Shareholders' Equity (Deficit) | Non-controlling Interests | Total Equity (Deficit) | ||||||
| December 31, 2022 | 3,861 | 112,437 | $ | 760,529 | $ | (21,054) | $ | (678,091) | $ | 61,384 | $ | (21,205) | $ | 40,179 |
| Cumulative effect of change in accounting principle for current expected credit losses, net of tax | - | - | - | - | (367) | (367) | - | (367) | ||||||
| NCI adjustments for changes in ownership | - | - | 14 | - | - | 14 | (14) | - | ||||||
| Equity-based compensation expense and related issuances | - | 287 | 984 | - | - | 984 | - | 984 | ||||||
| Net loss | - | - | - | - | (14,590) | (14,590) | (1,567) | (16,157) | ||||||
| March 31, 2023 | 3,861 | 112,724 | $ | 761,527 | $ | (21,054) | $ | (693,048) | $ | 47,425 | $ | (22,786) | $ | 24,639 |
| NCI adjustments for changes in ownership | - | - | (3,389) | - | - | (3,389) | 3,389 | - | ||||||
| Capital distributions, net | - | - | - | - | - | - | (3,968) | (3,968) | ||||||
| Other equity transactions | - | - | (130) | - | - | (130) | - | (130) | ||||||
| Equity-based compensation expense and related issuances | - | 479 | 694 | - | - | 694 | - | 694 | ||||||
| Net loss | - | - | - | - | (16,156) | (16,156) | (2,084) | (18,240) | ||||||
| June 30, 2023 | 3,861 | 113,203 | $ | 758,702 | $ | (21,054) | $ | (709,204) | $ | 28,444 | $ | (25,449) | $ | 2,995 |
| NCI adjustments for changes in ownership | - | - | (450) | - | - | (450) | 450 | - | ||||||
| Other equity transactions | - | - | (79) | - | (79) | - | (79) | |||||||
| Equity-based compensation expense and related issuances | - | 2,762 | 745 | - | - | 745 | - | 745 | ||||||
| Net loss | - | - | - | - | (7,625) | (7,625) | (234) | (7,859) | ||||||
| September 30, 2023 | 3,861 | 115,965 | $ | 758,918 | $ | (21,054) | $ | (716,829) | $ | 21,035 | $ | (25,233) | $ | (4,198) |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-4
| ACREAGE HOLDINGS, INC. |
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
|
| Attributable to shareholders of the parent | ||||||||||||||
| (in thousands) | LLC Membership Units | Pubco Shares (as converted) | Share Capital | Treasury Stock | Accumulated Deficit | Shareholders' Equity (Deficit) | Non-controlling Interests | Total Equity (Deficit) | ||||||
| December 31, 2023 | 3,861 | 115,995 | $ | 759,698 | $ | (21,054) | $ | (747,550) | $ | (8,906) | $ | (30,123) | $ | (39,029) |
| NCI adjustments for changes in ownership | - | - | (5,264) | - | - | (5,264) | 5,264 | - | ||||||
| Other equity transactions | - | - | (16) | - | - | (16) | - | (16) | ||||||
| Equity-based compensation expense and related issuances | - | 136 | 809 | - | - | 809 | - | 809 | ||||||
| Net loss | - | - | - | - | (27,978) | (27,978) | (5,341) | (33,319) | ||||||
| March 31, 2024 | 3,861 | 116,131 | $ | 755,227 | $ | (21,054) | $ | (775,528) | $ | (41,355) | $ | (30,200) | $ | (71,555) |
| NCI adjustments for changes in ownership | - | - | 6,329 | - | - | 6,329 | (6,329) | - | ||||||
| Other equity transactions | - | - | $ | (244) | $ | - | $ | - | $ | (244) | $ | - | $ | (244) |
| Private placement dividend | - | - | - | - | (8,380) | (8,380) | - | (8,380) | ||||||
| Equity-based compensation expense and related issuances | - | 1,094 | 1,342 | - | - | 1,342 | - | 1,342 | ||||||
| Net loss | - | - | - | - | (21,025) | (21,025) | (3,104) | (24,129) | ||||||
| June 30, 2024 | 3,861 | 117,225 | $ | 762,654 | $ | (21,054) | $ | (804,933) | $ | (63,333) | $ | (39,633) | $ | (102,966) |
| NCI adjustments for changes in ownership | - | - | 14,737 | - | - | 14,737 | (14,737) | - | ||||||
| Other equity transactions | - | - | $ | (690) | $ | - | $ | - | $ | (690) | $ | - | $ | (690) |
| Equity-based compensation expense and related issuances | - | 3,961 | (212) | - | - | (212) | - | (212) | ||||||
| Net loss | - | - | - | - | (19,508) | (19,508) | (2,732) | (22,240) | ||||||
| September 30, 2024 | 3,861 | 121,186 | $ | 776,489 | $ | (21,054) | $ | (824,441) | $ | (69,006) | $ | (57,102) | $ | (126,108) |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-5
| ACREAGE HOLDINGS, INC. |
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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| Nine Months Ended September 30, | ||||
| (in thousands) | 2024 | 2023 | ||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||
| Net loss | $ | (79,688) | $ | (42,256) |
| Adjustments for: | ||||
| Depreciation and amortization | 2,642 | 2,919 | ||
| Depreciation and amortization included in COGS | 8,033 | 6,058 | ||
| Equity-based compensation expense | 1,939 | 2,423 | ||
| Inventory write-off and provision | 5,581 | 8,824 | ||
| Change in accounting estimate for the costing of inventory | 13,828 | - | ||
| Loss on modification of debt | 6,322 | - | ||
| Gain on business divestiture | - | (47) | ||
| Loss on disposal of capital assets, net | 2,109 | 34 | ||
| Non-cash fair value change related to Warrant liability and Convertible notes | 452 | - | ||
| Bad debt expense | 342 | 320 | ||
| Non-cash interest expense | 6,486 | 3,743 | ||
| Non-cash operating lease adjustment | 693 | (18) | ||
| Loss on lease termination | - | (200) | ||
| Deferred tax income | (121) | 16 | ||
| Non-cash loss from investments, net | - | 870 | ||
| Write-down of assets held-for-sale | - | 3,557 | ||
| Change, net of acquisitions in: | ||||
| Accounts receivable | (3,482) | (3,427) | ||
| Inventory | (2,987) | (12,572) | ||
| Other assets | 227 | (597) | ||
| Interest receivable | 1,373 | (756) | ||
| Accounts payable and accrued liabilities | 5,719 | (2,628) | ||
| Taxes payable | (3,324) | 15,026 | ||
| Interest payable | 3,648 | 3,101 | ||
| Liability on unrecognized tax benefits | 14,691 | - | ||
| Other liabilities | (2,030) | (3,119) | ||
| Net cash used in operating activities | $ | (17,547) | $ | (18,729) |
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||
| Purchase of capital assets | $ | (2,390) | $ | (5,345) |
| Collection of notes receivable | - | 2,150 | ||
| Business acquisitions, net of cash acquired | - | 516 | ||
| Purchases of intangible assets | (500) | (27) | ||
| Proceeds from business divestiture | - | 500 | ||
| Net cash used in investing activities | $ | (2,890) | $ | (2,206) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
| Other equity transactions | $ | (950) | $ | (79) |
| Proceeds from financing (refer to Note 14 for related party financing) | 8,455 | 27,121 | ||
| Deferred financing costs paid | - | (500) | ||
| Proceeds from issuance of private placement units and warrants | 10,000 | - | ||
| Repayment of debt | (838) | (913) | ||
| Capital distributions - non-controlling interests | - | (3,968) |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-6
| ACREAGE HOLDINGS, INC. |
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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| Net cash provided by financing activities | $ | 16,667 | $ | 21,661 |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | (3,770) | $ | 726 |
| Cash, cash equivalents, and restricted cash - Beginning of period | 17,615 | 24,067 | ||
| Cash, cash equivalents, and restricted cash - End of period | $ | 13,845 | $ | 24,793 |
| RECONCILIATION OF CASH FLOW INFORMATION: | ||||
| Cash and cash equivalents | $ | 13,780 | $ | 15,142 |
| Restricted cash | 65 | 9,651 | ||
| Total cash, cash equivalents, and restricted cash at end of period | $ | 13,845 | $ | 24,793 |
| Nine Months Ended September 30, | ||||
| (in thousands) | 2024 | 2023 | ||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||
| Interest paid - non-lease | $ | 3,478 | $ | 19,266 |
| Income taxes paid | - | 5,933 | ||
| OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||
| Capital assets not yet paid for | $ | 781 | $ | 5,040 |
| Cumulative effect of change in accounting principle for current expected credit losses, net of tax | - | 121 | ||
| NCI adjustments for changes in ownership | - | (14) | ||
| Initial fair value recognition on Warrant Liability | 6,972 | - | ||
| Initial fair value recognition on Convertible Notes | 11,408 | - |
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
F-7
| ACREAGE HOLDINGS, INC. |
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
1. NATURE OF OPERATIONS
Acreage Holdings, Inc. (the "Company", "Pubco" or "Acreage") is a vertically integrated, multi-state operator in the United States ("U.S.") cannabis industry. The Company's operations include (i) cultivating and processing cannabis plants, (ii) manufacturing branded consumer products, (iii) distributing cannabis flower and manufactured products, and (iv) retailing cannabis products to patients and consumers. The Company's products appeal to medical and adult recreational use customers through brand strategies intended to build trust and loyalty.
The Company's Class E subordinate voting shares ("Fixed Shares") and Class D subordinate voting shares ("Floating Shares") are listed on the Canadian Securities Exchange under the symbols "ACRG.A.U" and "ACRG.B.U", respectively, quoted on the OTCQX under the symbols "ACRHF" and "ACRDF", respectively, and traded on the Frankfurt Stock Exchange under the symbols "0VZ1" and "0VZ2", respectively.
High Street Capital Partners, LLC ("HSCP") was formed on April 29, 2014. The Company became the indirect parent of HSCP on November 14, 2018 in connection with the reverse takeover ("RTO") transaction described below.
The Company's principal place of business is located at 366 Madison Ave, 14thfloor, New York, New York in the U.S. The Company's registered and records office address is Suite 2800, Park Place, 666 Burrard Street, Vancouver, British Columbia in Canada.
The RTO transaction
On September 21, 2018, the Company, HSCP, HSCP Merger Corp. (a wholly-owned subsidiary of the Company), Acreage Finco B.C. Ltd. (a special purpose corporation) ("Finco"), Acreage Holdings America, Inc. ("USCo") and Acreage Holdings WC, Inc. ("USCo2") entered into a business combination agreement (the "Business Combination Agreement") whereby the parties thereto agreed to combine their respective businesses, which would result in the RTO of Pubco by the security holders of HSCP, which was deemed to be the accounting acquiror. On November 14, 2018, the parties to the Business Combination Agreement completed the RTO.
Canopy Growth Corporation transaction
On June 27, 2019, the Company and Canopy Growth Corporation ("Canopy Growth" or "CGC") implemented the Prior Plan of Arrangement (as defined in Note 15) contemplated by the Original Arrangement Agreement (as defined in Note 15). Pursuant to the Prior Plan of Arrangement, Canopy Growth was granted an option to acquire all of the issued and outstanding shares of the Company. Canopy Growth was required to exercise the option upon a change in federal laws in the United States to permit the general cultivation, distribution and possession of marijuana (as defined in the relevant legislation) or to remove the regulation of such activities from the federal laws of the United States (the "Triggering Event") and, subject to the satisfaction or waiver of certain closing conditions set out in the Original Arrangement Agreement, Canopy Growth was required to acquire all of the issued and outstanding subordinated voting shares ("SVS") (following the mandatory conversion of the Class B proportionate voting shares (the "PVS") and Class C multiple voting shares (the "MVS") into SVS).
On June 24, 2020, Canopy Growth and the Company entered into an agreement to, among other things, amend the terms of the Original Arrangement Agreement and the terms of the Prior Plan of Arrangement (the "Amended Arrangement"). On September 16, 2020, the Company's shareholders voted in favor of a special resolution authorizing and approving the terms of, among other things, the Amended Arrangement. Subsequently, on September 18, 2020, the Company obtained a final order from the Supreme Court of British Columbia approving the Amended Arrangement, and on September 23, 2020 the Company and Canopy Growth entered into the Amending Agreement (as defined in Note 15) and implemented the Amended Arrangement. Pursuant to the Amended Arrangement, the Company's articles were amended to create the Fixed Shares, the Floating Shares and the Class F multiple voting shares (the "Fixed Multiple Shares"), and each outstanding SVS was exchanged for 0.7 of a Fixed Share and 0.3 of a Floating Share, each outstanding PVS was exchanged for 28 Fixed Shares and 12 Floating Shares; and each outstanding MVS was exchanged for 0.7 of a Fixed Multiple Share and 0.3 of a Floating Share. Pursuant to the Amended Arrangement, Canopy Growth was granted the option to acquire all of the issued and outstanding Fixed Shares on the basis of 0.03048 (after giving effect to the Canopy Consolidation) (the "Fixed Share Exchange Ratio") of a common share of Canopy Growth (each, a "Canopy Share") for each Fixed Share held at the time of the acquisition of the Fixed Shares (the "Acquisition" or "Acquisition Time"), subject to adjustment in accordance with the terms of the Amended Arrangement (the "Canopy Call Option"), which Canopy Growth is required to exercise upon the occurrence, or waiver (at the discretion of Canopy Growth), of a Triggering Event (the date on which the Triggering Event occurs, the "Triggering Event Date"). On December 15, 2023, Canopy Growth initiated a reverse 1-for-10 share consolidation (the "Canopy Consolidation"), which triggered an Exchange Ratio Adjustment Event which modified the Fixed Share Exchange Ratio from 0.3048 of a Canopy
F-8
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
Share for each Fixed Share to 0.03048 of a Canopy Share for each Fixed Share. Refer to Note 15 for further discussion, including a discussion of the anticipated adjustment to the Fixed Share Exchange Ratio as a result of the offering of convertible notes completed in June 2024.
Pursuant to the implementation of the Amended Arrangement, on September 23, 2020, a subsidiary of Canopy Growth advanced gross proceeds of $50,000 to Universal Hemp, LLC, an affiliate of the Company. The debenture bears interest at a rate of 6.1% per annum. Refer to Note 10 for further discussion.
On October 24, 2022, the Company entered into an arrangement agreement (the "Floating Share Agreement") with Canopy Growth and Canopy USA, LLC ("Canopy USA"), Canopy Growth's newly-created U.S. domiciled holding company, pursuant to which, subject to approval of the holders of the Class D subordinate voting shares of Acreage (the "Floating Shares") and the terms and conditions of the Floating Share Agreement, Canopy USA will acquire all of the issued and outstanding Floating Shares by way of court-approved Floating Share Arrangement for consideration of 0.04500 (after giving effect to the Canopy Consolidation) of a Canopy Share in exchange for each Floating Share. On March 15, 2023, the Company received the required approval of the holders of Floating Shares in connection with the Floating Share Arrangement at its special meeting of holders of Floating Shares (the "Special Meeting"). On March 21, 2023, the Company obtained a final order form from the Supreme Court of British Columbia approving the Floating Share Arrangement. Upon the satisfaction or waiver of all other conditions set out in the Floating Share Arrangement Agreement, which the parties continue to work towards, the parties will complete the Floating Share Arrangement. On December 15, 2023, Canopy Growth initiated the Canopy Consolidation, which triggered an Exchange Ratio Adjustment Event, which affected the Floating Share Agreement and the consideration agreed upon between Canopy USA and the Company. Refer to Note 15 for further discussion.
On June 3, 2024, the Canopy Call Option was exercised in accordance with the terms of the Amended Arrangement. Upon closing of the Amended Arrangement and Floating Share Agreement (the "Acquisitions" or the "Transactions"), Canopy USA will own 100% of the Fixed Shares and Floating Shares and in connection therewith, Acreage would become a wholly owned subsidiary of Canopy USA. Closing of the Acquisitions remain subject to all of the closing conditions set forth in the Amended Arrangement and the Floating Share Agreement. There can be no certainty, nor can the Company provide any assurance, that all conditions precedent will be satisfied or waived, which may result in the Acquisitions not being completed. Refer to Note 15 for further discussion.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and going concern
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024, or any other period. Further, the accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis which implies the Company will continue to meet its obligations for the next twelve months as of the date these financial statements are issued.
As reflected in the unaudited condensed consolidated financial statements, the Company had an accumulated deficit as of September 30, 2024, as well as a net loss and negative cash flow from operating activities for the nine months ended September 30, 2024. These factors raise substantial doubt about the Company's ability to continue as a going concern for at least one year from the issuance of these financial statements. Continuation as a going concern is dependent upon continued operations of the Company, which is dependent upon the Company's ability to meet its financial requirements and the success of its future operations. The consolidated financial statements do not include any adjustments to the amount and classification of assets and liabilities that may be necessary should the Company not continue as a going concern.
Management believes that substantial doubt about the Company's ability to meet its obligations for the next twelve months from the date these financial statements are issued can be mitigated by, but not limited to, (i) expected long-term sales growth from the Company's consolidated operations, (ii) latitude as to the timing and amount of certain operating expenses as well as capital expenditures, (iii) expense reduction plans that have already been put in place to improve the Company's results, (iv) access to the U.S. and Canadian public equity markets. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. Management also cannot provide any assurance as to unforeseen circumstances that could occur at any time within the next twelve months or thereafter which could increase the Company's need to raise additional capital on an immediate basis.
F-9
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, dated April 30, 2024, as filed with the Securities and Exchange Commission (the "2023 Form 10-K").
Use of estimates
Preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates presented and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Significant estimates inherent in the preparation of the accompanying unaudited condensed consolidated financial statements include the fair value of assets acquired and liabilities assumed in business combinations, assumptions relating to equity-based compensation expense, estimated useful lives for property, plant and equipment and intangible assets, the valuation allowance against deferred tax assets and the assessment of potential impairment charges on goodwill, intangible assets and investments in equity and notes receivable.
Emerging growth company
The Company is an "emerging growth company" as defined in the Jumpstart Our Business Startups Act (the "JOBS Act"). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.
Functional and presentation currency
The unaudited condensed consolidated financial statements and the accompanying notes are expressed in U.S. dollars. Financial metrics are presented in thousands. Other metrics, such as shares outstanding, are presented in thousands unless otherwise noted.
Basis of consolidation
The Company's unaudited condensed consolidated financial statements include the accounts of Acreage, its subsidiaries and variable interest entities ("VIEs") where the Company is considered the primary beneficiary, if any, after elimination of intercompany accounts and transactions. Investments in business entities in which Acreage lacks control but is able to exercise significant influence over operating and financial policies are accounted for using the equity method. The Company's proportionate share of net income or loss of the entity is recorded in Income (loss) from investments, netin the Unaudited Condensed Consolidated Statements of Operations.
VIEs
In determining whether the Company is the primary beneficiary of a VIE, the Company assesses whether it has the power to direct matters that most significantly impact the activities of the VIE and have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. There were no material consolidated VIEs as of September 30, 2024 or December 31, 2023.
Non-controlling interests ("NCI")
Non-controlling interests represent ownership interests in consolidated subsidiaries by parties that are not shareholders of Pubco. They are shown as a component of Total deficitin the Unaudited Condensed Consolidated Statements of Financial Position, and the share of loss attributable to non-controlling interests is shown as a component of Net lossin the Unaudited Condensed Consolidated Statements of Operations. Changes in the parent company's ownership that do not result in a loss of control are accounted for as equity transactions.
Cash and cash equivalents
The Company defines cash equivalents as highly liquid investments held for the purpose of meeting short-term cash commitments that are readily convertible into known amounts of cash, with original maturities of three months or less. The Company maintains cash with various U.S. banks and credit unions with balances in excess of the Federal Deposit Insurance
F-10
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
Corporation and National Credit Union Share Insurance Fund limits, respectively. The failure of a bank or credit union where the Company has significant deposits could result in a loss of a portion of such cash balances in excess of the insured limit, which could materially and adversely affect the Company's business, financial condition, results of operations and the market price of the Company's Fixed Shares and Floating Shares.
Restricted cash
Restricted cash represents funds contractually held for specific purposes and, as such, not available for general corporate purposes. Cash and cash equivalents and restricted cash, as presented on the Unaudited Condensed Consolidated Statements of Cash Flows, consists of $13,780 and $65 as of September 30, 2024, respectively, and $13,631 and $3,984 as of December 31, 2023, respectively.
Accounts receivable and notes receivable valuations
The Company reports accounts receivable at their net realizable value, which is management's best estimate of the cash that will ultimately be received from customers. The Company's notes receivable represent notes due from various third parties. The Company maintains an allowance for expected credit losses to reflect the expected uncollectability of accounts receivable and notes receivable based on historical collection data and specific risks identified among uncollected accounts, as well as management's expectation of future economic conditions. The Company also considers relevant qualitative and quantitative factors to assess whether historical loss experience should be adjusted to better reflect the risk characteristics of the companies receivables and the expected future losses. If current or expected future economic trends, events, or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. Trade accounts receivable and notes receivable are written off after exhaustive collection efforts occur and the receivable is deemed uncollectible. As of September 30, 2024 and December 31, 2023, the Company's allowance for doubtful accounts was $755 and $479, respectively, all of which relates to the allowance for credit losses over accounts receivable. As of September 30, 2024 and December 31, 2023, the allowance on loans receivable was $9,204 and $8,479, respectively, of which the allowance for credit losses over notes receivable was nil as the receivables were fully reserved for. Refer to Note 6 for further discussion.
Fair value of financial instruments
The Company accounts for assets and liabilities measured at fair value on a recurring basis in accordance with Accounting Standards Codification ("ASC") 820 - Fair Value Measurements. ASC 820 utilizes a fair value hierarchy that reflects the significance of the inputs used to make the measurements. The hierarchy is summarized as follows:
•Level 1 - quoted prices in active markets for identical assets or liabilities
•Level 2 - inputs that are observable for the asset or liability, either directly (quoted prices) for similar assets or liabilities in active markets or indirectly (derived from prices) for identical assets or liabilities in markets with insufficient volume or infrequent transactions
•Level 3 - inputs for assets or liabilities that are not based upon observable market data
The Company records Accounts receivable, net, and Accounts payable and accrued liabilitiesat cost. The carrying values of these instruments approximate their fair value due to their short-term maturities. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest or credit risks arising from these financial instruments.
Net loss per share
Net loss per share represents the net loss attributable to shareholders divided by the weighted average number of shares outstanding during the period on an as converted basis. Basic and diluted loss per share are the same for the three and nine months ended September 30, 2024 and 2023, as the issuance of shares upon conversion, exercise or vesting of outstanding units would be anti-dilutive in each period. There were 38,686 and 51,006 anti-dilutive shares outstanding during the three and nine months ended September 30, 2024 and 2023, respectively.
Change in Accounting Estimate
During the first quarter of 2024, the Company implemented a change in accounting estimate for the costing of inventory cultivated, extracted or processed, and manufactured or infused by the Company from historical average cost to three-month rolling average cost to better align with evolving market dynamics, improve the accuracy of inventory valuation, and enhance
F-11
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
financial reporting transparency. The Company accounted for this change as a change in accounting estimate and, accordingly, applied it on a prospective basis. This change resulted in a $13,828 charge to Cost of goods sold, wholesaleon the Company's Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2024.
Accounting Pronouncements Recently Adopted
In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08 - Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new standard improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency. The new standard requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606 - Revenue from Contracts with Customers. The ASU took effect for the Company's first interim period of fiscal 2024. The standard has been applied prospectively to business combinations occurring on or after the effective date of the amendments. The adoption of ASU 2021-08 did not have a material effect on the Company's unaudited condensed consolidated financial statements.
Accounting Pronouncements Not Yet Adopted
In November 2023, the FASB issued ASU 2023-07, Improvements to Reportable Segment Disclosures (Topic 280). This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker ("CODM") and included within each reported measure of a segment's profit or loss. This ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment's profit or loss in assessing segment performance and deciding how to allocate resources. The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is also permitted. This ASU will result in additional required disclosures when adopted, where applicable.
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (Topic 740). The ASU requires disaggregated information about a reporting entity's effective tax rate reconciliation as well as additional information on income taxes paid. The ASU is effective on a prospective basis for annual periods beginning after December 15, 2025. Early adoption is also permitted for annual financial statements that have not yet been issued or made available for issuance. Once adopted, this ASU will result in additional disclosures.
3. ACQUISITIONS, DIVESTITURES AND ASSETS HELD FOR SALE
Acquisitions
During the three and nine months ended September 30, 2024, the Company did not complete any acquisitions.
On January 2, 2023, a subsidiary of the Company acquired cultivation, processing and retail operations in Maine from a third party who provided cultivation, manufacturing, processing, distribution and handling, recordkeeping, compliance, and other services to the Company's operations in Maine. Under the terms of the agreement, the consideration paid consisted of the settlement of a pre-existing relationship, which included a line-of credit, other advances and the related interest receivable, all totaling $27,691, which were previously recorded in Notes receivable, neton the Statements of Financial Position.
The purchase price allocation is based upon final valuations, estimates and assumptions which are subject to change within the measurement period, generally one year from the acquisition date. The primary areas of the purchase price allocation that are not yet finalized relate to the valuation of the capital assets, tangible assets acquired and the residual goodwill resulting from the transaction.
F-12
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
| Purchase Price Allocation | Northeast Patients Group | |
| Assets acquired: | ||
| Cash and cash equivalents | $ | 361 |
| Accounts receivable | 25 | |
| Inventory | 384 | |
| Other current assets | 174 | |
| Capital assets | 7,297 | |
| Finance lease right-of-use asset | 320 | |
| Operating lease right-of-use asset | 1,279 | |
| Goodwill | 22,506 | |
| Liabilities assumed: | ||
| Accounts payable and accrued liabilities | (513) | |
| Taxes payable | (1,112) | |
| Finance lease liability, current | (87) | |
| Finance lease liability, non-current | (459) | |
| Operating lease liability, current | (73) | |
| Operating lease liability, non-current | (1,385) | |
| Notes payable | (11) | |
| Deferred tax liability | (1,015) | |
| Fair value of net assets acquired | $ | 27,691 |
| Consideration paid: | ||
| Settlement of pre-existing relationship | 27,691 | |
| Total consideration | $ | 27,691 |
Divestitures
During the three and nine months ended September 30, 2024, the Company did not complete any divestitures. During the three and nine months ended September 30, 2023, management committed to a plan to sell CWG Botanicals, Inc. ("CWG") as of June 30, 2023. As of then, all assets and liabilities were classified as held for sale on the balance sheet and written down to the fair value of the expected sale price. On September 12, 2023, the Company sold 100% of its ownership interest in CWG for an aggregate sales price of $500 and recognizing a gain of $47 on the Unaudited Condensed Consolidated Statements of Operations in Other income, net.
Assets Held for Sale
In the second quarter of 2024, the Company determined that the assets and liabilities categorized as held-for-sale related to the Company's Ohio operations no longer meet the held-for-sale criteria as the Company intends to retain and continue its Ohio operations. As of December 31, 2023, the Company determined certain businesses and assets in Ohio met the held-for-sale criteria. As such, the related assets and liabilities within these disposal groups were transferred into Assets held-for-saleand Liabilities related to assets held-for-saleon the Unaudited Condensed Consolidated Statements of Financial Position.
As of September 30, 2024, the Company determined certain businesses and assets in Connecticut and Maine met the held-for-sale criteria. As such, the related assets and liabilities within these disposal groups were transferred into Assets held-for-saleand Liabilities related to assets held-for-saleon the Unaudited Condensed Consolidated Statements of Financial Position.
The tables below presents the assets and liabilities classified as held for sale on the Unaudited Condensed Consolidated Statements of Financial Position for the periods ended September 30, 2024 and December 31, 2023, respectively.
F-13
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
| September 30, 2024 | ||||||
| Prime Wellness, D&B and Thames Valley, Connecticut | NPG Retail, Maine | Total | ||||
| Cash and cash equivalents | $ | 174 | $ | 75 | $ | 249 |
| Inventory | 611 | 352 | 963 | |||
| Other current assets | 93 | 93 | 186 | |||
| Total current assets classified as held-for-sale | 878 | 520 | 1,398 | |||
| Capital assets, net | 2,500 | 564 | 3,064 | |||
| Operating lease right-of-use assets | 2,056 | 856 | 2,912 | |||
| Intangible assets, net | 7,713 | - | 7,713 | |||
| Other non-current assets | 133 | 35 | 168 | |||
|
Total assets classified as held-for-sale
|
$ | 13,280 | $ | 1,975 | $ | 15,255 |
| Accounts payable and accrued liabilities | $ | (6,522) | $ | (576) | $ | (7,098) |
| Taxes payable | (424) | (81) | (505) | |||
| Operating lease liability, current | (442) | (223) | (665) | |||
| Total current liabilities classified as held-for-sale | (7,388) | (880) | (8,268) | |||
| Debt, non-current | (799) | - | (799) | |||
| Operating lease liability, non-current | (1,402) | (786) | (2,188) | |||
| Deferred tax liabilities | (538) | - | (538) | |||
| Liability on uncertain tax position | (3,979) | - | (3,979) | |||
| Total liabilities classified as held-for-sale | $ | (14,106) | $ | (1,666) | $ | (15,772) |
| December 31, 2023 | ||
|
Akron and Wickliffe, Ohio
|
||
| Inventory | 302 | |
| Other current assets | 147 | |
| Total current assets classified as held-for-sale | 449 | |
| Capital assets, net | 1,064 | |
| Intangible assets, net | 4,080 | |
| Goodwill | 415 | |
| Other non-current assets | 20 | |
|
Total assets classified as held-for-sale
|
$ | 6,028 |
| Accounts payable and accrued liabilities | $ | (1,730) |
| Operating lease liability, current | (99) | |
| Total current liabilities classified as held-for-sale | (1,829) | |
| Operating lease liability, non-current | (424) | |
| Total liabilities classified as held-for-sale | $ | (2,253) |
F-14
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
4. INTANGIBLE ASSETS AND GOODWILL
Intangible assets
The following table details the intangible asset balances by major asset classes:
| Intangibles | September 30, 2024 | December 31, 2023 | ||
| Indefinite-lived intangible assets | ||||
| Cannabis licenses | 27,910 | 31,044 | ||
| Total intangibles, net | $ | 27,910 | $ | 31,044 |
The intangible assets balance as of September 30, 2024 and December 31, 2023 excludes intangible assets reclassified to assets held-for-sale (refer to Note 3 for further discussion).
There was no amortization expense recorded for the three and nine months ended September 30, 2024 and 2023, respectively.
Goodwill
The following table details the changes in the carrying amount of goodwill:
| Goodwill | Total | |
| December 31, 2023 | $ | 13,346 |
| Transferred from held-for-sale | 415 | |
| September 30, 2024 | $ | 13,761 |
5. INVESTMENTS
The carrying values of the Company's investments in the Unaudited Condensed Consolidated Statements of Financial Position as of September 30, 2024 and December 31, 2023 are as follows:
| Investments | September 30, 2024 | December 31, 2023 | ||
| Investments held at FV-NI | $ | 33,170 | $ | 33,170 |
| Total long-term investments | $ | 33,170 | $ | 33,170 |
Income from investments, net in the Unaudited Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2024 and 2023 is as follows:
| Investment income | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Investments held at FV-NI | - | 248 | - | 228 | ||||
| Income from investments, net | $ | - | $ | 248 | $ | - | $ | 228 |
F-15
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
Investments held at FV-NI
The Company has an equity investment in the Red White and Bloom company that does not result in significant influence or control. These investments are carried at fair value, with gains and losses recognized in the Unaudited Condensed Consolidated Statements of Operations.
As further described under the "6.10% Secured debenture due September 2030" in Note 10, on September 23, 2020, a subsidiary of the Company, Universal Hemp, LLC ("Universal Hemp"), was advanced gross proceeds of $50,000 (less transaction costs) pursuant to the terms of a secured debenture. The Company subsequently engaged an investment advisor, which under the investment advisor's sole discretion, on September 28, 2020 invested $34,019 of these proceeds on behalf of Universal Hemp. As a result, Universal Hemp acquired 34,019 class B units, at $1 par value per unit, which represented 100% financial interest in an Investment Partnership, a Canada-based limited partnership. An affiliate of the institutional investor held Class A units of the Investment Partnership. The general partner of the Investment Partnership was also an affiliate of the Institutional Investor. During the fourth quarter of 2023, Kevin Murphy acquired all Class A units and became the general partner of the Investment Partnership. The Class B units are held by the Investment Advisor as an agent for Universal Hemp.
Universal Hemp, through its investment with the Investment Advisor, was originally determined to hold significant influence in the Investment Partnership in accordance with ASC 810 - Consolidations due to (1) the economic financial interest, and (2) the entitlement to matters as they pertain to 'Extraordinary Resolution' items as defined within the Investment Partnership Agreement. As a result, the Company accounted for the investment in the Investment Partnership under the equity method until December 2020. Refer to Note 10 for further discussion. In December 2020, the Company no longer held significant influence due to the removal of the Extraordinary Resolution entitlements and other revisions in the Investment Partnership Agreement. As a result, the Company changed its accounting for the Investment Partnership to recognize the investment at fair value, with gains and losses recognized in the Unaudited Condensed Consolidated Statements of Operations.
6. NOTES RECEIVABLE, NET
Notes receivable as of September 30, 2024 and December 31, 2023 consisted of the following:
| September 30, 2024 | December 31, 2023 | |||
| Promissory notes receivable | $ | 862 | $ | 862 |
| Line of credit receivable | 4,331 | 4,331 | ||
| Interest receivable | 4,011 | 3,286 | ||
| Allowance for notes and interest receivable | (9,204) | (8,479) | ||
| Total notes receivable | $ | - | $ | - |
| Less: Notes receivable, current | - | - | ||
| Notes receivable, non-current | $ | - | $ | - |
Interest income from loans receivable during the three and nine months ended September 30, 2024 was nil, respectively, and nil and $10 for the three and nine months ended September 30, 2023, respectively.
At each reporting date, the Company applies its judgment to evaluate the collectability of the note receivable and makes a provision based on the assessed amount of expected credit loss. This judgment is based on parameters such as interest rates, market conditions and creditworthiness of the creditor.
The Company determined that the collectability of certain notes receivables is doubtful based on information available. As of September 30, 2024 and December 31, 2023, the Company's allowance for notes receivable was $9,204 and $8,479, respectively, including $5,193 of principal outstanding and $4,011 and $3,286 of accrued interest, respectively, and represents the full value of such loan balances.
Activity during the nine months ended September 30, 2023
F-16
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
In January 2023, a subsidiary of the Company acquired cultivation, processing and retail operations in Maine from a third party who provided cultivation, manufacturing, processing, distribution and handling, recordkeeping, compliance, and other services to the Company's operations in Maine and the amounts outstanding under the promissory notes receivable were converted into equity in Northeast Patients Group. Refer to Note 3 for further discussion.
In April 2023, the Company's subsidiary Prime Alternative Treatment Center Consulting, LLC ("NH-PATCC") received $1,500 from Prime Alternative Treatment Center, Inc. ("PATC") in settlement of the principal balance related to a promissory note that was extended to "PATC".
In May 2023, the Company received a $500 cash payment towards the principal balance on a promissory note receivable from Grown Rogue.
The Company did not have any activity during the three and nine months ended September 30, 2024.
7. CAPITAL ASSETS, NET
Net property, plant and equipment consisted of:
| September 30, 2024 | December 31, 2023 | |||
| Land | $ | 9,390 | $ | 9,708 |
| Building | 57,987 | 58,524 | ||
| Right-of-use asset, finance leases | 5,077 | 6,183 | ||
| Furniture, fixtures and equipment | 40,632 | 39,943 | ||
| Leasehold improvements | 58,175 | 58,828 | ||
| Construction in progress | 1,342 | 4,069 | ||
| Software | 2,513 | 2,513 | ||
| Capital assets, gross | $ | 175,116 | $ | 179,768 |
| Less: accumulated depreciation and amortization | (46,355) | (38,036) | ||
| Capital assets, net | $ | 128,761 | $ | 141,732 |
Depreciation of capital assets for the three and nine months ended September 30, 2024 is comprised of $853 and $2,642 of depreciation and amortization expense, respectively, and $2,626 and $8,033 that was capitalized to inventory, respectively. Depreciation of capital assets for the three and nine months ended September 30, 2023 is comprised of $928 and $2,919 of depreciation and amortization expense, respectively, and $2,116 and $6,493 that was capitalized to inventory, respectively.
In September 2024, management made the decision to abandon construction activities for the Prime Wellness of Pennsylvania expansion project. As a result, the associated Construction in Progress (CIP) assets were disposed of. In accordance with ASC 360, we recognized a loss of $2,072 on the disposal of these assets as of September 30, 2024.
F-17
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
8. LEASES
The Company leases land, buildings, equipment and other capital assets which it plans to use for corporate purposes in addition to the production and sale of cannabis products. Leases with an initial term of 12 months or less are not recorded on the Unaudited Condensed Consolidated Statements of Financial Position and are expensed in the Unaudited Condensed Consolidated Statements of Operations on the straight-line basis over the lease term. The Company does not have any material variable lease payments and accounts for non-lease components separately from leases.
| Statement of Financial Position Information | Classification | September 30, 2024 | December 31, 2023 | ||
| Right-of-use assets | |||||
| Operating | Operating lease right-of-use assets | $ | 13,516 | $ | 17,531 |
| Finance | Capital assets, net | 5,077 | 6,183 | ||
| Total right-of-use assets | $ | 18,593 | $ | 23,714 | |
| Lease liabilities | |||||
| Current | |||||
| Operating | Operating lease liability, current | $ | 1,959 | $ | 2,457 |
| Financing | Debt, current | 4 | 116 | ||
| Non-current | |||||
| Operating | Operating lease liability, non-current | 14,138 | 17,293 | ||
| Financing | Debt, non-current | 5,375 | 5,827 | ||
| Total lease liabilities | $ | 21,476 | $ | 25,693 |
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||
| Statement of Operations Information | Classification | 2024 | 2023 | 2024 | 2023 | ||||
| Short-term lease expense | General and administrative | $ | 252 | $ | 102 | $ | 478 | $ | 311 |
| Operating lease expense | General and administrative | 1,313 | 1,238 | 3,657 | 3,853 | ||||
| Finance lease expense: | |||||||||
| Amortization of right of use asset | Depreciation and amortization | 35 | 93 | 190 | 278 | ||||
| Interest expense on lease liabilities | Interest expense | 162 | 213 | 518 | 633 | ||||
| Net operating and finance lease cost | $ | 1,510 | $ | 1,544 | $ | 4,365 | $ | 4,764 |
| Nine Months Ended September 30, | |||||
| Statement of Cash Flows Information | Classification | 2024 | 2023 | ||
| Cash paid for operating leases | Net cash used in operating activities | $ | 3,369 | $ | 3,871 |
| Cash paid for finance leases - interest | Net cash used in operating activities | $ | 555 | $ | 718 |
F-18
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
The following represents the Company's future minimum payments required under existing leases with initial terms of one year or more as of September 30, 2024:
| Maturity of lease liabilities | Operating Leases | Finance Leases | ||
| 2024 | $ | 905 | $ | 189 |
| 2025 | 3,153 | 766 | ||
| 2026 | 3,017 | 789 | ||
| 2027 | 3,056 | 812 | ||
| 2028 | 2,553 | 837 | ||
| Thereafter | 12,787 | 10,839 | ||
| Total lease payments | $ | 25,471 | $ | 14,232 |
| Less: interest | 9,374 | 8,853 | ||
| Present value of lease liabilities | $ | 16,097 | $ | 5,379 |
| Weighted average remaining lease term (years) | 8 | 10 | ||
| Weighted average discount rate | 11% | 12% |
As of September 30, 2024, there have been no leases entered into that have not yet commenced.
9. INVENTORY
The Company's inventory balance consists of the following:
| September 30, 2024 | December 31, 2023 | |||
| Retail inventory | $ | 2,436 | $ | 2,918 |
| Wholesale inventory | 22,839 | 36,139 | ||
| Cultivation inventory | 5,232 | 5,826 | ||
| Supplies & other | 2,402 | 2,792 | ||
| Total | $ | 32,909 | $ | 47,675 |
Inventory is valued at the lower of cost and net realizable value ("NRV"), defined as estimated selling price in the ordinary course of business, less estimated costs of disposal. During the nine months ended September 30, 2024, the Company analyzed its inventory balances, and recorded wholesale inventory adjustments as a result of (i) having excess or obsolete inventory and (ii) reducing the carrying value to ensure inventory balances are properly recorded at the lower of cost and NRV. The Company recognized $1,884 and $5,581 of wholesale inventory adjustments within Cost of goods sold, wholesale on the Statements of Operations during the three and nine months ended September 30, 2024, respectively, and $2,103 and $8,824 during the three and nine months ended September 30, 2023, respectively.
During the first quarter of 2024, the Company implemented a change in accounting estimate for the costing of inventory cultivated, extracted or processed, and manufactured or infused by the Company from historical average cost to three-month rolling average cost to better align with evolving market dynamics, improve the accuracy of inventory valuation, and enhance financial reporting transparency. The Company accounted for this change as a change in accounting estimate and, accordingly, applied it on a prospective basis. This change resulted in a $13,828 charge to Cost of goods sold, wholesaleon the Company's Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2024.
F-19
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
10. DEBT
The Company's debt balances consist of the following:
| Debt balances | September 30, 2024 | December 31, 2023 | ||
| Financing liability (failed sale-leaseback) | $ | 14,454 | $ | 15,253 |
| Finance lease liabilities | 5,379 | 5,943 | ||
|
7.50% Loan due April 2026
|
34,691 | 32,438 | ||
|
6.10% Secured debenture due September 2030
|
47,293 | 46,955 | ||
| Note due December 2024 | 792 | 2,375 | ||
|
13.50% credit facilities due September 2027, as amended
|
158,719 | 132,337 | ||
| Convertible notes | 11,693 | - | ||
|
Note backed by ERTC
|
1,641 | 1,641 | ||
| Total debt | $ | 274,662 | $ | 236,942 |
| Less: current portion of debt | 2,437 | 4,132 | ||
| Total long-term debt | $ | 272,225 | $ | 232,810 |
Scheduled maturities of debt, excluding amortization of discount and issuance costs, are as follows:
| 2024 | $ | 2,437 |
| 2025 | - | |
| 2026 | - | |
| 2027 | 35,493 | |
| 2028 | 167,431 | |
| Thereafter | 69,778 | |
|
Total payments (excluding amortization of discount and issuance costs)(1)
|
$ | 275,139 |
(1)Excludes future liabilities related to Convertible notes as this instrument is not expected to be settled in cash.
During the three and nine months ended September 30, 2024, the Company incurred interest expense of $8,128 and $25,423, respectively, $9,207 and $26,143 during the three and nine months ended September 30, 2023, respectively, on the Unaudited Condensed Consolidated Statements of Operations. Interest expense for the three and nine months ended September 30, 2024 included debt discount amortization of $238 and $1,195, respectively, and amortization of debt issuance costs of $152 and $1,296, respectively. Interest expense for the three and nine months ended September 30, 2023 included debt discount amortization of $525 and $1,015, respectively, and amortization of debt issuance costs of $698 and $1,388, respectively. As of September 30, 2024 and December 31, 2023, the Company had unamortized discount $7,184 and $4,484, respectively, and debt issuance costs of $4,986 and $7,410, respectively, which is netted against the gross carrying value of long-term debt in Debt, non-currenton Unaudited Condensed Consolidated Statements of Financial Position. Additionally, as of September 30, 2024 and December 31, 2023, the Company had accrued interest of $5,451 and $5,539, respectively, within Interest payableon the Unaudited Condensed Consolidated Statements of Financial Position.
Financing liability (failed sales leaseback)
In connection with the Company's failed sale-leaseback transaction in November 2020, a financing liability was recognized equal to the cash proceeds received. The Company will recognize the cash payments made on the lease as interest expense, and the principal will be de-recognized upon expiration of the lease.
6.10% Secured debenture due September 2030
On September 23, 2020, pursuant to the implementation of the Amended Arrangement (refer to Note 15 for further discussion), a subsidiary of Canopy Growth advanced gross proceeds of $50,000 (less transaction costs of approximately $4,025) to Universal Hemp, an affiliate of the Company, pursuant to the terms of a secured debenture ("6.1% Loan"). In accordance with the terms of the debenture, the funds cannot be used, directly or indirectly, in connection with or for any cannabis or cannabis-related operations in the United States, unless and until such operations comply with all applicable laws of the United States. An additional $50,000 may be advanced pursuant to the debenture subject to the satisfaction of certain conditions by Universal
F-20
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
Hemp. The debenture bears interest at a rate of 6.1% per annum, matures 10 years from the date hereof or such earlier date in accordance with the terms of the debenture and all interest payments made pursuant to the debenture are payable in cash by Universal Hemp. Subsequent to the quarter end September 30, 2023, Universal Hemp received a reservations of rights letter for failure to make the annual cash interest payment within 10 business days of September 23, 2023 (October 10, 2023). The parties agreed on November 14, 2023 to waive the default until March 29, 2024 and that the cash interest payment would be satisfied through a partial cash payment of $1,400 by year end 2023, an obligation of Universal Hemp to deliver proceeds from the sale of certain real property held by Universal Hemp and an agreement between the parties to offset potential future expenses that may be payable by Canopy Growth. The debenture is secured by substantially all of the assets of Universal Hemp and its subsidiaries and, further, is not convertible and is not guaranteed by Acreage.
With a portion of the proceeds for the 6.1% Loan received by Universal Hemp, Acreage engaged an Investment Advisor which, under the Investment Advisor's sole discretion, invested on behalf of Universal Hemp $34,019 on September 28, 2020. As a result, Universal Hemp acquired 34,019 class B units, at $1.00 par value per unit, which represented 100% financial interest in the Investment Partnership, a Canada-based limited partnership. An affiliate of the Institutional Investor holds class A units of the Investment Partnership. The general partner of the Investment Partnership is also an affiliate of the Institutional Investor. During the fourth quarter of 2023, Kevin Murphy acquired all Class A units and became the general partner of the Investment Partnership. The class B units are held by the Investment Advisor as an agent for Universal Hemp. Upon execution of the limited partnership agreement, $1,019 was distributed to the class A unit holders of the Investment Partnership.
7.50% Loan due April 2026
On September 28, 2020, the Company received gross proceeds of $33,000 (less transaction costs of approximately $959) from an affiliate of the Institutional Investor (the "Lender") and used a portion of the proceeds of this loan to retire its short-term $11,000 convertible note (as described above) and its short-term note aggregating approximately $18,000 in October 2020, with the remainder being used for working capital purposes. The loan is unsecured, matures in 3 years and bears interest at a 7.5% annual interest rate. The Lender is controlled by the Institutional Investor. The Investment Partnership is the investor in the Lender. On December 16, 2021, the Company paid an amendment fee of $413 to extend the maturity date from September 28, 2023 to April 2, 2026. The amendment was treated as a debt extinguishment.
Note due December 2024
In November 2020, the Company issued a promissory note with a third party, which is non-interest bearing and payable based on a payment schedule with ten payments in the aggregate amount of $7,750 through December 31, 2024, as a result of a settlement described under the "CanWell Dispute" in Note 15.
13.5% credit facilities due September 2027, as amended
On December 16, 2021, the Company entered into a $150,000 senior secured credit facility with a syndicate of lenders consisting of a $75,000 initial draw, a $25,000 delayed draw that must be advanced within 12 months and a $50,000 committed accordion facility that is available after December 1, 2022, provided certain financial covenants are met, and with a maturity of January 1, 2026. Upon closing, gross proceeds of $75,000 were drawn (before origination discounts and issuance costs of approximately $4,000 and $1,500, respectively, which were capitalized). In April 2022, the Company drew down on the $25,000 delayed draw. Refer to Note 16 for further discussion of the syndicated related party lender.
On October 24, 2022, the Company amended the senior secured credit facility such that $25,000 of the committed accordion was available for immediate draw by Acreage, which was drawn down in the fourth quarter of 2022, with the remaining $25,000 available from January 1, 2023, provided certain predetermined milestones are achieved. The Company paid an amendment fee of $1,250 to the syndicate of lenders and the amendment was treated as a debt modification.
On April 28, 2023, the Company reached an agreement with the lenders of the Prime rate credit facilities due January 2026 that would allow it to draw a further $15,000 under its current Credit Agreement, but such funds would be maintained in a segregated account until dispersed and be restricted for use to only eligible capital expenditures. As part of this agreement, the Company agreed to limit the total amounts outstanding under the Credit Agreement to $140,000 and to at all times subsequent to the amendment, maintain collateral (as defined in the Credit Agreement) equal to or greater than the outstanding amount under the Credit Agreement.
The loan is secured by pledged equity interests and substantially all of the assets of the Company. Advances under the facility bear interest at a variable rate of U.S. prime ("Prime") plus 5.75% per annum, payable monthly in arrears, with a Prime floor of 5.50% plus an additional 1.0% per annum until certain collateral assignment agreements are delivered.
F-21
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
The facility has a maturity date of January 1, 2026 and the Company had the option to extend the maturity date to January 1, 2027 prior to January 1, 2024, for a fee equal to 1.0% of the total loan amount. If the Company chooses to extend the maturity date, it will also be required to make monthly installment payments, each of which shall be an amount equal to five percent per year of the outstanding amount of the loan. The Company did not exercise the option to extend the maturity date.
On April 20, 2024 and May 10, 2024, the Company received a notice of default letter on each date from the agents of the Prime rate credit facilities due January 2026, as amended, of the occurrence of certain events of default (the "Default Letters"). The Default Letter dated April 20, 2024 contains allegations that there have been three events of default with respect to the credit agreement and the agents and lenders reserved all rights, and that they were in the process of reviewing the appropriate course of action to be taken with respect to the identified events of default. On May 10, 2024, the Company received another default letter from the agents alleging an event of default for failure by the borrower to make a monthly interest payment due May 1, 2024. The Default Letters did not identify that there had been any exercise of rights or remedies available to the agents or lenders under Section 9.1 of the credit agreement. As described below, the Company remedied the notices of default by entering into the amended and restated credit agreement. Subsequently, as described below, the Company entered into the second amended and restated credit agreement, superseding the amended and restated credit agreement and establishing an interest rate of 13.5% and a maturity date of September 13, 2027 for the Prime rate credit facilities previously due January 2026.
Amended and Restated Credit Agreement
On June 3, 2024, the Company, HSCP, as borrower, 11065220 Canada Inc., a wholly-owned subsidiary of Canopy Growth, VRT Agent and the loan parties thereto from time to time, entered into an amended and restated credit agreement (the "Amended and Restated Credit Agreement"). 11065220 Canada Inc. purchased all of the rights and interests of certain of our senior lenders under the Prime rate credit facilities due January 2026, as amended, for an aggregate amount equal to approximately $99,800. Further, this amendment allowed the Company to capitalize accrued obligations that existed before the amendment on June 3, 2024, including accrued interest, which brought the principal outstanding under this Facility to $143,287. The interest rate under the loan was a variable rate of U.S. prime ("Prime") plus 5.75% per annum, payable monthly in arrears, with a Prime floor of 5.50%, and a maturity date of January 1, 2026. Interest under the Amended and Restated Credit Agreement was payable in cash or in kind, at the Company's election, through November 30, 2024. The loan was secured by pledged equity interests and substantially all of the assets of the Company. Further, the loan is subject to various financial covenants, including (i) a fixed charge coverage ratio and two leverage ratios in respect of all periods beginning on or after December 31, 2024 and (ii) a minimum cash requirement of $3.0 million as of quarter end for all periods beginning on or after December 31, 2024. As discussed further below, the Amended and Restated Credit Agreement was replaced with the Second Amended and Restated Credit Agreement (defined below) on September 13, 2024. The amendment was treated as a debt extinguishment and the Company recognized a loss of $6,322 to Other income (loss), neton the Unaudited Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2024.
Second Amended and Restated Credit Agreement
On September 13, 2024, the Company entered into a second amended and restated credit agreement with a third party lender (the "New Lender") and 11065220 Canada Inc. (the "Canopy Lender") (the "Second Amended and Restated Credit Agreement"). This agreement supersedes the Amended and Restated Credit Agreement.
The New Lender advanced $65,000 with an original issue discount of 10%, being $6,500. Approximately $48,000 of the amount advanced by the New Lender was used to repay amounts owing by Acreage pursuant to the Amended and Restated Credit Agreement to the non-Canopy lender (the "Prior Lender"). As a result, the Prior Lender has been repaid in full. The net proceeds of the loan to Acreage totaled approximately $8,000 after closing costs and expenses.
Under the Second Amended and Restated Credit Agreement, the loans bear interest at a rate of 13.5% and a maturity date of September 13, 2027, with the interest in favor of the New Lender payable in cash and interest in favor of 11065220 Canada Inc. payable in cash or in kind at Acreage's option and will initially be payable in kind.
The Second Amended and Restated Credit Agreement also provides the New Lender with a board observer right.
ERTC Factoring Agreement
On April 11, 2023, the Company received $12,113 pursuant to a financing agreement with a third-party lender (the "Financing Agreement"), which was included in "Debt, current" as of June 30, 2023. The Company assigned to the lender its interests in Employee Retention Tax Credits ("ERTC") that it submitted for a claim of approximately $14,251. If the Company does not
F-22
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
receive the ERTC, in whole or in part, the Company is required to repay the related portion of the funds received plus 10% interest accrued from the date of the Financing Agreement through the repayment date. The Financing Agreement does not have a stated maturity date and the discount is being accreted to interest expense over an expected term. The Company's obligations under the Financing Agreement will be satisfied upon receipt of the ERTC or other full repayment. Finally, the Company determined the ERTC did not meet the criteria to record as a receivable as of June 30, 2023 due to the uncertain nature of such claims.
During the year ended December 31, 2023, the Company received $10,472 of the ERTC claims which was remitted to the lender per the terms of the Financing Agreement, extinguishing an equal portion of the debt included in "Debt, current."
Private Placement
On June 5, 2024, the Company entered into a Subscription Agreement with ATB Securities (the "Agent") and certain investors ("Holder" or "Investor"). Under the agreement, the Company issued 12,000 units (the "Units") by way of a brokered private placement (the "Private placement") at a price of $833.33 per Unit, for gross proceeds of $10,000. Each Unit consists of $1,000 principal amount of non-recourse unsecured convertible notes (the "Convertible Notes") and Fixed Share purchase warrants (the "Warrants" or "Warrant Liability"). Refer to Note 11 for further discussion regarding the Company's Warrant liability.
The initial fair values of the Convertible Notes and Warrant Liability of $18,380, in the aggregate, exceeded the gross proceeds received of $10,000 by $8,380. As a result, the excess fair value over the proceeds is accounted for as a deemed dividend and recorded in Accumulated deficit, refer to Private placement dividend on the Unaudited Condensed Consolidated Statements of Shareholders' Equity (Deficit).
The Convertible Notes are convertible into that number of Fixed Shares of the Company at a to-be-determined conversion price. The conversion price per Fixed Share is determined by multiplying (i) the exchange ratio (as defined by the Fixed Share Arrangement Agreement) by (ii) the fair market value of the common shares of Canopy on the business day prior to the closing of the transactions with Canopy USA, LLC. If the transactions occur on or before the maturity date, which is 15 months from the issue date of June 5, 2024, the Convertible Note will automatically convert into Fixed Shares at the conversion price. If the Transactions do not occur before the maturity date, holders of the Units entered into a Put Agreement with Canopy USA, pursuant to which such investor will have the right to require Canopy USA to purchase the subscribed for Convertible Notes and the Warrants subscribed for. The Company elected the fair value option to account for the liability related to the convertible notes. Refer to Note 12 for further discussion.
While the number of Fixed Shares issuable upon conversion or exercise, as applicable, of the Convertible Notes and the Warrants remains unknown at this time, the completion of the Offering is expected to result in significant dilution of the Fixed Shares, particularly given that the Conversion Price of the Notes is based on the Exchange Ratio, which will be adjusted pursuant to the Fixed Share Arrangement Agreement for issuances in excess of the Purchaser Approved Share Threshold (as such term is defined in the Fixed Share Arrangement Agreement). The Offering is expected to result in the issuance of Fixed Shares under the Convertible Notes, and Warrants exercisable to acquire Fixed Shares, at the time of closing the Fixed Share Arrangement, well in excess of the Purchaser Approved Share Threshold, with the effect that the Fixed Share Exchange Ratio will be significantly reduced. The Fixed Share Exchange Ratio reduction is expected to have a material and adverse effect on the number of Canopy shares that holders of Fixed Shares could receive pursuant to the Fixed Share Arrangement Agreement may have a material and adverse effect on the value of the Fixed Shares. See Note 15 for further discussion.
11. WARRANT LIABILITY
On June 4, 2024, the Company issued units by way of a private placement, with each unit consisting of convertible notes and fixed share purchase warrants. Refer to Note 10 for further discussion on the private placement and convertible notes.
The fixed share purchase warrants are each exercisable to acquire one Fixed Share at a set exercise price at any time on or before the expiration date of June 5, 2029. The exercise price is determined by multiplying i) the exchange ratio (as defined by the Fixed Share Arrangement Agreement) by ii) the fair market value of the Canopy shares on the business day prior to the close of the Transactions. In the event the Transactions do not occur prior to the expiration date of June 5, 2029, the Warrants will become void and the subscription rights will expire and terminate. Refer to Note 12 for further discussion. Further, liability accounting has been applied to the Warrants as the units issued are linked to Canopy's publicly traded share price. Finally, the number of Fixed Shares issuable upon conversion of the Warrants remains unknown at this time; however, the completion of the Private Placement is expected to result in significant dilution of the Fixed Shares.
F-23
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
12. FAIR VALUE
The following table summarize the Company's financial assets and liabilities recorded at fair value:
| September 30, 2024 | ||||||||||
| Level 1 | Level 2 | Level 3 | NAV | Total | ||||||
| Assets | ||||||||||
| Cash and cash equivalents | $ | 13,780 | $ | - | $ | - | $ | - | $ | 13,780 |
| Restricted cash | 65 | - | - | - | 65 | |||||
| Long-term investments | - | - | - | 33,170 | 33,170 | |||||
| Liabilities | ||||||||||
| Convertible notes | $ | - | $ | - | $ | 11,693 | $ | - | $ | 11,693 |
| Warrant liability | - | - | 7,133 | - | 7,133 |
| December 31, 2023 | ||||||||||
| Level 1 | Level 2 | Level 3 | NAV | Total | ||||||
| Assets | ||||||||||
| Cash and cash equivalents | $ | 13,631 | $ | - | $ | - | $ | - | $ | 13,631 |
| Restricted cash | 3,984 | - | - | - | 3,984 | |||||
| Long-term investments | - | - | - | 33,170 | 33,170 |
Convertible Notes and Warrant Liability related to the Private Placement
On June 4, 2024, the Company issued 12,000 units by way of a private placement, with each unit is comprised of convertible notes and warrants. Refer to Note 10 for further discussion. As part of the transaction, the Company recognized liabilities of $11,408 and $6,972 related to the Convertible notes and Warrant liability, respectively, that were classified as Debt, non-currenton the Unaudited Condensed Consolidated Statements of Financial Position.
The following tables summarize the valuation techniques and quantitative inputs and assumptions used for financial assets and liabilities categorized as Level 3 as of September 30, 2024 (unless otherwise noted):
| Financial Assets or Liability | Fair Value | Valuation Techniques | Unobservable Inputs | Value of Unobservable Inputs as of June 4, 2024 | Value of Unobservable Inputs as of September 30, 2024 | |||
| Convertible notes | $ | 11,693 | Probability-weighted expected return model | Probability of each scenario | 95.0 | % | 95.0 | % |
| Discount rate | 5.1 | % | 4.3 | % | ||||
| Credit-adjusted discount rate | 18.0 | % | 12.1 | % | ||||
| Warrant liability | 7,133 | Monte Carlo simulation model | Probability of each scenario | 95.0 | % | 95.0 | % | |
| Black-Scholes method | Discount rate | 4.3 | % | 3.6 | % | |||
| Canopy stock price at warrant exercise | $ | 7.81 | $ | 4.82 | ||||
| Canopy stock volatility | 109.5 | % | 111.5 | % |
F-24
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
The following are reconciliations for Level 3 liabilities measured at fair value for the three and nine months ended September 30, 2024:
| Three months ended September 30, 2024 | |||||||||||
| Beginning balance | Net purchases, issuances, sales and settlements | Change in fair value | Transfers in (out) | Ending Balance | |||||||
| Liabilities | |||||||||||
| Convertible notes | $ | 11,447 | $ | - | $ | 246 | (1) | $ | - | $ | 11,693 |
| Warrant liability | 7,020 | - | 113 | - | 7,133 |
| Nine months ended September 30, 2024 | |||||||||||
| Beginning balance | Net purchases, issuances, sales and settlements | Change in fair value | Transfers in (out) | Ending Balance | |||||||
| Liabilities | |||||||||||
| Convertible notes | $ | - | $ | 11,408 | $ | 285 | (2) | $ | - | $ | 11,693 |
| Warrant liability | - | 6,972 | 161 | - | 7,133 |
(1)Includes $30 of unrealized fair value changes related to the Company's credit risk. As this amount is immaterial, it has been included in earnings rather than other comprehensive income.
(2)Includes $37 of unrealized fair value changes related to the Company's credit risk. As this amount is immaterial, it has been included in earnings rather than other comprehensive income.
13. SHAREHOLDERS' EQUITY (DEFICIT) AND NON-CONTROLLING INTERESTS
The table below details the change in Pubco shares outstanding by class for the nine months ended September 30, 2024:
| Shareholders' Equity | Fixed Shares | Floating Shares | Fixed Shares Held in Treasury | Floating Shares Held in Treasury | Fixed Multiple Shares | Total Shares Outstanding |
| December 31, 2023 | 80,700 | 36,019 | (589) | (253) | 118 | 115,995 |
| Vesting | 246 | 4,945 | - | - | - | 5,191 |
| September 30, 2024 | 80,946 | 40,964 | (589) | (253) | 118 | 121,186 |
Warrants
A summary of the warrants activity outstanding is as follows:
| Warrants | Fixed Shares | Floating Shares |
| December 31, 2023 | 5,817 | 2,524 |
| Expired | - | - |
| September 30, 2024 | 5,817 | 2,524 |
The exercise price of each Fixed Share warrants ranged from $3.15 to $4.00, respectively, and the exercise price of each Floating Share warrants ranged from $3.01 to $4.00, respectively. The warrants are exercisable for a period of 4 years. The weighted-average remaining contractual life of the warrants outstanding is approximately 0.4 years. There was no aggregate intrinsic value for warrants outstanding as of September 30, 2024.
Non-controlling interests - convertible units
The Company has NCIs in consolidated subsidiaries USCo2 and HSCP. The non-voting shares of USCo2 and HSCP units make up substantially all of the NCI balance as of September 30, 2024 and are convertible for either 0.7 of a Fixed Share and
F-25
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
0.3 of a Floating Share of Pubco or cash, as determined by the Company. Summarized financial information of HSCP is presented below. USCo2 does not have discrete financial information separate from HSCP.
| HSCP net asset reconciliation | September 30, 2024 | December 31, 2023 | ||
| Current assets | $ | 74,681 | $ | 81,913 |
| Non-current assets | 214,616 | 233,666 | ||
| Current liabilities | (65,260) | (9,263) | ||
| Non-current liabilities | (353,995) | (255,272) | ||
| Other NCI balances | (726) | (727) | ||
| Accumulated equity-settled expenses | (245,997) | (244,058) | ||
| Net assets | $ | (376,681) | $ | (193,741) |
| HSCP/USCo2 ownership % of HSCP | 15.35 | % | 15.92 | % |
| Net assets allocated to USCo2/HSCP | $ | (57,828) | $ | (30,850) |
| Net assets attributable to other NCIs | 726 | 727 | ||
| Total NCI | $ | (57,102) | $ | (30,123) |
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| HSCP Summarized Statement of Operations | 2024 | 2023 | 2024 | 2023 | ||||
| Net loss allocable to HSCP/USCo2 | $ | (17,865) | $ | (1,521) | $ | (70,941) | $ | (23,924) |
| HSCP/USCo2 weighted average ownership % of HSCP | 15.29 | % | 15.37 | % | 15.76 | % | 16.23 | % |
| Net loss allocated to HSCP/USCo2 | $ | (2,732) | $ | (234) | $ | (11,177) | $ | (3,884) |
| Net loss allocated to other NCIs | - | - | - | (1) | ||||
| Net loss attributable to NCIs | $ | (2,732) | $ | (234) | $ | (11,177) | $ | (3,885) |
As of September 30, 2024, USCo2's non-voting shares owned approximately 0.20% of HSCP units. USCo2's capital structure is comprised of voting shares, all of which are held by the Company, and of non-voting shares held by certain former HSCP members. Certain executive employees and profits interests holders own approximately 15.55% of HSCP units. The remaining 84.25% interest in HSCP is held by USCo and represents the members' equity attributable to shareholders of the parent.
A reconciliation of the beginning and ending amounts of convertible units is as follows:
| Convertible Units | September 30, 2024 | December 31, 2023 |
| Beginning balance | 22,698 | 22,698 |
| NCI units converted to Pubco | (19) | - |
| Ending balance | 22,679 | 22,698 |
14. EQUITY-BASED COMPENSATION EXPENSE
Amended Arrangement with Canopy Growth
On September 23, 2020, the Company announced the implementation of the Amended Arrangement (as defined in Note 15). Pursuant to the Amended Arrangement, the Company's articles have been amended to create new Fixed Shares, Floating Shares and Fixed Multiple Shares. Consequently, the Company's equity-based compensation was modified into new equity awards of the Company. Refer to Note 15 for further discussion.
Equity-based compensation - Plan (Acreage Holdings, Inc. Omnibus Incentive Plan)
In connection with the RTO transaction, the Company's Board of Directors adopted an Omnibus Incentive Plan, as amended September 23, 2020 (the "Plan"), which permits the issuance of stock options, stock appreciation rights, stock awards, share units, performance shares, performance units and other stock-based awards up to an amount equal to 15% of the issued and outstanding Subordinate Voting Shares of the Company.
F-26
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
Pursuant to the Amended Arrangement, the Company retained the Plan described above, the upper limit of issuances being up to an amount equal to 15% of the issued and outstanding Fixed Shares and Floating Shares of the Company. As of September 30, 2024, the Company had 14,059 shares authorized and available for grant under the Plan.
Restricted Share Units ("RSUs")
| Fixed Shares | Floating Shares | |||||
|
Restricted Share Units
(Fair value information expressed in whole dollars)
|
RSUs | Weighted Average Grant Date Fair Value | RSUs | Weighted Average Grant Date Fair Value | ||
|
Unvested, January 1, 2024
|
5,866 | $ | 1.29 | 5,844 | $ | 0.60 |
| Granted | 160 | $ | 0.13 | 1,972 | $ | 0.31 |
| Forfeited | (4,370) | $ | 0.26 | (120) | $ | 0.21 |
| Vested | (670) | $ | 1.17 | (7,696) | $ | 0.24 |
|
Unvested, September 30, 2024
|
986 | $ | 0.86 | - | $ | 0.38 |
|
Vested and unreleased(1)
|
16 | $ | 18.34 | 5 | $ | 20.93 |
|
Outstanding, September 30, 2024
|
1,002 | $ | 1.14 | 5 | $ | 20.93 |
(1) RSUs that are vested and unreleased represent RSUs that are pending delivery.
RSUs of the Company generally vest over a period of three years and RSUs granted to certain executives vest based on achievement of specific performance conditions. In certain situations for specified individuals, RSUs vest on an accelerated basis on separation. The fair value for RSUs is based on the Company's share price on the date of the grant. The Company recorded $(300) and $1,678 as Equity-based compensation expenserelating to RSUs on the Unaudited Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2024, respectively, and $791 and $2,019 during the three and nine months ended September 30, 2023, respectively. The fair value of RSUs vested during the three and nine months ended September 30, 2024 was $1,876 and $2,482, respectively, and $890 and $1,489 during the three and nine months ended September 30, 2023, respectively.
The total weighted average remaining contractual life and aggregate intrinsic value of unvested RSUs as of September 30, 2024 was approximately 0.3 years and $185, respectively. Unrecognized compensation expense related to these awards at September 30, 2024 was $466 and is expected to be recognized over a weighted average period of approximately 0.5 years.
Stock options
| Fixed Shares | Floating Shares | |||||
|
Stock Options
(Exercise price expressed in whole dollars) |
Options | Weighted Average Exercise Price | Options | Weighted Average Exercise Price | ||
|
Options outstanding, January 1, 2024
|
4,543 | $ | 4.04 | 2,097 | $ | 3.10 |
| Granted | - | $ | - | - | $ | - |
| Forfeited | - | $ | - | - | $ | - |
| Expired | - | $ | - | - | $ | - |
|
Options outstanding, September 30, 2024
|
4,543 | $ | 4.04 | 2,097 | $ | 3.10 |
|
Options exercisable, September 30, 2024
|
3,500 | $ | 5.01 | 2,076 | $ | 3.10 |
Stock options of the Company generally vest over a period of three years and options granted to certain executives vest based on achievement of specific performance conditions. Stock options of the Company have an expiration period of 5 or 10 years from the date of grant. The weighted average contractual life remaining for Fixed Share options outstanding and exercisable as of September 30, 2024 was approximately 3 years, respectively. The weighted average contractual life remaining for Floating Share options outstanding and exercisable as of September 30, 2024 was approximately 2 years, respectively. The Company recorded $88 and $261 as Equity-based compensation expenseon Unaudited Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2024 and $(46) and $404 during the three and nine months ended September 30, 2023, respectively, in connection with these awards.
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| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
As of September 30, 2024, unamortized expense related to stock options totaled $392 and is expected to be recognized over a weighted-average period of approximately 0.4 years. As of September 30, 2024, the aggregate intrinsic value for unvested options and for vested and exercisable options was nil, respectively.
15. COMMITMENTS AND CONTINGENCIES
Commitments
The Company provides revolving lines of credit to certain of its portfolio companies. As of September 30, 2024, only one revolving line of credit remained outstanding and the maximum obligation under this arrangement was equal to the balance advanced of $4,331. Refer to Note 6 for further discussion.
Prior Plan of Arrangement with Canopy Growth
On June 19, 2019, the shareholders of the Company and of Canopy Growth separately approved the proposed plan of arrangement (the "Prior Plan of Arrangement") involving the two companies, and on June 21, 2019, the Supreme Court of British Columbia granted a final order approving the Prior Plan of Arrangement. Effective June 27, 2019, the articles of the Company were amended pursuant to the Prior Plan of Arrangement to provide that, upon the occurrence (or waiver by Canopy Growth) of the Triggering Event, subject to the satisfaction of the conditions set out in the arrangement agreement entered into between Acreage and Canopy Growth on April 18, 2019, as amended on May 15, 2019 (the "Original Arrangement Agreement"), Canopy Growth will acquire all of the issued and outstanding shares in the capital of the Company (each, an "Acreage Share").
Second Amendment to the Arrangement Agreement with Canopy Growth
On September 23, 2020, Acreage and Canopy Growth entered into an amending agreement (the "Amending Agreement" or "Amended Arrangement") (and together with the Original Arrangement Agreement and any further amendments thereto, the "Amended Plan of Arrangement") and the Amended Arrangement became effective at 12:01 a.m. (Vancouver time) (the "Amendment Time") on September 23, 2020 (the "Amendment Date"). Pursuant to the Amended Plan of Arrangement, Canopy Growth made a cash payment of $37,500 which was delivered to Acreage's shareholders and certain holders of securities convertible or exchangeable into shares of Acreage. Acreage also completed a capital reorganization (the "Capital Reorganization") effective as of the Amendment Time whereby: (i) each existing SVS was exchanged for 0.7 of a Fixed Share and 0.3 of a Floating Share; (ii) each issued and outstanding PVS was exchanged for 28 Fixed Shares and 12 Floating Shares; and (iii) each issued and outstanding MVS was exchanged for 0.7 of a Fixed Multiple Share and 0.3 of a Floating Share.
At the Amendment Time, each option, restricted share unit, compensation option, and warrant to acquire existing SVS (each a "Security") that was outstanding immediately prior to the Amendment Time, was exchanged for a replacement Security to acquire Fixed Shares (a "Fixed Share Replacement Security") and a replacement Security to acquire Floating Shares (a "Floating Share Replacement Security") to account for the Capital Reorganization.
Pursuant to the Amended Plan of Arrangement, on the Triggering Event Date, Canopy Growth will, subject to the satisfaction or waiver of certain closing conditions set out in the Arrangement Agreement: (i) acquire all of the issued and outstanding Fixed Shares (following the mandatory conversion of the Fixed Multiple Shares into Fixed Shares) in accordance with the Fixed Share Exchange Ratio, on the basis of 0.03048 (after giving effect to the Canopy Consolidation) of a Canopy Share for each Fixed Share held at the Acquisition Time, subject to adjustment in accordance with the terms of the Amended Plan of Arrangement (the "Canopy Call Option") including but not limited to the Canopy Consolidation effectuated by Canopy on December 15, 2023. The Canopy Call Option will expire 10 years from the Amendment Time.
At the Acquisition Time, on the terms and subject to the conditions of the Amended Plan of Arrangement, each Fixed Share Replacement Security will be exchanged for a replacement Security from Canopy Growth equal to: (i) the number of Fixed Shares that were issuable upon exercise of such Fixed Share Replacement Security immediately prior to the Acquisition Time, multiplied by (ii) the Fixed Share Exchange Ratio in effect immediately prior to the Acquisition Time (provided that if the foregoing would result in the issuance of a fraction of a Canopy Share, then the number of Canopy Shares to be issued will be rounded down to the nearest whole number).
The Amended Plan of Arrangement provides for, among other things, Amendments to the definition of Purchaser Approved Share Threshold (as defined therein) to change the number of shares of Acreage available to be issued by Acreage without an adjustment in the Fixed Share Exchange Ratio such that Acreage may issue a maximum of 32,700 shares. Furthermore, Acreage generally may not issue any equity securities without Canopy Growth's prior consent. Additionally, the Amended Plan
F-28
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
of Arrangement allows for various Canopy Growth rights that extend beyond the Acquisition Date, including, among others: (i) rights to nominate a majority of Acreage's Board of Directors following the Acquisition Time; (ii) restrictive covenants in respect of the business conduct in favor of Canopy Growth; (iii) termination of non-competition and exclusivity rights granted to Acreage by Canopy Growth in the event that Acreage does not meet certain specified financial targets; (iv) implementation of further restrictions on Acreage's ability to operate its business in the event that Acreage does not meet certain specified financial targets; and (v) termination of the Amended Plan of Arrangement in the event that Acreage does not meet certain specified financial targets in the trailing 12 month period. Each of the financial targets referred to above is specified in the Amending Agreement and related to the performance of Acreage relative to a business plan for Acreage for each fiscal year ended December 31, 2020 through December 31, 2029 set forth in the Proposal Agreement (the "Initial Business Plan").
Further, the Amended Plan of Arrangement imposes restrictions on Acreage entering into any contracts in respect of Company Debt if: (i) such contract would be materially inconsistent with market standards for companies operating in the United States cannabis industry; (ii) such contract prohibits a prepayment of the principal amount of such Company Debt; and (iii) such contract would provide for interest payments to be paid through the issuance of securities as opposed to cash, among other restrictions. The Amended Plan of Arrangement also provides for the following: (i) certain financial reporting obligations to Canopy Growth; (ii) certain specified criteria related to any new directors or officers of Acreage, and (iii) a limit to Acreage's operations to the Identified States (as defined therein).
Floating Share Arrangement Agreement with Canopy Growth
On October 24, 2022, the Company entered into an arrangement agreement (the "Floating Share Agreement") with Canopy Growth and Canopy USA, LLC ("Canopy USA"), Canopy Growth's newly-created U.S. domiciled holding company, pursuant to which, subject to approval of the holders of the Class D subordinate voting shares of Acreage (the "Floating Shares") and the terms and conditions of the Floating Share Agreement, Canopy USA will acquire all of the issued and outstanding Floating Shares in accordance with the Floating Share Arrangement for consideration of 0.04500 (after giving effect to the Canopy Consolidation, as further described below) of a Canopy Share in exchange for each Floating Share. At the Special Meeting, the holders of Floating Shares approved the Floating Share Arrangement. On December 15, 2023, Canopy Growth effected the Canopy Consolidation, which triggered an Exchange Ratio Adjustment Event which affected the Floating Share Agreement and the consideration agreed upon between Canopy USA and the Company.
Concurrently with entering the Floating Share Agreement, Canopy Growth irrevocably waived its option to acquire the Floating Shares pursuant to the Amended Arrangement.
Subject to the provisions of the Floating Share Agreement, Canopy Growth has agreed to exercise the fixed option pursuant to the Amended Agreement to acquire all outstanding Fixed Shares, representing approximately 70% of the total shares of Acreage as at the date hereof, at the Fixed Share Exchange Ratio of 0.03048 of a Canopy Share for each Fixed Share. On December 15, 2023, Canopy Growth effected the Canopy Consolidation, which triggered an Exchange Ratio Adjustment Event which affected our Amended Plan of Arrangement and modified the Fixed Share Exchange Ratio from 0.3048 of a Canopy Share for each Fixed Share to 0.03048 of a Canopy Share for each Fixed Share.
Effect of Private Placement on Exchange Ratio
As discussed in Note 10, on June 5, 2024, the Company entered into a Subscription Agreement with ATB Securities (the "Agent") and certain investors ("Holder" or "Investor"). Under the agreement, the Company issued 12,000 units (the "Units") by way of a brokered private placement (the "Private Placement") at a price of $833.33 per Unit, for gross proceeds of $10,000. Each Unit consists of $1,000 principal amount of non-recourse unsecured convertible notes (the "Convertible Notes") and Fixed Share purchase warrants (the "Warrants" or "Warrant Liability").
While the number of Fixed Shares issuable upon conversion or exercise, as applicable, of the Convertible Notes and the Warrants remains unknown at this time, the completion of the Offering is expected to result in significant dilution of the Fixed Shares, particularly given that the Conversion Price of the Notes is based on the Exchange Ratio, which will be adjusted pursuant to the Fixed Share Arrangement Agreement for issuances in excess of the Purchaser Approved Share Threshold (as such term is defined in the Fixed Share Arrangement Agreement). The Offering is expected to result in the issuance of Fixed Shares under the Convertible Notes, and Warrants exercisable to acquire Fixed Shares, at the time of closing the Fixed Share Arrangement, well in excess of the Purchaser Approved Share Threshold, with the effect that the Fixed Share Exchange Ratio will be significantly reduced. The Fixed Share Exchange Ratio reduction is expected to have a material and adverse effect on the number of Canopy shares that holders of Fixed Shares could receive pursuant to the Fixed Share Arrangement Agreement may have a material and adverse effect on the value of the Fixed Shares.
F-29
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
The following table below sets forth the potential Exchange Ratio based on a range of Canopy Share prices during the previous 52-week period after giving effect to the Offering:
| Canopy Share Price | Fixed Share Exchange Ratio |
| US$5.00 | ≈ 0.00000 |
| US$6.00 | 0.0019 |
| US$7.00 | 0.0066 |
| US$8.00 | 0.0101 |
| US$9.00 | 0.0128 |
| US$10.00 | 0.0149 |
| US$11.00 | 0.0167 |
| US$12.00 | 0.0182 |
| US$13.00 | 0.0195 |
| US$14.00 | 0.0205 |
| US$15.00 | 0.0215 |
| US$16.00 | 0.0223 |
| US$17.00 | 0.0230 |
| US$18.00 | 0.0236 |
| US$19.00 | 0.0242 |
While the above chart shows indicative potential adjustment to the Fixed Share Exchange Ratio at the closing of the Fixed Share Acquisition (based on the number of Fixed Shares and securities convertible into or exercisable to acquire Fixed Shares, as of the date hereof), it assumes there have been no further actions taken by the Company to address the potential significant dilution and related impact on the Exchange Ratio.
On June 3, 2024, the Canopy Call Option was exercised in accordance with the terms of the Amended Arrangement. Upon closing of the Amended Arrangement and Floating Share Agreement (the "Acquisitions"), Canopy USA will own 100% of the Fixed Shares and Floating Shares and in connection therewith, Acreage would become a wholly owned subsidiary of Canopy USA. Closing of the Acquisitions remain subject to all of the closing conditions set forth in the Amended Arrangement and the Floating Share Agreement. There can be no certainty, nor can the Company provide any assurance, that all conditions precedent will be satisfied or waived, which may result in the Acquisitions not being completed.
Tax Receivable Agreement and Tax Receivable Bonus Plans
The Company is a party to (i) a tax receivable agreement dated November 14, 2018 and subsequently amended (the "Tax Receivable Agreement") between the Company and certain current and former unit holders of HSCP and (ii) tax receivable bonus plans dated November 14, 2018 and subsequently amended (the "Tax Receivable Bonus Plans") between the Company and certain directors, officers and consultants of the Company (together the "Tax Receivable Recipients"). Under the Tax Receivable Agreement and the Tax Receivable Bonus Plans, the Company is required to make cash payments to the Tax Receivable Recipients equal to 85% of the tax benefits, if any, that the Company actually realizes, or in certain circumstances is deemed to realize, as a result of (i) the increases in its share of the tax basis of assets of HSCP resulting from any redemptions or exchanges of Units from the HSCP Members, and (ii) certain other tax benefits related to the Company making payments under the Tax Receivable Agreement and the Tax Receivable Bonus Plan. Although the actual timing and amount of any payments that the Company makes to the Tax Receivable Recipients cannot be estimated, it expects those payments will be significant. Any payments made by the Company to the Tax Receivable Recipients may generally reduce the amount of overall cash flow that might have otherwise been available to it. Payments under the Tax Receivable Agreement are not conditioned on any Tax Receivable Recipient's continued ownership of Units or our shares after the completion of the RTO. Payments under the Tax Receivable Bonus Plan may, at times, be conditioned on the Tax Receivable Recipient's continued employment by the Company. As of September 30, 2024, the Company has not made any payments in relation to the Tax Receivable Agreement or the Tax Receivable Bonus Plans.
Concurrently with the execution of the Floating Share Arrangement Agreement, Canopy Growth, Canopy USA, High Street, Acreage Holdings America, Inc. and certain individuals party to the Tax Receivable Agreement, amended the Tax Receivable Agreement in accordance with the Floating Share Agreement. Pursuant to the Floating Share Agreement, Canopy Growth, on
F-30
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
behalf of Canopy USA agreed to: (i) issue Canopy Shares with a value of approximately $30,500 to the Tax Receivable Agreement Members in exchange for each such individual executing an assignment of rights agreement assigning such individual's rights under the Tax Receivable Agreement to Canopy USA, such that following assignment, Canopy USA is the sole member and beneficiary under the Tax Receivable Agreement; and (ii) fund a payment with a value of approximately $19,500 to be made by the Company in Canopy Shares to certain eligible participants pursuant to the Tax Receivable Bonus Plans, as amended on October 24, 2022, both in order to reduce a potential liability of approximately $121,000 under the Tax Receivable Agreement and the Tax Receivable Bonus Plans. In connection with the foregoing, Canopy issued: (i) 564,893 common shares with a value of $15.2 million to certain Tax Receivable Agreement Members on November 4, 2022 as the first installment; and (ii) 710,208 common shares with a value of $15.2 million to certain Tax Receivable Agreement Members on March 17, 2023, as the second installment. Canopy also agreed to issue Canopy common shares with a value of approximately $19.5 million to certain eligible participants pursuant to the Bonus Plans to be issued immediately prior to completion of the Floating Share Arrangement.
Debenture
In connection with the implementation of the Amended Arrangement, pursuant to a secured debenture dated September 23, 2020 (the "Debenture") issued by Universal Hemp, LLC, an affiliate of Acreage that operates solely in the hemp industry in full compliance with all applicable laws (the "Borrower"), to 11065220 Canada Inc., an affiliate of Canopy Growth (the "Lender"), the Lender agreed to provide a loan of up to $100,000 (the "Loan"), $50,000 of which was advanced on the Amendment Date (the "Initial Advance"), and $50,000 of the Loan will be advanced in the event that the following conditions, among others, are satisfied: (a) the Borrower's EBITDA (as defined in the Debenture) for any 90 day period is greater than or equal to 2.0 times the interest costs associated with the Initial Advance; and (b) the Borrower's business plan for the 12 months following the applicable 90 day period supports an Interest Coverage Ratio (as defined in the Debenture) of at least 2.00:1. On October 24, 2022, the Debenture was assigned by the Lender to Canopy USA.
The principal amount of the Loan will bear interest from the date of advance, compounded annually, and be payable on each anniversary of the date of the Debenture in cash in U.S. dollars at a rate of 6.1% per annum. The Loan will mature 10 years from the date of the Initial Advance.
The Loan must be used exclusively for U.S. hemp-related operations and on the express condition that such amount will not be used, directly or indirectly, in connection with or for the operation or benefit of any of the Borrower's affiliates other than subsidiaries of the Borrower exclusively engaged in U.S. hemp-related operations and not directly or indirectly, towards the operation or funding of any activities that are not permissible under applicable law. The Loan proceeds must be segregated in a distinct bank account and detailed records of debits to such distinct bank account will be maintained by the Borrower.
No payment due and payable to the Lender by the Borrower pursuant to the Debenture may be made using funds directly or indirectly derived from any cannabis or cannabis-related operations in the United States, unless and until the Triggering Event Date.
The Debenture includes usual and typical events of default for a financing of this nature, including, without limitation, if: (i) Acreage is in breach or default of any representation or warranty in any material respect pursuant to the Arrangement Agreement; (ii) operations deemed to be non-core must cease within 18 months from the Amendment Date; and (iii) Acreage fails to perform or comply with any covenant or obligation in the Arrangement Agreement which is not remedied within 30 days after written notice is given to the Borrower by the Lender. The Debenture also includes customary representations and warranties, positive covenants and negative covenants of the Borrower.
Advisor fee
In connection with the Prior Plan of Arrangement, the Company entered into an agreement with its financial advisor providing for a fee payment of $7,000 in either cash, Acreage shares or Canopy Growth shares, at the discretion of the Company, upon the successful acquisition of Acreage by Canopy Growth. During the fourth quarter of 2022, the Company amended the terms of the agreement with its financial advisors providing for a fee payment of $3,000 in cash, less a $500 initial payment, and $2,000 in shares of the Company, upon the successful acquisition of Acreage by Canopy Growth.
Surety bonds
The Company has indemnification obligations with respect to surety bonds primarily used as security against non-performance in the amount of $5,000 as of September 30, 2024, for which no liabilities are recorded on the Unaudited Condensed Consolidated Statements of Financial Position.
F-31
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
The Company is subject to other capital commitments and similar obligations. As of September 30, 2024 and 2023, such amounts were not material.
CanWell Settlement
In November 2020, the Company entered into a final confidential settlement agreement with CanWell, LLC for certain outstanding proceedings. As part of that agreement, the Company accrued for $7,750 in Legal settlements, neton the Statements of Operations for the year ended December 31, 2020. In connection with this settlement agreement, the Company issued a promissory note in the amount of $7,750 to CanWell, which is non-interest bearing and is payable in periodic payments through December 31, 2024. Through September 30, 2024, the Company has paid $6,958 of the promissory note.
Contingencies
The Company's operations are subject to a variety of local and state regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company's applicable subsidiaries ceasing operations. While management of the Company believes that the Company's subsidiaries are in compliance with applicable local and state regulations as of September 30, 2024, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company's subsidiaries may be subject to regulatory fines, penalties, or restrictions in the future.
The Company and its subsidiaries may be, from time to time, subject to various administrative, regulatory and other legal proceedings arising in the ordinary course of business. Contingent liabilities associated with legal proceedings are recorded when a liability is probable, and the contingent liability can be reasonably estimated.
New York outstanding litigation
On November 2, 2018, EPMMNY LLC ("EPMMNY") filed a complaint in the Supreme Court of the State of New York, County of New York, asserting claims against 16 defendants, including NYCANNA, Impire State Holdings LLC ("Impire"), NY Medicinal Research & Caring, LLC ("NYMRC") (each, a wholly owned subsidiary of High Street) and High Street. The Index Number for the action is 655480/2018. EPMMNY alleges that it was wrongfully deprived of a minority equity interest and management role in NYCANNA by its former partner, New Amsterdam Distributors, LLC ("New Amsterdam"), which attempted to directly or indirectly sell or transfer EPMMNY's alleged interest in NYCANNA to other entities in 2016 and 2017, including Impire, NYMRC and High Street.
EPMMNY alleges that it is entitled to the value of its alleged minority interest in NYCANNA or minority ownership in NYCANNA. EPMMNY also alleges that certain defendants misused its alleged intellectual property and/or services, improperly solicited its employees, and aided and abetted or participated in the transfer of equity and/or business opportunities from EPMMNY.
High Street, along with the other Defendants, filed motions to dismiss on April 1, 2019. The motions were fully briefed and submitted to the Court as of July 18, 2019, and oral argument was heard on September 6, 2019. Following a hearing held during April 2022, in ruling on one dismissal argument advanced by several Defendants, the Court ruled that Plaintiff had the capacity to bring this action on behalf of EPMMNY. On July 13, 2023, the Court ruled on the remaining dismissal arguments, granting the vast majority of them. As part of its ruling, the Court dismissed without prejudice every claim against NYCANNA, Impire, NYMRC, and High Street, except the claims for unjust enrichment and quantum meruit (which also were permitted to proceed against other Defendants). The only other claim that the Court did not dismiss was for breach of contract against New Amsterdam. High Street and the other remaining Defendants filed motions to reargue the motion to dismiss order on August 14, 2023. The motions were fully briefed on September 13, 2023, and oral argument was held on December 18, 2023. The Court has not yet ruled on these motions to reargue.
On July 24, 2023, EPMMNY moved for leave to file a proposed amended complaint. The proposed amended complaint names several defendants, including NYCANNA, Impire, NYMRC, High Street, and Kevin Murphy, and contains similar allegations to those in the original complaint. High Street, along with the other Defendants, filed oppositions to EPMMNY's motion for leave to file the amended complaint on August 10, 2023. Oral argument on EPMMNY's motion for leave to amend was also heard at the December 18, 2023 hearing. The Court has not yet ruled on the motion for leave to amend, but in any event directed the parties to file motions to dismiss the proposed amended complaint (which is not technically operative) on February 29, 2024. Defendants plan to do so.
F-32
| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
At the December 18, 2023 hearing, the Court ordered that Plaintiff could serve written discovery requests in connection with the remaining claims. On January 25, 2024, the parties agreed to a limited discovery schedule under which Plaintiff and Defendants must serve document requests and interrogatories by March 8, 2024, and the deadline for responses and objections to those requests is April 8, 2024. Defendants served discovery requests on March 8, 2024, but Plaintiff did not serve any discovery requests. Plaintiff also failed to serve any responses and objections to Defendants' requests.
On May 3, 2024, Plaintiff's counsel filed a motion to be relieved as counsel, which the Court granted at a May 22, 2024 hearing. On June 13, 2024, Plaintiff's former counsel filed a notice of charging lien, which purports to claim 18% of any recovery Plaintiff obtains in the action. On June 27, 2024, Plaintiff filed a motion to reargue the Court's order relieving its former counsel and a motion to quash the charging lien. Plaintiff's motions to reargue and quash remain pending. To date, Plaintiff has been unable to retain counsel
High Street intends to continue vigorously defend this action, which the Company firmly believes is without merit. High Street also believes it is entitled to full indemnity from the claims asserted against it by EPMMNY pursuant to the purchase agreement pertaining to its acquisition of NYCANNA and personal guarantee by the largest shareholders of the seller.
Health Circle, Inc. litigation
On April 13, 2023, Health Circle, Inc., a licensed cannabis dispensary operator in Massachusetts, initiated a civil action against the Company and MA RMD SVCS, LLC in Plymouth County, Massachusetts for alleged breaches of that certain Revolving Line of Credit, dated October 31, 2017, by and between Health Circle, Inc. and MA RMD SVCS, LLC (the "HCI Credit Agreement") and certain torts. High Street has filed a second civil action against Michael Westort, individually, in the Business Litigation Section, located in Boston, MA, predicated upon that certain Membership Interest Purchase Agreement, dated June 30, 2018, by and between Mr. Westort and High Street. The Company has moved to partially dismiss the complaint in Plymouth County, and the court has scheduled a hearing on February 1, 2024 to hear argument on this motion. The Company is assessing the amended complaint, and will ultimately file counterclaims against Health Circle, Inc. based on the outstanding debt under the HCI Credit Agreement. High Street intends to vigorously defend against this action, which the Company believes is without merit, and to pursue its claims against Mr. Westort and Health Circle, Inc.
Alfred's Finest, Inc. arbitration
On June 22, 2023, Alfred's Finest, Inc. ("AFI") filed a demand for arbitration relating to that certain Asset Purchase Agreement, dated June 24, 2021, by and between Alfred's Finest, Inc., Robert M. Andrews, Jr and The Botanist, Inc., a wholly owned subsidiary of High Street, and the Company (the "AFI APA"). The AFI APA provided for the payment of $2,000 to AFI upon closing and an additional $3,000 payable on or before the 18-month anniversary of the closing date. Pursuant to its termination rights provided under the APA, the Company sent a notice of termination of the AFI APA on June 29, 2022 before the closing occurred. AFI alleges that the Company breached the terms of the APA and claims that the notice of termination sent by the Company has no basis in the language of the AFI APA. AFI is seeking relief from the Company consisting of specific performance of the AFI APA and recovery of its damages, including arbitration fees and costs. The Company believes the plain language of the AFI APA supports its position and intends to vigorously defend this action, which the Company believes is without merit. The Company has filed a counterclaim against AFI for breach of the AFI APA based on AFI's failure to act in good faith as required by the AFI APA.
On June 28, 2023, in response to AFI's demand for arbitration, the Company asserted its right under the AFI APA to submit the dispute to mediation before it proceeds to arbitration. An initial mediation was held on October 30, 2023, with no resolution to the matter. An initial arbitration conference was held on October 7, 2024, with the arbitration tentatively scheduled for April 2025.
16. RELATED PARTY TRANSACTIONS
Transactions with related parties are entered into in the normal course of business and are measured at the amount established and agreed to by the parties.
Tax Receivable Agreement and Tax Receivable Bonus Plans
The Company is a party to (i) a tax receivable agreement dated November 14, 2018 and subsequently amended (the "Tax Receivable Agreement") between the Company and certain current and former unit holders of HSCP and (ii) tax receivable bonus plans dated November 14, 2018 and subsequently amended (the "Tax Receivable Bonus Plans") between the Company and certain directors, officers and consultants of the Company (together the "Tax Receivable Recipients"). Under the Tax
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| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
Receivable Agreement and the Tax Receivable Bonus Plans, the Company is required to make cash payments to the Tax Receivable Recipients equal to 85% of the tax benefits, if any, that the Company actually realizes, or in certain circumstances is deemed to realize, as a result of (i) the increases in its share of the tax basis of assets of HSCP resulting from any redemptions or exchanges of Units from the HSCP Members, and (ii) certain other tax benefits related to the Company making payments under the Tax Receivable Agreement and the Tax Receivable Bonus Plan. Although the actual timing and amount of any payments that the Company makes to the Tax Receivable Recipients cannot be estimated, it expects those payments will be significant. Any payments made by the Company to the Tax Receivable Recipients may generally reduce the amount of overall cash flow that might have otherwise been available to it. Payments under the Tax Receivable Agreement are not conditioned on any Tax Receivable Recipient's continued ownership of Units or our shares after the completion of the RTO. Payments under the Tax Receivable Bonus Plan may, at times, be conditioned on the Tax Receivable Recipient's continued employment by the Company. As of September 30, 2024, the Company has not made any payments in relation to the Tax Receivable Agreement or the Tax Receivable Bonus Plans. Refer to Note 15 for further discussion.
6.10% Secured debenture due September 2030
As disclosed in Note 10, "6.10% Secured debenture due September 2030", on September 23, 2020, pursuant to the implementation of the Amended Arrangement, a subsidiary of Canopy Growth advanced gross proceeds of $50,000 (less transaction costs of approximately $4,025) to Universal Hemp, an affiliate of the Company, pursuant to the terms of a secured debenture. In accordance with the terms of the debenture, the funds cannot be used, directly or indirectly, in connection with or for any cannabis or cannabis-related operations in the United States, unless and until such operations comply with all applicable laws of the United States. Acreage then engaged an investment advisor (the "Investment Advisor") which, under the Investment Advisor's sole discretion, invested on behalf of Universal Hemp, $34,019 of the proceeds on September 28, 2020. During the three and nine months ended September 30, 2024 and 2023, the Company incurred interest expense attributable to the 6.10% Secured debenture due September 2030 of $763 and $2,288, respectively.
As a result of the transaction described above, Universal Hemp, a subsidiary of the Company, acquired 34,019 class B units, at $1 par value per unit, which represented 100% financial interest in an Investment Partnership, a Canada-based limited partnership. An affiliate of the Institutional Investor holds Class A Units of the Investment Partnership. The general partner of the Investment Partnership is also an affiliate of the Institutional Investor. During the fourth quarter of 2023, Kevin Murphy acquired all Class A units and became the general partner of the Investment Partnership. The class B units are held by the Institutional Investor as agent for Universal Hemp. On September 28, 2020, the Company received gross proceeds of $33,000 (less transaction costs of approximately $959) from the Lender and used a portion of the proceeds of this loan to retire its short-term $11,000 convertible note and its short-term note aggregating approximately $18,000 in October 2020, with the remainder being used for working capital purposes. The Lender is controlled by the Institutional Lender. The Investment Partnership is the investor in the Lender.
Prime rate credit facilities due January 2026, as amended
On December 16, 2021, the Company entered into the Prime rate credit facilities due January 2026 with a syndicate of lenders, including Viridescent Realty Trust, Inc. ("Viridescent"), an entity affiliated with Kevin Murphy. Refer to Note 10 for further discussion. On October 24, 2022, the Company amended these credit facilities and the Company paid an amendment fee of $1,250 to the lenders, with $375 paid to Viridescent. On April 28, 2023, the Company and the lenders further amended the Prime rate credit facilities. Refer to Note 10 for further discussion.
On June 3, 2024, the Company, HSCP, as borrower, 11065220 Canada Inc., a wholly-owned subsidiary of Canopy Growth, VRT Agent and the loan parties thereto from time to time, entered into an Amended and Restated Credit Agreement. Interest under the loan was a variable rate of U.S. prime ("Prime") plus 5.75% per annum, payable monthly in arrears, with a Prime floor of 5.50%, and a maturity date of January 1, 2026. Interest under the Amended and Restated Credit Agreement was payable in cash or in kind, at the Company's election, through November 30, 2024. The loan was secured by pledged equity interests and substantially all of the assets of the Company. During the nine months ended September 30, 2024, the Company incurred interest expense attributable to Viridescent of $2,560 related to the Prime rate credit facilities due January 2026 and $488 of interest expense related to the Amended and Restated Credit Agreement.
On September 13, 2024, this loan was superseded by the Second Amended and Restated Credit Agreement, discussed above in Note 10. As a result of the Second Amended and Restated Credit Agreement, Mr. Murphy no longer has any interest in the credit facility.
Canopy Put Option
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| ACREAGE HOLDINGS, INC. |
|
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
| (in thousands, except per share data) |
In connection with the private placement, investors also entered into a Put Agreement with Canopy USA, pursuant to which such investor will have the right to require Canopy USA to purchase the Convertible Notes and the Warrants subscribed for by it under the offering if: (i) the Fixed Share Acquisition is not completed before the Maturity Date; under this scenario, investors are assumed to exercise the Put right requiring Canopy USA to purchase the Convertible Notes and Warrants, and in this case, Acreage would be obligated to pay the aggregate principal amount back to Canopy of $12,000, (ii) if the Fixed Share Acquisition is terminated at any time prior to the Maturity Date, or (iii) if the Company is subject to an insolvency event. Refer to Note 10 for further discussion.
17. REPORTABLE SEGMENTS
The Company prepares its segment reporting on the same basis that its Chief Operating Decision Maker manages the business, and makes operating decisions. The Company operates under one operating segment, which is its only reportable segment: the production and sale of cannabis products. The Company's measure of segment performance is net income, and derives its revenue primarily from the sale of cannabis products, as well as related management or consulting services which were not material in all periods presented. All of the Company's operations are located in the United States.
18. EARNINGS PER SHARE
Basic earnings per share are computed by dividing net loss attributable to common shareholders of the Company by the weighted average number of outstanding shares for the period. Diluted earnings per share are calculated based on the weighted number of outstanding common shares plus the dilutive effect of stock options and warrants, as if they were exercised, and restricted stock units and profits interests, as if they vested and NCI convertible units, as if they converted.
Basic and diluted loss per share is as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Net loss attributable to common shareholders of the Company | $ | (19,508) | $ | (7,625) | $ | (68,511) | $ | (38,371) |
| Weighted average shares outstanding - basic | 119,965 | 114,171 | 117,422 | 113,181 | ||||
| Effect of dilutive securities | - | - | - | - | ||||
| Weighted average shares - diluted | 119,965 | 114,171 | 117,422 | 113,181 | ||||
| Net loss per share attributable to common shareholders of the Company - basic | $ | (0.16) | $ | (0.07) | $ | (0.58) | $ | (0.34) |
| Net loss per share attributable to common shareholders of the Company - diluted | $ | (0.16) | $ | (0.07) | $ | (0.58) | $ | (0.34) |
During the nine months ended September 30, 2024, 5,817 Fixed warrants, 2,524 Floating warrants, 1,002 Fixed Share RSUs, 5 Floating Share RSUs, 4,543 Fixed Share stock options, 2,097 Floating Share stock options and 22,679 NCI convertible units were excluded from the calculation of net loss per share attributable to common shareholders of the Company - diluted, as they were anti-dilutive. During the nine months ended September 30, 2023, 5,817 Fixed warrants, 2,524 Floating warrants, 6,167 Fixed Share RSUs, 6,237 Floating Share RSUs, 5,462 Fixed Share stock options, 2,101 Floating Share stock options and 22,698 NCI convertible units were excluded from the calculation of net loss per share attributable to common shareholders of the Company - diluted, as they were anti-dilutive.
19. SUBSEQUENT EVENTS
Amendment to Secured Debenture
On October 9, 2024, Universal Hemp, LLC (the "Borrower"), Universal Hemp II, LLC and Universal Hemp Canada ULC (the "Guarantors"), and Canopy USA, LLC ("CUSA") entered into a First Amending Agreement to the Secured Debenture originally executed on September 23, 2020. Under the terms of the Amendment, the interest on the obligations under the Debenture will accrue and be paid in kind ("PIK Interest"), with the Borrower retaining the option to pay any portion of such interest in cash.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to assist in the understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. This discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Such statements involve risks and uncertainties. Our actual results may differ materially from those contemplated by these forward-looking statements as a result of various factors, including those set forth in "Risk Factors" in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Form 10-K"), and "Cautionary Statement Regarding Forward-Looking Statements" set forth below.
This MD&A should be read in conjunction with the Company's unaudited condensed consolidated financial statements and for the three and nine month period ended September 30, 2024 and related notes appearing elsewhere in this Quarterly Report on Form 10-Q (this "Quarterly Report" or "Form 10-Q") and the 2023 Form 10-K. Financial information presented in this MD&A is presented in thousands of U.S. dollars, unless otherwise indicated.
Cautionary Statement Regarding Forward Looking-Statements
This Quarterly Report of the Company contains statements that include forward-looking information and are forward-looking statements within the meaning of applicable Canadian and United States securities legislation ("forward-looking statements"), including the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. All statements, other than statements of historical fact, included herein are forward-looking statements, including, for greater certainty, statements regarding the proposed transactions with Canopy Growth Corporation ("Canopy Growth" or "Canopy"), including the anticipated benefits and likelihood of completion thereof.
Generally, forward-looking statements may be identified by the use of forward-looking terminology such as "plans", "expects" or "does not expect", "proposed", "is expected", "budgets", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or variations of such words and phrases, or by the use of words or phrases which state that certain actions, events or results may, could, would, or might occur or be achieved. There can be no assurance that such forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such forward-looking statements. Forward-looking statements reflect Acreage's current beliefs and are based on information currently available to Acreage and on assumptions Acreage believes are reasonable. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Acreage to be materially different from those expressed or implied by such forward-looking statements. Such risks and other factors may include, but are not limited to:
•The U.S. Federal illegality of the Company's business activities
•the anticipated benefits of the Floating Share Arrangement with Canopy Growth;
•the likelihood of Canopy Growth completing the acquisition of the Fixed Shares and/or Floating Shares;
•risks related to the ability to finance Acreage's business and fund its obligations;
•other expectations and assumptions concerning the transactions contemplated between Canopy Growth and Acreage;
•in the event that the Floating Share Arrangement is completed, the likelihood of Canopy completing the Acquisition in accordance with the Existing Arrangement Agreement;
•the risk of a change of control of either Canopy or Canopy USA;
•the impact of material non-recurring expenses in connection with the Floating Share Arrangement on Acreage's future results of operations, cash flows and financial condition;
•the ability of Canopy, Canopy USA and Acreage to leverage each other's respective capabilities and resources;
•the available funds of Acreage and the anticipated use of such funds;
•the availability of financing opportunities for Acreage and the risks associated with the completion thereof;
•regulatory and licensing risks;
•changes in general economic, business and political conditions, including changes in the financial and stock markets;
•legal and regulatory risks inherent in the cannabis industry;
•risks associated with economic conditions, dependence on management and currency risk;
•risks relating to U.S. regulatory landscape and enforcement related to cannabis, including political risks;
•risks relating to anti-money laundering laws and regulation;
•other governmental and environmental regulation;
•public opinion and perception of the cannabis industry;
•risks related to contracts with third-party service providers;
•risks related to the enforceability of contracts and lack of access to U.S. bankruptcy protections;
•reliance on the expertise and judgment of senior management of Acreage;
•risks related to proprietary intellectual property and potential infringement by third parties;
•the concentrated voting control of Acreage's founder and the unpredictability caused by Acreage's capital structure;
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•the dual structure of the Fixed and Floating Shares
•risks relating to the management of growth;
•increasing competition in the industry;
•risks inherent in an agricultural business;
•risks relating to energy costs;
•risks associated with cannabis products manufactured for human consumption including potential product recalls;
•reliance on key inputs, suppliers and skilled labor;
•cybersecurity risks;
•ability and constraints on marketing products;
•fraudulent activity by employees, contractors and consultants;
•tax and insurance related risks;
•risks related to the economy generally;
•risk of litigation;
•conflicts of interest;
•risks relating to certain remedies being limited and the difficulty of enforcement judgments and effecting service outside of Canada;
•risks related to future acquisitions or dispositions;
•sales by existing shareholders; and
•limited research and data relating to cannabis.
A description of additional assumptions used to develop such forward-looking statements and a description of additional risk factors that may cause actual results to differ materially from forward-looking statements can be found in Part I, Item 1A of the Company's Annual Report on Form 10-K, under the heading "Risk Factors", dated April 30, 2024, as filed with the Securities and Exchange Commission. Although Acreage has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. Readers are cautioned that the foregoing list of factors is not exhaustive. Readers are further cautioned not to place undue reliance on forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur. Forward-looking statements contained in this Form 10-Q are expressly qualified by this cautionary statement. The forward-looking statements contained in this Form 10-Q represent the expectations of Acreage as of the date of this Form 10-Q and, accordingly, are subject to change after such date. However, Acreage expressly disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by applicable securities law.
Management's discussion and analysis of financial condition and results of operations is intended to help provide an understanding of the Company's financial condition, changes in financial condition and results of operations. This discussion is organized as follows:
•Overview-This section provides a general description of the Company's businesses, its strategic objectives, as well as developments that occurred during the three and nine months ended September 30, 2024 and 2023 that the Company believes are important in understanding its results of operations and financial condition or to disclose known trends.
•Results of Operations-This section provides an analysis of the Company's results of operations for the three and nine months ended September 30, 2024 and 2023. This analysis is presented on a consolidated basis. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.
•Liquidity and Capital Resources-This section provides an analysis of the Company's cash flows for the three and nine months ended September 30, 2024 and 2023, as well as a discussion on the Company's outstanding debt and commitments that existed as of September 30, 2024. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund the Company's future commitments and obligations, as well as a discussion of other financing arrangements.
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Overview
Acreage Holdings, Inc. ("Acreage" or the "Company"), a vertically integrated, multi-state operator of cannabis licenses and assets in the U.S, was continued into the Province of British Columbia under the Business Corporations Act (British Columbia). Acreage Fixed Shares and Floating Shares (as such terms are defined at Note 15 of the unaudited condensed consolidated financial statements) are each listed on the Canadian Securities Exchange under the symbols "ACRG.A.U" and "ACRG.B.U", respectively, and are quoted on the OTCQX® Best Market by OTC Markets Group under the symbols "ACRHF" and "ACRDF", respectively and on the Open Market of the Frankfurt Stock Exchange under the symbols "0VZ1" and "0VZ2", respectively. Acreage operates through its consolidated subsidiary High Street Capital Partners, LLC ("HSCP"), a Delaware limited liability company. HSCP, which does business as "Acreage Holdings", was formed on April 29, 2014. The Company became an indirect parent of HSCP on November 14, 2018 in connection with a reverse takeover ("RTO") transaction. The Company's operations include (i) cultivating cannabis plants, (ii) manufacturing branded consumer products, (iii) distributing cannabis flower and manufactured products, and (iv) retailing high-quality, effective cannabis products to consumers. The Company appeals to medical and adult-use customers through brand strategies intended to build trust and loyalty.
As of September 30, 2024, Acreage owned and operated a total of 21 dispensaries - five in Ohio, four in Maine, three in New York, two in New Jersey, three in Connecticut, two in Massachusetts, and two in Illinois. As of September 30, 2024, Acreage owned and operated a total of seven cultivation and processing facilities, one each in Illinois, Maine, Massachusetts, New Jersey, New York, Ohio and Pennsylvania.
Strategic Priorities
The Company believes its focused strategy is the key to continued improvements in its financial results and shareholder value. For the past few years, the Company was focused on three key strategic objectives - accelerating growth in its core markets, driving profitability, and strengthening the balance sheet. For 2023 and onwards, the Company has modified its strategic objectives in response to Company and industry developments - focus on cash, accelerate growth in core markets with core brands and prepare for Canopy USA.
Focus on Cash: A combination of economic conditions, lack of regulatory change and industry competition impacting pricing have negatively impacted the Company's ability to generate cash flow to support operational requirements and capital activities. Additionally, these factors have likely limited the additional capital that might be available to the Company. While these factors continue, the Company will focus on maximizing the cash flow generated by operating activities and limit capital expenditures to only those projects that can be funded from existing resources and are expected to generate near-term returns.
Accelerating Growth in Core Markets with Core Brands: Through prior acquisitions and capital expenditures, management believes Acreage is well positioned for future success in several key markets as regulations regarding the use of cannabis continue to evolve. The Company will continue to focus its growth in its core markets where it can take advantage of and expand on the presence already established. Additionally, the Company has developed a portfolio of core brands that resonate with its customers. The Company will focus on ensuring that these core brands feature prominently in the markets where they are available.
Prepare for Canopy USA:During the fourth quarter of 2022, the Company entered into a new strategic arrangement with Canopy Growth that would allow Canopy Growth to acquire 100% of Acreage by (i) waiving its existing Floating Share option and entering into a new Floating Share arrangement agreement dated October 24, 2022 (the "Floating Share Arrangement Agreement"); and (ii) committing to exercise its Fixed Share option, all subject to required approvals and terms of the related agreements. Throughout 2023, the Company has taken steps necessary to prepare for the eventual closing of these transactions, including holding a special meeting of its holders of Floating Shares to authorize and approve the plan of arrangement (the "Floating Share Arrangement") in accordance with the terms of the Floating Share Arrangement Agreement on March 15, 2023 (the "Special Meeting").
On June 3, 2024, the Canopy Call Option was exercised in accordance with the terms of the Amended Arrangement. Upon closing of the Amended Arrangement and Floating Share Agreement (the "Acquisitions"), Canopy USA will own 100% of the Fixed Shares and Floating Shares and in connection therewith, Acreage would become a wholly owned subsidiary of Canopy USA. Closing of the Acquisitions remain subject to all of the closing conditions set forth in the Amended Arrangement and the Floating Share Agreement. There can be no certainty, nor can the Company provide any assurance, that all conditions precedent will be satisfied or waived, which may result in the Acquisitions not being completed.
Highlights from the three and nine months ended September 30, 2024:
•Adjusted EBITDA for the three and nine months ended September 30, 2024 was $0.6 million and $4.5 million, respectively, compared to adjusted EBITDA of $6.6 million and $24.0 million, respectively, during the same period in
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2023. This marks fourteen consecutive quarters of positive adjusted EBITDA, further validating management's refocused strategic plan. Refer to section "Non-GAAP Information" for a discussion of Adjusted EBITDA as a non-GAAP measure.
•On January 3, 2024, the Company entered the New York adult-use market with its first wholesale product sale.
•On January 25, 2024, the Company relocated a Connecticut dispensary to Vernon Connecticut, marking the first-ever cannabis dispensary in the borough of over 30,000 residents.
•On March 11, 2024, the Company launched adult-use sales at its Vernon, Connecticut Dispensary. The Botanist Vernon is now operating as a hybrid dispensary, providing its full suite of products to both medical patients and adult-use customers.
•On June 3, 2024, the Canopy Call Option was exercised in accordance with the terms of the Amended Arrangement. Upon closing of the Amended Arrangement and Floating Share Agreement (the "Acquisitions"), Canopy USA will own 100% of the Fixed Shares and Floating Shares and in connection therewith, Acreage would become a wholly owned subsidiary of Canopy USA.
•On June 3, 2024, the Company entered into an amended and restated credit agreement. The loan will continue to bear interest at a variable rate of U.S. prime ("Prime") plus 5.75% per annum, payable monthly in arrears, with a Prime floor of 5.50%, and a maturity date of January 1, 2026. Interest under the A&R Credit Agreement will be payable in cash or in kind, at the Company's election, through November 30, 2024. Refer to Note 10 for further discussion.
•On June 4, 2024, the Company brokered a private placement of 12,000 units of the Company at a price of US$833.33 per Unit, for gross proceeds to the Company of $10 million. Refer to Note 10 for further discussion.
•On September 13, 2024, the Company entered into a second amended and restated credit agreement with a third party lender (the "New Lender") and 11065220 Canada Inc. (the "Canopy Lender") (the "Second Amended and Restated Credit Agreement"). This agreement supersedes the Amended and Restated Credit Agreement. The New Lender advanced $65,000 with an original issue discount of 10%, being $6,500. Approximately $48,000 of the amount advanced by the New Lender was used to repay amounts owing by Acreage pursuant to the Amended and Restated Credit Agreement to the non-Canopy lender (the "Prior Lender"). As a result, the Prior Lender has been repaid in full. The net proceeds of the loan to Acreage totaled approximately $8,000 after closing costs and expenses. Under the Second Amended and Restated Credit Agreement, the loans bear interest at a rate of 13.5%, with the interest in favor of the New Lender payable in cash and interest in favor of 11065220 Canada Inc. payable in cash or in kind at Acreage's option and will initially be payable in kind.
•Launched non-medical sales across Ohio at the Botanist locations in Akron, Canton, Cleveland, Wickliffe, and Columbus. Non-medical sales represented 38% of Q3 2024 Ohio revenue, and the Company expects to double its 2023 revenue of $50 million in the state throughout 2025.
•Secured approval from the New Jersey Cannabis Regulatory Commission for the relocation of the Company's Atlantic City dispensary to Collingswood, New Jersey, marking the borough's first cannabis dispensary. The Botanist Collingswood is expected to open for medical and adult-use sales in Q4 2024, subject to final regulatory approval.
Operational and Regulation Overview (all amounts in thousands, except per share amounts)
The Company believes its operations are in material compliance with all applicable state and local laws, regulations and licensing requirements in the states in which it operates. However, cannabis is illegal under U.S. federal law. Substantially all of the Company's revenue is derived from U.S. cannabis operations. For information about risks related to U.S. cannabis operations, please refer to Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
Results of Operations
The following table presents selected financial data derived from the unaudited condensed consolidated financial statements of the Company for the three and nine months ended September 30, 2024 and 2023. The selected financial information set out below may not be indicative of the Company's future performance.
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Summary Results of Operations
| Better/(Worse) | Better/(Worse) | |||||||||||||||
| in thousands, except per share amounts | Three Months Ended September 30, | 2024 vs. 2023 | Nine Months Ended September 30, | 2024 vs. 2023 | ||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||
| Revenues, net | $ | 39,624 | $ | 56,502 | $ | (16,878) | (30) | % | $ | 123,923 | $ | 170,580 | $ | (46,657) | (27) | % |
| Net operating loss | (8,664) | (2,501) | (6,163) | (246) | (37,463) | (6,411) | (31,052) | (484) | ||||||||
| Net loss attributable to Acreage | (19,508) | (7,625) | (11,883) | (156) | (68,511) | (38,371) | (30,140) | (79) | ||||||||
| Basic and diluted loss per share attributable to Acreage | $ | (0.16) | $ | (0.07) | $ | (0.09) | (129) | % | $ | (0.58) | $ | (0.34) | $ | (0.24) | (71) | % |
Revenues, Cost of goods sold and Gross profit
The Company derives its revenues from sales of cannabis and cannabis-infused products through retail dispensary, wholesale and manufacturing and cultivation businesses, as well as from management or consulting fees from entities for whom the Company provides management or consulting services.
Gross profit is revenue less cost of goods sold. Cost of goods sold includes costs directly attributable to inventory sold such as direct material, labor, and overhead, including depreciation. Such costs are further affected by various state regulations that limit the sourcing and procurement of cannabis and cannabis-related products, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes.
| Better/(Worse) | Better/(Worse) | |||||||||||||||
| in thousands | Three Months Ended September 30, | 2024 vs. 2023 | Nine Months Ended September 30, | 2024 vs. 2023 | ||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||
| Retail revenue, net | $ | 27,435 | $ | 43,857 | $ | (16,422) | (37) | % | $ | 85,620 | $ | 130,651 | $ | (45,031) | (34) | % |
| Wholesale revenue, net | 12,188 | 12,645 | (457) | (4) | 38,302 | 39,845 | (1,543) | (4) | ||||||||
| Other revenue, net | 1 | - | 1 | n/m | 1 | 84 | (83) | (99) | ||||||||
| Total revenues, net | $ | 39,624 | $ | 56,502 | $ | (16,878) | (30) | % | $ | 123,923 | $ | 170,580 | $ | (46,657) | (27) | % |
| Cost of goods sold, retail | (14,995) | (23,247) | 8,252 | 35 | (47,538) | (67,145) | 19,607 | 29 | ||||||||
| Cost of goods sold, wholesale | (10,715) | (11,981) | 1,266 | 11 | (47,046) | (34,454) | (12,592) | (37) | ||||||||
| Total cost of goods sold | $ | (25,710) | $ | (35,228) | $ | 9,518 | 27 | % | $ | (94,584) | $ | (101,599) | $ | 7,015 | 7 | % |
| Gross profit | $ | 13,914 | $ | 21,274 | $ | (7,360) | (35) | % | $ | 29,339 | $ | 68,981 | $ | (39,642) | (57) | % |
| Gross margin | 35 | % | 38 | % | (3) | % | 24 | % | 40 | % | (16) | % |
Three months ended September 30, 2024 vs. 2023
Total revenues for the three months ended September 30, 2024 declined by $16,878, or 30%, compared to the three months ended September 30, 2023. The decline in total revenue was primarily driven by liquidity constraints during the three months ended September 30, 2024 that limited the Company's ability to purchase inventory from third parties.
Retail revenue for the three months ended September 30, 2024 decreased by $16,422, or 37%, compared to the three months ended September 30, 2023. This decline was primarily driven by liquidity constraints during the three months ended September 30, 2024 that limited the Company's ability to purchase inventory from third parties.
Wholesale revenue for the three months ended September 30, 2024 decreased by $457, or 4%, compared to the three months ended September 30, 2023. The decline in wholesale revenue was primarily due to price compression and decreased wholesale demand in key markets, particularly in those markets where integrated operators put a greater focus on the sales of their own internally produced products.
Retail cost of goods sold decreased $8,252, or 35%, for the three months ended September 30, 2024 compared to 2023. This decrease was roughly in line with the reduction in Retail revenue, net; however, Retail cost of goods sold was negatively impacted by the Company's reduced purchasing power as a result of the liquidity constraints described above.
Wholesale cost of goods sold decreased $1,266, or 11%, for the three months ended September 30, 2024 compared to 2023. Wholesale cost of goods sold decreased due to a change in accounting estimate for the costing of inventory during the first
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quarter of 2024. As a result of this change, the Company no longer uses historical average cost but instead uses three-month rolling average cost to better align with evolving market dynamics, improve the accuracy of inventory valuation, and enhance financial reporting transparency.
Gross profit decreased $7,360, or 35%, for the three months ended September 30, 2024 to $13,914 from $21,274 in 2023, and Gross margin decreased from 38% of revenue for the three months ended September 30, 2023 to 35% of revenue in 2024, or (3)%, primarily due to the change in accounting estimates for wholesale product costing, as discussed above.
Nine months ended September 30, 2024 vs. 2023
Total revenues for the nine months ended September 30, 2024 declined by $46,657, or 27%, compared to the nine months ended September 30, 2023. The decline in total revenue was primarily due to continued competitive pressure across most of the Company's markets.
Retail revenue for the nine months ended September 30, 2024 decreased by $45,031, or 34%, compared to the nine months ended September 30, 2023. This decline was primarily driven by liquidity constraints that limited the Company's access to inventory, increased retail competition, and pricing pressures in key markets.
Wholesale revenue for the nine months ended September 30, 2024 decreased by $1,543, or 4%, compared to the nine months ended September 30, 2023. The decline in wholesale revenue was primarily due to price compression and decreased wholesale demand in key markets, particularly in those markets where integrated operators put a greater focus on the sales of their own internally produced products.
Retail cost of goods sold decreased $19,607, or 29%, for the nine months ended September 30, 2024 compared to 2023. This decrease was driven by lower volumes and cost efficiencies.
Wholesale cost of goods sold increased $12,592, or 37%, for the nine months ended September 30, 2024 compared to 2023. The growth in wholesale cost of goods sold contrasted with a 4% decrease in wholesale revenue. Wholesale cost of goods sold increased due to i) a change in accounting estimate for the costing of inventory which resulted in a $13,828 charge to Cost of goods sold, wholesale(refer to Note 2 for further discussion) and ii) inflation driven cost increases and product mix shifts, which were greater than the cost reductions associated with lower volumes.
Gross profit decreased $39,642 for the nine months ended September 30, 2024 to $29,339 from $68,981 in 2023, and Gross margin decreased from 40% of revenue for the nine months ended September 30, 2023 to 24% of revenue in 2024, or 16%, due to the factors discussed above. Efficiencies gained from further economies of scale were unable to offset overall selling price declines, and cost increases due to inflation.
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Total operating expenses
Total operating expenses consist primarily of recurring general and administrative expenses, compensation expenses, professional fees, which includes, but is not limited to, legal and accounting services, and one-time expenses such as loss on disposal of construction in process.
| Operating expenses | Better/(Worse) | Better/(Worse) | ||||||||||||||
| in thousands | Three Months Ended September 30, | 2024 vs. 2023 | Nine Months Ended September 30, | 2024 vs. 2023 | ||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||
| General and administrative | $ | 7,516 | $ | 8,036 | $ | 520 | 6 | % | $ | 22,814 | $ | 25,621 | $ | 2,807 | 11 | % |
| Compensation expense | 11,746 | 13,524 | 1,778 | 13 | 35,614 | 38,930 | 3,316 | 9 | ||||||||
| Equity-based compensation expense | (212) | 745 | 957 | n/m | 1,939 | 2,423 | 484 | 20 | ||||||||
| Marketing | 603 | 542 | (61) | (11) | 1,721 | 1,942 | 221 | 11 | ||||||||
| Loss on disposals of construction in process | 2,072 | - | (2,072) | n/m | 2,072 | - | (2,072) | n/m | ||||||||
| Write down of assets held-for-sale | - | - | - | n/m | - | 3,557 | 3,557 | n/m | ||||||||
| Depreciation and amortization | 853 | 928 | 75 | 8 | 2,642 | 2,919 | 277 | 9 | ||||||||
| Total operating expenses | $ | 22,578 | $ | 23,775 | $ | 1,197 | 5 | % | $ | 66,802 | $ | 75,392 | $ | 8,590 | 11 | % |
| n/m - Not Meaningful |
Three months ended September 30, 2024 vs. 2023
Total operating expenses for the three months ended September 30, 2024 were $22,578, a decrease of $1,197, or 5%, compared with 2023. The primary drivers of the decrease in operating expenses were as follows:
•General and administrative expenses decreased $520 during the three months ended September 30, 2024 compared with 2023, primarily due to decreases related to deal related professional fees.
•Compensation expense decreased $1,778 during the three months ended September 30, 2024 as compared with 2023, primarily due to staffing reductions.
•Equity-based compensation expense decrease $957 during the three months ended September 30, 2024 as compared with 2023, primarily due to changes made to the Company's long-term incentive compensation plans.
•Loss on disposals of capital assets expenses increased by $2,072 during the three months ended September 30, 2024 compared with 2023, primarily due to increase in capital asset disposals related to construction activities for the Prime Wellness of Pennsylvania expansion project.
Nine months ended September 30, 2024 vs. 2023
Total operating expenses for the nine months ended September 30, 2024 were $66,802, a decrease of $8,590, or 11%, compared with 2023. The primary drivers of the increase in operating expenses were as follows:
•General and administrative expenses decreased $2,807 during the nine months ended September 30, 2024 compared with 2023, primarily due to initiatives put in place by management to reduce operating costs across the Company.
•Compensation expense decreased $3,316 during the nine months ended September 30, 2024 as compared with 2023, primarily due to staffing reductions.
•Equity-based compensation expense decreased $484 during the nine months ended September 30, 2024 as compared with 2023, primarily due to changes made to the Company's long-term incentive compensation plans.
•Loss on disposals of capital assets expenses increased by $2,072 during the nine months ended September 30, 2024 compared with 2023, primarily due to increase in capital asset disposals related to construction activities for the Prime Wellness of Pennsylvania expansion project.
•Write down of assets held-for-sale of $3,557 during the nine months ended September 30, 2023 related to the Company's adult-use cannabis cultivation and processing operations in the state of California, which did not recur in the current year.
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Total other income (loss)
|
Other loss
|
Better/(Worse) | Better/(Worse) | |||||||||||||
| in thousands | Three Months Ended September 30, | 2024 vs. 2023 | Nine Months Ended September 30, | 2024 vs. 2023 | |||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | ||||||||
| Income from investments, net | $ | - | $ | 248 | $ | (248) | n/m | $ | - | $ | 228 | $ | (228) | n/m | |
| Interest income from loans receivable | - | - | - | n/m | - | 10 | (10) | n/m | |||||||
| Interest expense | (8,128) | (9,207) | 1,079 | 12 | (25,423) | (26,143) | 720 | 3 | % | ||||||
| Other income (loss), net | (983) | 10,021 | (11,004) | n/m | (7,320) | 9,823 | (17,143) | n/m | |||||||
| Total other income (loss) | $ | (9,111) | $ | 1,062 | $ | (10,173) | n/m | $ | (32,743) | $ | (16,082) | $ | (16,661) | (104) | % |
| n/m - Not Meaningful |
Three months ended September 30, 2024 vs. 2023
Total other income (loss) for the three months ended September 30, 2024 was $9,111, an increase of $10,173 compared with 2023. The primary drivers of the increase in Total other income (loss) were as follows:
•Interest expense for the three months ended September 30, 2024 of $8,128 decreased by $1,079, which was driven by (i) a decrease in interest expense related to the Note backed by ERTC resulting from a reduction in the principal balance and (ii) changes to interest related to the Amended and Restated Credit Agreement and the Second Amended and Restated Credit Agreement, refer to Note 10 for further discussion.
•Other income (loss), net for the three months ended September 30, 2024 of $983 increased by $11,004 as compared with 2023 and was primarily driven by not receiving employee retention tax credits.
Nine months ended September 30, 2024 vs. 2023
Total other income (loss) for the nine months ended September 30, 2024 was $32,743, increased by $16,661 compared with 2023. The primary drivers of the decrease in Total other loss were as follows:
•Interest expense for the nine months ended September 30, 2024 of $25,423 decreased by $720 as a result of the Company having a larger debt balance as compared to 2023.
•Other income (loss) for the nine months ended September 30, 2024 of $7,320 increased by $17,143 as compared with 2023 and was driven by a $6,322 loss related to the extinguishment of the Prime rate credit facilities due September 2027, as amended, and not receiving employee retention tax credits.
Net loss
| Net loss | Better/(Worse) | Better/(Worse) | ||||||||||||||
| in thousands | Three Months Ended September 30, | 2024 vs. 2023 | Nine Months Ended September 30, | 2024 vs. 2023 | ||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||
| Net loss | $ | (22,240) | $ | (7,859) | $ | (14,381) | (183) | % | $ | (79,688) | $ | (42,256) | $ | (37,432) | (89) | % |
| Less: net loss attributable to non-controlling interests | (2,732) | (234) | (2,498) | n/m | (11,177) | (3,885) | (7,292) | (188) | ||||||||
| Net loss attributable to Acreage Holdings, Inc. | $ | (19,508) | $ | (7,625) | $ | (11,883) | (156) | % | $ | (68,511) | $ | (38,371) | $ | (30,140) | (79) | % |
The changes in net loss are driven by the factors discussed above.
Non-GAAP Information
This statement includes Adjusted EBITDA, which is a non-GAAP performance measure that we use to supplement our results presented in accordance with U.S. GAAP. The Company uses Adjusted EBITDA to evaluate its actual operating performance and for planning and forecasting future periods. The Company believes that the adjusted results presented provide relevant and useful information for investors because they clarify the Company's actual operating performance, make it easier to compare our results with those of other companies and allow investors to review performance in the same way as our management. Since these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation of, or as a
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substitute for, net loss or our other reported results of operations as reported under U.S. GAAP as indicators of our performance, and they may not be comparable to similarly named measures from other companies.
The Company defines Adjusted EBITDA as net income before interest, income taxes and, depreciation and amortization and excluding the following: (i) income from investments, net (the majority of the Company's investment income relates to remeasurement to net asset value of previously-held interests in connection with our roll-up of affiliates, and the Company expects income from investments to be a non-recurring item as its legacy investment holdings diminish), (ii) equity-based compensation expense, (iii) non-cash losses on disposals of construction in process, (iv) transaction costs, (v) non-cash inventory adjustments and (vi) other non-recurring expenses (other expenses and income not expected to recur).
| Adjusted EBITDA | Better/(Worse) | Better/(Worse) | ||||||||||||||
| in thousands | Three Months Ended September 30, | 2024 vs. 2023 | Nine Months Ended September 30, | 2024 vs. 2023 | ||||||||||||
| 2024 | 2023 | $ | % | 2024 | 2023 | $ | % | |||||||||
| Net loss (U.S. GAAP) | $ | (22,240) | $ | (7,859) | $ | (79,688) | $ | (42,256) | ||||||||
| Income tax expense | 4,465 | 6,420 | 9,482 | 19,763 | ||||||||||||
| Interest expense, net | 8,128 | 9,207 | 25,423 | 26,133 | ||||||||||||
|
Depreciation and amortization(1)
|
3,165 | 2,427 | 12,675 | 8,976 | ||||||||||||
| EBITDA (non-GAAP) | $ | (6,482) | $ | 10,195 | $ | (16,677) | (164) | % | $ | (32,108) | $ | 12,616 | $ | (44,724) | (355) | % |
| Adjusting items: | ||||||||||||||||
| Loss (income) from investments, net | - | (248) | - | (228) | ||||||||||||
| Loss on disposals of construction in process | 2,072 | - | 2,072 | - | ||||||||||||
|
Non-cash inventory adjustments
|
2,048 | 2,103 | 5,745 | 8,824 | ||||||||||||
|
Loss on extraordinary events(2)
|
- | - | 154 | 1,692 | ||||||||||||
| Gain on business divestiture | - | (47) | - | (47) | ||||||||||||
| Write down of assets held-for-sale | - | - | - | 3,557 | ||||||||||||
| Equity-based compensation expense | (212) | 745 | 1,939 | 2,423 | ||||||||||||
|
Other non-recurring expenses(3)
|
3,196 | (6,174) | 26,695 | (4,835) | ||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 622 | $ | 6,574 | $ | (5,952) | (91) | % | $ | 4,497 | $ | 24,002 | $ | (19,505) | (81) | % |
(1) Depreciation and amortization for the three and nine months ended September 30, 2024 and 2023 contains depreciation and amortization included in cost of goods sold.
(2)Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence.
(3) Other non-recurring income and expenses relates to (i) certain compensation, (ii) general and administrative, (iii) other miscellaneous income and expenses, and (iv) a change in accounting estimate for the costing of inventory, which resulted in a $13,828 charge to Cost of goods sold, wholesale for the nine months ended September 30, 2024 (refer to Note 2 for further discussion). The Company excludes these items as they are not expected to recur.
The changes in adjusted EBITDA are driven by the factors discussed above.
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LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN
Liquidity
Sources and uses of cash (all amounts in thousands, except per share amounts)
The Company's primary uses of capital include operating expenses, income taxes, capital expenditures and the servicing of outstanding debt. The Company's primary sources of capital include funds generated by cannabis sales as well as financing activities. Through September 30, 2024, the Company had primarily used private financing as a source of liquidity for short-term working capital needs and general corporate purposes.
As of September 30, 2024, the Company had cash of $13,845, including $13,780 of cash and cash equivalents and $65 of restricted cash, respectively, on the Consolidated Statements of Financial Position. The Company's ability to fund its operations, capital expenditures, acquisitions, and other obligations depends on its future operating performance and ability to obtain financing, which are subject to prevailing economic conditions, as well as financial, business and other factors, some of which are beyond the Company's control.
The Company's future contractual obligations include the following:
Leases
As of September 30, 2024, the Company had future operating lease obligations and future finance lease obligations of $25,471 and $14,232, respectively, with $905 and $189 payable within the next three months, respectively. The Company leases land, buildings, equipment and other capital assets which it plans to use for corporate purposes in addition to the production and sale of cannabis products. Leases with an initial term of 12 months or less are not recorded on the Unaudited Condensed Consolidated Statements of Financial Position and are expensed in the Unaudited Condensed Consolidated Statements of Operations on the straight-line basis over the lease term. The Company does not have any material variable lease payments, and accounts for non-lease components separately from leases. Refer to Note 8 of the Unaudited Condensed Consolidated Financial Statements for further discussion.
Debt
As of September 30, 2024, the Company had outstanding debt with varying maturities for an aggregate principal amount of $274,662 (net of $12,170 of unamortized discounts and debt issuance costs), with $2,437 payable within the remaining three months. The Company has related future interest payments of $25,423, with $8,128 payable within the remaining three months. On June 3, 2024, the Company entered into an amended and restated credit agreement (the "Amended and Restated Credit Agreement") with a new syndicate of lenders, including a wholly owned subsidiary of Canopy Growth Corporation. Refer to Notes 10 and 17 of the Unaudited Condensed Consolidated Financial Statements for further discussion. On June 4, 2024, the Company entered into an agreement that allowed the Company to issue 12,000 units (the "Units") by way of a brokered private placement (the "Private placement") at a price of $833.33 per Unit, for gross proceeds of $10,000. Refer to Notes 10 and 17 of the Unaudited Condensed Consolidated Financial Statements for further discussion. On September 13, 2024, the Company entered into a second amended and restated credit agreement with a third party lender (the "New Lender") and 11065220 Canada Inc. (the "Canopy Lender") (the "Second Amended and Restated Credit Agreement"). This agreement supersedes the Amended and Restated Credit Agreement. The New Lender advanced $65,000 with an original issue discount of 10%, being $6,500. Approximately $48,000 of the amount advanced by the New Lender was used to repay amounts owing by Acreage pursuant to the Amended and Restated Credit Agreement to the non-Canopy lender (the "Prior Lender"). As a result, the Prior Lender has been repaid in full. The net proceeds of the loan to Acreage totaled approximately $8,000 after closing costs and expenses. Under the Second Amended and Restated Credit Agreement, the loans bear interest at a rate of 13.5%, with the interest in favor of the New Lender payable in cash and interest in favor of 11065220 Canada Inc. payable in cash or in kind at Acreage's option and will initially be payable in kind.
The Company expects that its cash and cash equivalents of $13,780 as of September 30, 2024, and other mitigating factors, will assist the future obligations discussed above as well as the capital needs of the existing operations and expansion plans over the next twelve months. Refer to Note 2 of the Unaudited Condensed Consolidated Financial Statements for further discussion.
Going Concern
As reflected in the unaudited condensed consolidated financial statements, the Company had an accumulated deficit as of September 30, 2024, as well as a net loss and negative cash flow from operating activities for the nine months ended September 30, 2024. These factors raise substantial doubt about the Company's ability to continue as a going concern for at least one year from the issuance of these unaudited condensed consolidated financial statements. Continuation as a going concern is dependent upon continued operations of the Company, which is dependent upon the Company's ability to meet its financial requirements and the success of its future operations. The consolidated financial statements do not include any adjustments to
45
the amount and classification of assets and liabilities that may be necessary should the Company not continue as a going concern.
Management believes that substantial doubt about the Company's ability to meet its obligations for the next twelve months from the date these financial statements are issued can be mitigated by, but not limited to, (i) expected long-term sales growth from the Company's consolidated operations, (ii) latitude as to the timing and amount of certain operating expenses as well as capital expenditures, (iii) expense reduction plans that have already been put in place to improve the Company's results, (iv) access to the U.S. and Canadian public equity markets. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. Management also cannot provide any assurance as to unforeseen circumstances that could occur at any time within the next twelve months or thereafter which could increase the Company's need to raise additional capital on an immediate basis.
Cash flows
Cash and cash equivalents were $13,845 as of September 30, 2024, which represents a net decrease of $3,770 for the nine months ended September 30, 2024. The following table details the change in cash, cash equivalents, restricted cash and cash related to assets held for sale for the nine months ended September 30, 2024 and 2023.
| Cash flows | Better/(Worse) | |||||||
| in thousands | Nine Months Ended September 30, | 2024 vs. 2023 | ||||||
| 2024 | 2023 | $ | % | |||||
| Net cash used in operating activities | $ | (17,547) | $ | (18,729) | $ | 1,182 | 6 | % |
| Net cash used in investing activities | (2,890) | (2,206) | (684) | (31) | ||||
| Net cash provided by financing activities | 16,667 | 21,661 | (4,994) | (23) | ||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | (3,770) | $ | 726 | $ | (4,496) | n/m | |
|
n/m - Not Meaningful
|
Net cash used in operating activities
During the nine months ended September 30, 2024, the Company used $17,547 of net cash in operating activities, which represented a change of $1,182, or 6%, when compared with 2023. This change was driven by (i) unrecognized tax benefits of $14,691, (ii) non-cash inventory write-offs and provisions of $13,588, (iii) loss on extinguishment of $6,322, and (iv) primarily offset by an increase to net loss of $37,431.
Net cash used in investing activities
During the nine months ended September 30, 2024, the Company used $2,890 of net cash through investing activities compared to $2,206 of net cash used in investing activities in the same period for 2023, which represented a change of $684, which was primarily driven by less purchases of capital assets of $2,955, offset by collection of notes receivable of $2,150.
Net cash provided by financing activities
During the nine months ended September 30, 2024, the Company provided $16,667 of net cash through financing activities compared to $21,661 of net cash provided by financing activities in the same period for 2023, which represented a change of $4,994. This change was primarily driven by less proceeds from debt refinancing of $18,666, offset by proceeds from private placement of $10,500 and changes in capital distributions - non-controlling interests of $3,968.
46
Capital Resources
Capital structure and debt
Our debt outstanding as of September 30, 2024 and December 31, 2023 is as follows:
| Debt balances | September 30, 2024 | December 31, 2023 | ||
| Financing liability (failed sale-leaseback) | $ | 14,454 | $ | 15,253 |
| Finance lease liabilities | 5,379 | 5,943 | ||
| 7.50% Loan due April 2026 | 34,691 | 32,438 | ||
| 6.10% Secured debenture due September 2030 | 47,293 | 46,955 | ||
| Note due December 2024 | 792 | 2,375 | ||
| 13.5% credit facilities due September 2027, as amended | 158,719 | 132,337 | ||
| Amended and restated credit agreement | - | - | ||
| Convertible notes | 11,693 | - | ||
| Note backed by ERTC | 1,641 | 1,641 | ||
| Total debt | $ | 274,662 | $ | 236,942 |
| Less: current portion of debt | 2,437 | 4,132 | ||
| Total long-term debt | $ | 272,225 | $ | 232,810 |
Commitments and contingencies
Commitments
The Company provides revolving lines of credit to certain of its portfolio companies. As of September 30, 2024, only one revolving line of credit remained outstanding and the maximum obligation under this arrangement was equal to the balance advanced. Refer to Note 6 of the Unaudited Condensed Consolidated Financial Statements for further discussion.
Arrangement with Canopy Growth
On June 19, 2019, the shareholders of the Company and of Canopy Growth separately approved the Prior Plan of Arrangement involving the two companies, which was subsequently amended on September 23, 2020.
During the fourth quarter of 2022, the Company entered into a new strategic arrangement with Canopy Growth that, would allow Canopy Growth to acquire 100% of Acreage by (i) waiving its existing Floating Share option and entering into a new Floating Share acquisition agreement; and (ii) committing to exercise its Fixed Share option, all subject to required approvals and terms of the related agreements.
Refer to Note 15 of the Unaudited Condensed Consolidated Financial Statements for further discussion.
Advisor fee
In connection with the Prior Plan of Arrangement, the Company entered into an agreement with its financial advisor providing for a fee payment of $7,000 in either cash, Acreage shares or Canopy Growth shares, at the discretion of the Company, upon the successful acquisition of Acreage by Canopy Growth. During the fourth quarter of 2022, the Company amended the terms of the agreement with its financial advisors providing for a fee payment of $3,000 in cash, less a $500 initial payment, and $2,000 in shares of the Company, upon the successful acquisition of Acreage by Canopy Growth.
Tax Receivable Agreement
The Company is a party to (i) a tax receivable agreement dated November 14, 2018 and subsequently amended (the "Tax Receivable Agreement") between the Company, certain current and former unit holders of HSCP and, Canopy Growth and Canopy USA and (ii) tax receivable bonus plans dated November 14, 2018 and subsequently amended (the "Tax Receivable Bonus Plans") between the Company and certain directors, officers, consultants of the Company, Canopy Growth and Canopy USA (together the "Tax Receivable Recipients"). Under the Tax Receivable Agreement and the Tax Receivable Bonus Plans, the Company is required to make cash payments to the Tax Receivable Recipients equal to 85% of the tax benefits, if any, that the Company actually realizes, or in certain circumstances is deemed to realize, as a result of (i) the increases in its share of the tax basis of assets of HSCP resulting from any redemptions or exchanges of Units from the HSCP Members, and (ii) certain
47
other tax benefits related to the Company making payments under the Tax Receivable Agreement and the Tax Receivable Bonus Plan.
Concurrently with the execution of the Floating Share Agreement, Canopy, Canopy USA, High Street, USCo and certain individuals party to the Tax Receivable Agreement, amended the Tax Receivable Agreement. Pursuant to the Floating Share Agreement, Canopy, on behalf of Canopy USA agreed to: (i) issue Canopy Shares with a value of approximately $30.5 million due to the participants of a tax receivable agreement (the "Tax Receivable Agreement Members") in exchange for each such individual executing an assignment of rights agreement assigning such individual's rights under the Tax Receivable Agreement to Canopy USA, such that following assignment, Canopy USA is the sole member and beneficiary under the TRA; and (ii) fund a payment with a value of approximately $19.5 million to be made by the Company in Canopy Shares to certain eligible participants pursuant to the Bonus Plans, as amended on October 24, 2022, both in order to reduce a potential liability of approximately $121 million under the Tax Receivable Agreement and the Bonus Plans. In connection with the foregoing, Canopy, on behalf of Canopy USA, issued: (i) 5,648,927 Canopy Shares (equivalent to 564,893 Canopy Shares on a post-Canopy Consolidation basis) with a value of $15.2 million to certain Tax Receivable Agreement Members on November 4, 2022 as the first installment; and (ii) 7,102,081 Canopy Shares (equivalent to 710,208 on a post-Canopy Consolidation basis)with a value of $15.2 million to certain Tax Receivable Agreement Members on March 17, 2023, as the second installment, as consideration for the assignment of such Tax Receivable Agreement Members' rights under the Tax Receivable Agreement to Canopy USA. Canopy, on behalf of Canopy USA, also agreed to issue Canopy common shares with a value of approximately US$19.6 million to certain eligible participants pursuant to the Bonus Plans to be issued immediately prior to completion of the Floating Share Arrangement.
Surety bonds
The Company has indemnification obligations with respect to surety bonds primarily used as security against non-performance in the amount of $5,000 as of September 30, 2024, for which no liabilities are recorded on the Unaudited Condensed Consolidated Statements of Financial Position.
The Company is subject to other capital commitments and similar obligations. As of September 30, 2024, such amounts were not material.
Contingencies
The Company's operations are subject to a variety of local and state regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company's applicable subsidiaries ceasing operations. While management of the Company believes that the Company's subsidiaries are in compliance with applicable local and state regulations as of September 30, 2024, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company's subsidiaries may be subject to regulatory fines, penalties, or restrictions in the future.
The Company and its subsidiaries may be, from time to time, subject to various administrative, regulatory and other legal proceedings arising in the ordinary course of business. Contingent liabilities associated with legal proceedings are recorded when a liability is probable, and the contingent liability can be reasonably estimated. Refer to Note 15 of the Unaudited Condensed Consolidated Financial Statements for further discussion.
Critical accounting policies and estimates
We have adopted various accounting policies to prepare the Unaudited Condensed Consolidated Financial Statements in accordance with GAAP. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. In our 2023 Annual Report on Form 10-K, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements.
During the nine months ended September 30, 2024, the Company implemented a change in accounting estimate for the costing of inventory cultivated, extracted or processed, and manufactured or infused by the Company from historical average cost to three-month rolling average cost to better align with evolving market dynamics, improve the accuracy of inventory valuation, and enhance financial reporting transparency. The Company accounted for this change as a change in accounting estimate and, accordingly, applied it on a prospective basis. This change resulted in a $13,828 charge to Cost of goods sold, wholesaleon the Company's Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2024.
48
Item 3. Quantitative and Qualitative Disclosures About Market Risk (presented in thousands, except share amounts).
The Company has exposure to certain risks, including market, credit, liquidity, asset forfeiture, banking and interest rate risk, and assesses the impact and likelihood of those risks. However, there have been no material changes in our market risk during the three and nine months ended September 30, 2024. For additional information, refer to our 2023 Annual Report on Form 10-K for the year ended December 31, 2023.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of the Company's management, and due to the material weakness in internal controls over financial reporting described below, the Company's principal executive officer and principal financial officer have concluded that the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective for the period ending September 30, 2024 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company's management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Inherent Limitations Over Internal Controls
The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles ("GAAP"). The Company's internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Management, including the Company's Principal Executive Officer and Principal Financial Officer, does not expect that the Company's internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weaknesses in Internal Control Over Financial Reporting
A material weakness in internal controls over financial reporting is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
The review, testing and evaluation of key internal controls over financial reporting completed by the Company resulted in the Company's Principal Executive Officer and Principal Financial Officer concluding that a material weakness in the Company's internal controls over financial reporting remained present as of September 30, 2024. Specifically, as a result of turnover and the availability of resources with the appropriate level of technical capabilities (including the impacts on staffing and recruiting and the general global labor shortage brought about by the global COVID-19 pandemic), the Company did not have effective staffing levels and adequate segregation of duties within several finance and accounting processes, including the ability to adequately assess the impairment of goodwill and intangible assets.
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In connection with the remediation of this material weakness, the Company has implemented additional controls to address the inventory cutoff deficiency mentioned above. Specifically, the Company has designed and implemented manual and automated controls over accruals, along with improved post-close review procedures. Additionally, the Company has introduced a quarterly cut-off control testing procedure to ensure that the timing of goods receipt aligns with invoicing. Through formal testing, management has concluded that the controls over inventory cutoff are now operating effectively.
Further, and as a result of this material weakness, the Company's financial disclosures for the quarterly period ending June 30, 2021 incorrectly disclosed certain debt that was due 11 months after the balance sheet date as long-term rather than as current liabilities. This debt was correctly classified and disclosed as of September 30, 2021. Additionally, and as a result of this material weakness, the Company's financial disclosures for the quarterly and annual periods ended June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, and September 30, 2021 incorrectly reported the weighted average shares outstanding which resulted in an incorrect determination of earnings per share and diluted earnings per share. The calculation of earnings per share and diluted earnings per share were corrected and disclosed as of December 31, 2021.
The Company has begun to address the material weaknesses described above through the following actions. Although the Company previously believed the material weaknesses would be addressed by the second half of 2023, due to continued staff turnover and the availability of resources with appropriate levels of technical capabilities, the Company now expects to complete these actions in 2024:
a.Engaging third-party consultants with appropriate expertise to assist the finance and accounting department on an interim basis until key roles are filled;
b.Assessing finance and accounting resources to identify the areas and functions that lack sufficient personnel and recruiting for experienced personnel to assume these roles;
c.Further centralization of key accounting processes to enable greater segregation of duties;
d.Developing further training on segregation of duties; and
e.Designing and implementing additional compensating controls where necessary.
The Company is working diligently to remediate this material weakness and will continue to evaluate the staffing requirements of the Company as the landscape and needs of the Company continue to evolve. However, there is no assurance that this material weakness will be fully remediated by December 31, 2024 given continuing lasting impacts of COVID-19 on staffing and labor for companies within our industry and otherwise. A material weakness cannot be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control Over Financial Reporting
During the third quarter of 2023, we implemented a new Enterprise Resource Planning ("ERP") system. As a result of this implementation, we revised existing internal controls, processes, and procedures where necessary.
Other than the changes discussed above in connection with our implementation of a new ERP system and remediation plan relating to our material weakness, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during our most recent quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings.
For information on legal proceedings, refer to Note 15 to the Unaudited Condensed Consolidated Financial Statements included this report.
Item 1A. Risk Factors.
There have been no material changes to the risk factors described in the section titled "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
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Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
(c)
During the third quarter of 2024, none of our directors or Section 16 officers adopted or terminated any "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" (as each term is defined in Item 408(a) of Regulation S-K).
Item 6. Exhibits.
| Incorporated by Reference | ||||||
| Exhibit No. | Description of Document | Schedule Form | File Number | Exhibit/Form | Filing Date | Filed or Furnished Herewith |
| 10.1 | 8-K | 000-56021 | 9/13/2024 | |||
|
31.1
|
Certification of Periodic Report by Principal Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||
|
31.2
|
Certification of Periodic Report by Principal Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. | X | ||||
|
32.1
|
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* | X | ||||
| 101 |
Attached as Exhibit 101 to this report are the following documents formatted in iXBRL (Extensible Business Reporting Language):): (i) Consolidated Statements of Financial Position as of September 30, 2024 (unaudited) and December 31, 2023 (audited), (ii) Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and September 30, 2023, (iii) Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2024 and September 30, 2023, (iv) Unaudited Condensed Consolidated Statements of Shareholders' Equity for the three and nine months ended September 30, 2024 and September 30, 2023, (v) Notes to Unaudited Condensed Consolidated Financial Statements and (vi) the information included in Part II, Item 5(c).
|
X |
* Document has been furnished, is not deemed filed and is not to be incorporated by reference into any of the Company's filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, irrespective of any general incorporation language contained in any such filing.
+ Portions of this exhibit are redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: November 14, 2024
| Acreage Holdings, Inc. | |
| By: | /s/ Philip Himmelstein |
| Philip Himmelstein | |
|
Chief Financial Officer (Principal Financial Officer and Authorized Signatory) |
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