UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 7, 2021
(Exact Name of Registrant as Specified in Its Charter)
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(State or Other Jurisdiction of Incorporation)
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(Commission File Number)
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(IRS Employer Identification No.)
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(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions
(see General Instructions A.2. below):
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading
Symbol(s)
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Name of each exchange on which registered
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of
the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Introductory Note
On September 13, 2021, AFC Gamma, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Report”) to report the
closing of the Company’s increased loan commitment to Devi Holdings Inc. and certain of its subsidiaries and affiliates (“Devi”) and related matters under Items 2.01 and 9.01 of Form 8-K.
This Current Report on Form 8-K/A (this “Amendment”) is being filed
as an amendment to the Original Report. This Amendment is being filed to provide the historical financial information of Devi, as required by Item 9.01 of Form 8-K that were not available for inclusion with the Original Report as permitted by item
9.01(a)(3). Except as set forth herein, this Amendment does not amend, modify or update the disclosure contained in the Original Report.
| Item 9.01 |
Financial Statements and Exhibits.
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(a) Financial statements of businesses or funds acquired.
The audited financial statements of Devi as of and for the year ended December 31, 2020, are filed as Exhibit 99.1 to this Amendment
and are incorporated herein by reference. The unaudited consolidated financial statements of Devi as of and for the six months ended June 30, 2021 are filed as Exhibit 99.2 to this Amendment and are incorporated herein by reference.
(b) Pro forma financial information.
The financial statements filed pursuant to paragraph (a) to this Item 9.01 are not, and will not, be consolidated into the Company’s
consolidated financial statements; therefore, no such disclosure of pro forma financial information is applicable.
(d) Exhibits
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Exhibit No.
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Description
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Audited consolidated financial statements of Devi Holdings Inc. as of and for the year ended December 31, 2020
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Interim unaudited consolidated financial statements of Devi Holdings Inc. as of and for the six months ended June 30, 2021
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104
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Cover Page Interactive Data File (embedded withing the Inline XBRL document)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
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Date: November 12, 2021
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AFC GAMMA, INC.
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By:
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/s/ Brett Kaufman
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Brett Kaufman
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Chief Financial Officer
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Exhibit 99.1
Devi Holdings, Inc and Subsidiaries
Consolidated Financial Statements and Independent Auditor’s Report
Years ended December 31, 2020 and 2019
(Expressed in U.S. Dollars)
Amounts presented in 000s of United States dollars, unless otherwise noted
DEVI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 2020 AND 2019
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Report of Independent Registered Public Accounting Firm
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1
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Consolidated Balance Sheets
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2
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Consolidated Statements of Operations
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3
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Consolidated Statements of Shareholders’ Equity
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4
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Consolidated Statements of Cash Flows
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5
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Notes to Consolidated Financial Statements
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7 - 54
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Directors of
Devi Holdings, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Devi Holdings, Inc. and its subsidiaries (together, the “Company”) as of December 31, 2020
and 2019, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the years ended December 31, 2020 and 2019 including the related notes (collectively referred to as the “consolidated financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019 and the results of its operations and its cash flows for the years
ended December 31, 2020 and 2019, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Matter
We draw attention to Note 2 in the financial statements, which indicates that the Company incurred a net loss of $14,600 for the year ended December 31,
2020 and has incurred cumulative losses from inception in the amount of $68,140 at December 31, 2020. These conditions, along with other matters as set forth in Note 2, indicate the existence of a material uncertainty that may cast significant
doubt about the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
We have served as the Company’s auditor since 2021.
/s/ DAVIDSON & COMPANY LLP
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Vancouver, Canada
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Chartered Professional Accountants
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November 10, 2021
1
DEVI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts expressed in thousands of United States dollars, except share data)
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As at December 31,
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||||||||
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2020
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2019
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|||||||
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ASSETS
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||||||||
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Current assets:
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||||||||
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Cash and cash equivalents
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$
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4,255
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$ |
3,141
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||||
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Accounts receivable, net
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1,214
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1,454
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Prepaid expenses
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1,997
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6,713
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Inventory, net
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9,264
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4,583
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Assets held for sale, current
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1,196
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-
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Other current assets
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75
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40
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Total current assets
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18,001
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15,931
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Property, plant and equipment, net
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56,257
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35,310
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Notes receivable, long-term
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1,365
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976
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Operating lease right-of-use asset, net
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3,223
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2,928
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Finance lease right-of-use asset, net
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3,362
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3,852
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Goodwill
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27,513
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25,170
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Intangible assets
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16,642
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9,642
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Equity method investments
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4,729
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1,069
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Assets held for sale
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-
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1,087
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Total assets
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$
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131,092
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$ |
95,965
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LIABILITIES, NON-CONTROLLING INTEREST AND SHAREHOLDERS’EQUITY
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Current liabilities:
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Accounts payable
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$
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4,489
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$ |
2,595
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Accrued expenses and other liabilities
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4,425
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3,090
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Income tax payable
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18,162
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7,239
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Operating lease liability, current portion
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632
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252
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Finance lease liability, current portion
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32
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467
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Notes payable, current portion
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-
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7,731
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Related party notes payable, current portion
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-
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12,059
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Related party paid-in-kind (‘PIK’) loan, current portion
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1,091
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-
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Total liabilities associated with assets held for sale, current
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640
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-
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Total current liabilites
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29,471
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33,433
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Put right liability
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1,171
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-
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Warrant liability, long-term
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11,494
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-
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Notes payable, net of current portion
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-
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1,037
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Related party paid-in-kind (‘PIK’) loan, net of current portion
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26,301
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-
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||||||
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Operating lease liability, net of current portion
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2,771
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2,768
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Finance lease liability, net of current portion
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3,398
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3,430
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Total liabilities associated with assets held for sale
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-
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452
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Total liabilities
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74,606
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41,120
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Commitments and contingencies (Note 16)
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Devi Holdings, Inc. shareholders’ equity:
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||||||||
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Common stock
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20
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13
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Additional paid-in capital
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117,152
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51,643
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Accumulated deficit
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(68,140
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)
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(30,328
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)
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Total Devi Holdings, Inc. shareholders’ equity
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49,032
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21,328
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Non-controlling interest
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7,454
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33,517
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Total shareholders’ equity
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56,486
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54,845
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Total liabilities and shareholders’ equity
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$
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131,092
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$ |
95,965
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||||
See accompanying Notes to Consolidated Financial Statements
2
DEVI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts expressed in thousands of United States dollars, except share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts expressed in thousands of United States dollars, except share data)
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For the year ended December 31,
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|||||||
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2020
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2019
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|||||||
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Revenue, net of discounts
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$
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76,340
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$
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45,182
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Cost of goods sold
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(36,744
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)
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(18,946
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)
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Gross profit
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39,596
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26,236
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||||||
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Operating expenses
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||||||||
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General and administrative
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23,500
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21,077
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Selling and marketing
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1,812
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1,206
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Share-based compensation
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10,986
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-
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Depreciation
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1,158
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1,050
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Total operating expenses
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37,456
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23,333
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Operating income
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2,140
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2,903
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Other (expense) income
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||||||||
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Loss on disposal of assets
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(120
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)
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(6
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)
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||||
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Income (loss) from equity method investments
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3,274
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(675
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)
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|||||
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Other income
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96
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79
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||||||
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Interest income
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156
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207
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||||||
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Interest expense
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(5,249
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)
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(1,708
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)
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||||
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Amortization of debt costs related to related party PIK loan
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(3,325
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)
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-
|
|||||
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Income (loss) before taxes and non controlling interest
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(3,028
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)
|
800
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|||||
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Income taxes
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(11,198
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)
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(7,674
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)
|
||||
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Loss from continued operations before non controlling interest
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(14,226
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)
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(6,874
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)
|
||||
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Net loss from discontinued operations, net of tax
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(374
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)
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(801
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)
|
||||
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Net loss before non controlling interest
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(14,600
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)
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(7,675
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)
|
||||
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Net income attributed to non controlling interest
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9,047
|
10,312
|
||||||
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Net loss attributed to Devi Holdings, Inc.
|
$
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(23,647
|
)
|
$
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(17,987
|
)
|
||
See accompanying Notes to Consolidated Financial Statements
3
DEVI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Amounts expressed in thousands of United States dollars, except share data)
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Shareholders’ Equity
|
||||||||||||||||||||||||||||
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Common Stock
|
||||||||||||||||||||||||||||
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Number of shares
|
At Par Value
|
Additional Paid-
in Capital
|
Accumulated
Deficit
|
Shareholders’
Equity attributed
to Devi
|
Non controlling
Interest |
Total
Shareholders’
Equity
|
||||||||||||||||||||||
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Balance at January 1, 2019
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-
|
$
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-
|
$
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-
|
$
|
-
|
$
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-
|
$
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-
|
$
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-
|
|||||||||||||||
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Shares issued to shareholders
|
32,050,010
|
3
|
28,648
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-
|
28,651
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-
|
28,651
|
|||||||||||||||||||||
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Share issuance costs
|
-
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-
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(1,323
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)
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-
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(1,323
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)
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-
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(1,323
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)
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||||||||||||||||||
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Dividends paid
|
-
|
-
|
-
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(1,290
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)
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(1,290
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)
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-
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(1,290
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)
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||||||||||||||||||
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Shares issued in connection with business combinations
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95,542,434
|
10
|
24,318
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-
|
24,328
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-
|
24,328
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|||||||||||||||||||||
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Acquisition and ownership changes relating to non controlling interests
|
-
|
-
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-
|
(8,995
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)
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(8,995
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)
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23,205
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14,210
|
|||||||||||||||||||
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Common control adjustment (prior to transfer date)
|
-
|
-
|
-
|
(2,056
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)
|
(2,056
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)
|
-
|
(2,056
|
)
|
||||||||||||||||||
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Net income (loss)
|
-
|
-
|
-
|
(17,987
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)
|
(17,987
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)
|
10,312
|
(7,675
|
)
|
||||||||||||||||||
|
Balance at December 31, 2019
|
127,592,444
|
$
|
13
|
$
|
51,643
|
$
|
(30,328
|
)
|
$
|
21,328
|
$
|
33,517
|
$
|
54,845
|
||||||||||||||
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Shares issued - equity financing
|
3,456,000
|
-
|
3,000
|
-
|
3,000
|
-
|
3,000
|
|||||||||||||||||||||
|
Share issuance costs
|
-
|
-
|
(423
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)
|
-
|
(423
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)
|
-
|
(423
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)
|
||||||||||||||||||
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Capital contributions from major shareholder
|
-
|
-
|
202
|
-
|
202
|
-
|
202
|
|||||||||||||||||||||
|
Shares issued in connection with business combination
|
1,984,126
|
-
|
1,329
|
-
|
1,329
|
-
|
1,329
|
|||||||||||||||||||||
|
Conversion of convertible notes payable
|
3,435,667
|
-
|
3,000
|
-
|
3,000
|
-
|
3,000
|
|||||||||||||||||||||
|
Cancellation of notes payable
|
8,500,000
|
1
|
5,999
|
-
|
6,000
|
-
|
6,000
|
|||||||||||||||||||||
|
Acquisition and ownership changes relating to non controlling interests
|
36,000,000
|
4
|
40,361
|
(14,165
|
)
|
26,200
|
(35,110
|
)
|
(8,910
|
)
|
||||||||||||||||||
|
Agent warrants in connection with AFC Term loan
|
-
|
-
|
1,056
|
-
|
1,056
|
-
|
1,056
|
|||||||||||||||||||||
|
Share-based compensation
|
15,290,000
|
2
|
10,985
|
-
|
10,987
|
-
|
10,987
|
|||||||||||||||||||||
|
Net income (loss)
|
-
|
-
|
-
|
(23,647
|
)
|
(23,647
|
)
|
9,047
|
(14,600
|
)
|
||||||||||||||||||
|
Balance at December 31, 2020
|
196,258,237
|
$
|
20
|
$
|
117,152
|
$
|
(68,140
|
)
|
$
|
49,032
|
$
|
7,454
|
$
|
56,486
|
||||||||||||||
See accompanying Notes to Consolidated Financial Statements
4
DEVI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts expressed in thousands of United States dollars, except share data)
|
2020
|
2019
|
|||||||
|
CASH FLOW FROM OPERATING ACTIVITIES
|
||||||||
|
Net loss
|
$
|
(14,600
|
)
|
$
|
(7,675
|
)
|
||
|
Net loss from discontinued operations, net of tax
|
374
|
801
|
||||||
|
Adjustments to reconcile net loss to net cash from operating activities
|
||||||||
|
Depreciation
|
1,669
|
1,050
|
||||||
|
Amortization of debt issuance cost related to related party PIK l
|
3,325
|
468
|
||||||
|
Amortization of right-of-use assets
|
644
|
290
|
||||||
|
Change in investment
|
(3,274
|
)
|
675
|
|||||
|
Loss on disposal of property, plant and equipment, net
|
154
|
56
|
||||||
|
Provision for bad debts
|
5
|
200
|
||||||
|
Share-based compensation
Changes in operating assets and liabilities
|
10,987
|
-
|
||||||
|
Accounts receivable
|
437
|
(553
|
)
|
|||||
|
Prepaids and other current assets
|
(924
|
)
|
(1,073
|
)
|
||||
|
Inventory
|
(4,681
|
)
|
(374
|
)
|
||||
|
Accounts payable and accrued liability and other liablities
|
3,232
|
4,347
|
||||||
|
Operating lease liability
|
(301
|
)
|
(173
|
)
|
||||
|
NET CASH PROVIDED IN CONTINUING OPERATIN
|
(2,953
|
)
|
(1,961
|
)
|
||||
|
NET CASH PROVIDED (USED) IN DISCONTINUED
|
115
|
4
|
||||||
|
NET CASH PROVIDED IN OPERATING ACTIVITIES
|
(2,838
|
)
|
(1,957
|
)
|
||||
|
CASH FLOW FROM INVESTING ACTIVITIES
|
||||||||
|
Acquisition of business, net of cash acquired
|
(2,042
|
)
|
(3,790
|
)
|
||||
|
Purchase of property, plant and equipment
|
(19,223
|
)
|
(18,239
|
)
|
||||
|
Purchase of intangible asset
|
-
|
(1,050
|
)
|
|||||
|
Issuance of notes receivable
|
-
|
(951
|
)
|
|||||
|
Distributions from equity method investments
|
2,813
|
-
|
||||||
|
Net cash used in investing activities from discontinued operations
|
(12
|
)
|
(433
|
)
|
||||
|
NET CASH USED IN INVESTING ACTIVITIES
|
(18,464
|
)
|
(24,463
|
)
|
||||
|
CASH FLOW FROM FINANCING ACTIVITIES
|
||||||||
|
Proceeds from issuance of common stock, net
|
2,577
|
23,572
|
||||||
|
Repayment of Finance Lease Liability
|
(1,559
|
)
|
(527
|
)
|
||||
|
Proceeds from issuance of notes payable
|
37,094
|
18,806
|
||||||
|
Repayment of notes payable
|
(7,098
|
)
|
(9,757
|
)
|
||||
|
Owner contribution
|
1,402
|
(1,243
|
)
|
|||||
|
Dividends paid
|
-
|
(1,290
|
)
|
|||||
|
Acquisition of NCI
|
(10,000
|
)
|
-
|
|||||
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
22,416
|
29,561
|
||||||
|
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
|
1,114
|
3,141
|
||||||
|
Cash, cash equivalents, beginning of year
|
3,141
|
-
|
||||||
|
Cash, cash equivalents, end of year
|
$
|
4,255
|
$
|
3,141
|
||||
See accompanying Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts expressed in thousands of United States dollars, except share data)
|
2020
|
2019
|
|||||||
|
Supplemental disclosure with respect to cash flows
|
||||||||
|
Interest paid
|
5,481
|
1,559
|
||||||
|
Taxes paid
|
243
|
400
|
||||||
|
Supplemental disclosure of non-cash activities
|
||||||||
|
Shares issued for acquisition of business
|
1,984
|
5,997
|
||||||
|
Shares issued for cancellation of warrants
|
10,245
|
-
|
||||||
|
Related party notes payable settlement in exchange for equity
|
7,500
|
-
|
||||||
|
Notes payable settlement in exchange for equity
|
2,500
|
-
|
||||||
|
Recognition of right-of-use assets and liabilities
|
7,953
|
7,312
|
||||||
|
Fair value of warrant liability
|
11,494
|
-
|
||||||
|
Fair value of put right
|
1,171
|
-
|
||||||
See accompanying Notes to Consolidated Financial Statements
6
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
DEVI HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
NOTE 1.
|
DESCRIPTION OF BUSINESS
|
On January 1, 2019, Devi Holdings, Inc. (the “Company” or “Devi”), a Delaware corporation, was formed through the investment of capital and the contribution of assets
from a group of stockholders. The Company is a vertically integrated multi-state cannabis operator, headquarters in Phoenix, Arizona at 120 N. 44th Street, Phoenix, AZ
85008. The Company holds licenses in Arizona, Maryland, Massachusetts, and Michigan, and the Company completed the divestiture of our ownership interest in the Connecticut retail asset in February 2021. Additionally, the Company holds investments in
entities that hold licenses in California and Missouri.
The Company conducts business through wholly-owned and majority-owned operating subsidiaries, operating agreements and other commercial arrangements.
These consolidated financial statements were authorized for issue by the Board of Directors on November 10, 2021.
|
NOTE 2.
|
BASIS OF PRESENTATION
|
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) as of December 31, 2020 and 2019.
The accounting policies have been consistently applied for all periods presented unless otherwise noted.
These consolidated financial statements include all the entities which the Company holds a controlling financial interest. Noncontrolling interest (“NCI”) on the
Company’s consolidated balance sheet represent the portion of the entities in which the Company does not have a 100% equity ownership. These consolidated financial statements reflect all adjustments, which, in the opinion of management, are necessary
for a fair presentation of the Company’s financial position and results of operations.
Basis on Measurement
These consolidated financial statements have been prepared on the going concern basis, which assume that the Company will continue in operation for the foreseeable
future and will be able to realize its assets and discharge its liabilities in the normal course of operations as they come due. Under the going concern basis, the historical cost convention, except for certain financial
instruments that are measured at fair value as described herein. The Company has a net loss of $14,600 for the year ended December 31, 2020 (year ended December 31, 2019 – loss of $7,675) and an accumulated deficit of $68,140 at December 31, 2020
(December 31, 2019 - $30,328). Management believes it will be successful in raising or obtaining the necessary funds to continue in the normal course of operations; however, there is no assurance that these funds will be available on terms acceptable
to the Company or at all. These financial statements do not include the adjustments that would be necessary should the Company be unable to continue as a going concern, and such adjustments could be material.
7
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Functional and presentation currency
These consolidated financial statements are presented in United States dollars, which is the functional currency of the Company and its subsidiaries.
Basis of Consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company either has a controlling voting interest or is the primary beneficiary of a variable
interest entity. All intercompany transactions and balances are eliminated on consolidation, and consistent accounting policies are applied across the Company. The financial statements of subsidiaries are included in the consolidated financial
statements from the date that control commences until the date that control ceases. The following is a list of the Company’s operating subsidiaries:
|
Legal Name
|
State of Organization
|
Nature of Operations
|
Ownership %
|
|||
|
AMMA INVESTMENT GROUP, LLC
|
Arizona
|
Management Company
|
50.01%
|
|||
|
TIDE MANAGEMENT, LLC
|
Arizona
|
Dispensary Management
|
100.00%
|
|||
|
DEVI ARIZONA RE HOLDING, LLC
|
Arizona
|
Real Estate Holdings
|
100.00%
|
|||
|
ARIZONA NATURAL PAIN SOLUTIONS, INC.
|
Arizona
|
Retail Dispensary
|
100.00%
|
|||
|
SIXTH STREET ENTERPRISES, INC.
|
Arizona
|
Retail Dispensary
|
100.00%
|
|||
|
AMADO MANAGEMENT, LLC
|
Arizona
|
Greenhouse/Outdoor Grow/Processing Lab
|
100.00%
|
|||
|
NATURE’S SWEETNESS, LLC
|
Arizona
|
Cultivation/Processing
|
100.00%
|
|||
|
DEVI CT MANAGEMENT, LLC
|
Connecticut
|
Dispensary Management
|
100.00%
|
|||
|
BLUE MOUNTAIN HOLDINGS, LLC
|
Maryland
|
Dispensary Management
|
100.00%
|
|||
|
MARYLAND HEALTH MANAGEMENT, LLC
|
Maryland
|
Dispensary Management
|
100.00%
|
|||
|
JKJ MANAGEMENT LAUREL, LLC
|
Maryland
|
Dispensary Management
|
100.00%
|
|||
|
BLUE MOUNTAIN CARE, LLC
|
Maryland
|
Retail Dispensary
|
0.00%
|
|||
|
DURJAYA, LLC
|
Maryland
|
Retail Dispensary
|
0.00%
|
|||
|
FARMALOGICS HEALTH AND WELLNESS, LLC
|
Maryland
|
Retail Dispensary
|
49.00%
|
|||
|
BLU PHARMS, LLC
|
Maryland
|
Retail Dispensary
|
0.00%
|
|||
|
GLOBE STREET MANAGEMENT, LLC
|
Massachusetts
|
Dispensary Management
|
100.00%
|
|||
|
NATURE’S MEDICINES, INC.
|
Massachusetts
|
Retail Dispensary
|
100.00%
|
|||
|
DEVI MASSACHUSETTS RE HOLDING, LLC
|
Massachusetts
|
Real Estate Holdings
|
100.00%
|
|||
|
TEDRA HEALTH MANAGEMENT, LLC
|
Michigan
|
Dispensary Management
|
100.00%
|
|||
|
DEVI WAYNE REAL ESTATE, LLC
|
Michigan
|
Real Estate Holdings
|
100.00%
|
|||
|
DEVI MI GROW, LLC
|
Michigan
|
Cultivation/Processing
|
0.00%
|
|||
|
DEVI MICHIGAN RE HOLDING, LLC
|
Michigan
|
Real Estate Holdings
|
100.00%
|
|||
|
PURE RELEAF N UNION, LLC
|
Michigan
|
Retail Dispensary
|
0.00%
|
|||
|
DEVI TIREMAN, LLC
|
Michigan
|
Retail Dispensary
|
100.00%
|
|||
|
WAYNE PRV, INC.
|
Michigan
|
Retail Dispensary
|
100.00%
|
The Company has additional subsidiaries that are not included above that have no impact on the consolidated financial statements.
The Company’s subsidiaries for which there is non-controlling interests include:
|
Legal Name
|
State of Organization
|
Nature of Operations
|
Non-controlling
%
|
|||
|
TIDE MANAGEMENT, LLC
|
Arizona
|
Dispensary Management
|
49.99%
|
|||
|
BLUE MOUNTAIN CARE, LLC
|
Maryland
|
Retail Dispensary
|
100.00%
|
|||
|
DURJAYA, LLC
|
Maryland
|
Retail Dispensary
|
100.00%
|
|||
|
FARMALOGICS HEALTH AND WELLNESS, LLC
|
Maryland
|
Retail Dispensary
|
51.00%
|
|||
|
BLU PHARMS LIMITED LIABILITY COMPANY
|
Maryland
|
Retail Dispensary
|
100.00%
|
|||
|
DEVI MI GROW, LLC
|
Michigan
|
Cultivation/Processing
|
100.00%
|
|||
|
PURE RELEAF N UNION, LLC
|
Michigan
|
Retail Dispensary
|
100.00%
|
8
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Intragroup balances, and any unrealized gains and losses or income and expenses arising from transactions with jointly controlled entities are eliminated to the extent
of the Company’s interest in the entity.
The Company treats transactions that do not result in a loss of control as equity transactions and generally no gain or loss is recognized. A change in ownership
interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests
and any consideration paid or received is recognized in a separate reserve within shareholders’ equity; additional paid in capital and attributable to the owners of the Company.
Variable Interest Entities (“VIE”)
A Variable Interest Entity (“VIE”) is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial
support, is structured such that equity investors lack the ability to make significant decisions relating to the entity’s operations through voting rights, or do not substantively participate in the gains and losses of the entity. Upon inception of a
contractual agreement, the Company performs an assessment to determine whether the arrangement contains a variable interest in a legal entity and whether that legal entity is a VIE. The primary beneficiary has both the power to direct the activities
of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE entity that could potentially be significant to the VIE. Where the Company concludes it is
the primary beneficiary of a VIE, the Company consolidates the accounts of that VIE. When the Company is not the primary beneficiary, the VIE is accounted for using the equity method and is included in equity method investments on the balance sheets.
Refer to Note 7 Equity Method Investments for the Company’s VIEs accounted for using the equity method.
The Company regularly reviews and reconsiders previous conclusions regarding whether it is the primary beneficiary of a VIE. The Company also reviews and reconsiders
previous conclusions regarding whether the Company holds a variable interest in a potential VIE, the status of an entity as a VIE, and whether the Company is required to consolidate such a VIE in the financial statements when a change occurs.
Equity method investments
In accordance with ASC 323, Investments – Equity Method and Joint Ventures, investments in entities over which the Company does not have a controlling financial interest
but has significant influence are accounted for using the equity method, with the Company’s share of earnings or losses reported in earnings or losses from equity method investments on the consolidated statements of operations. Equity method
investments are recognized initially at cost, which includes transaction costs. After initial recognition, the consolidated financial statements include the Company’s share of undistributed earnings or losses, and impairment, if any, until the date
on which significant influence ceases. The Company applies the cumulative earnings approach related to distributions received from equity method investment entities.
If the Company’s share of losses in an equity investment equals or exceeds its interest in the entity, including any net advances, the group does not recognize further
losses, unless it has guaranteed obligations of the investee or is otherwise committed to provide further financial support for the investee.
Unrealized gains on transactions between the Company and its equity-method investees are eliminated only to the extent of the Company’s interest in these entities.
Unrealized losses are also eliminated, except to the extent that the underlying asset is impaired.
9
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
|
NOTE 3.
|
SIGNIFICANT ACCOUNTING POLICIES
|
| (a) |
Revenue Recognition
|
Revenue is recognized when the control of the promised goods, through performance obligation, is transferred to the customer in an amount that reflects the consideration
we expect to be entitled to in exchange for the performance obligations. Excise taxes remitted to tax authorities are government-imposed excise taxes on cannabis. Excise taxes are recorded as a reduction of sales in net revenue in the consolidated
statements of operations and recognized as a current liability within accounts payable and other current liabilities on the consolidated balance sheets, with the liability subsequently reduced when the taxes are remitted to the tax authority. In
addition, amounts disclosed as net revenue are net of excise taxes, sales tax, duty tax, allowances, discounts and rebates. Due to the ability to sell product to retail and wholesale customers, along with operating in multiple geographical regions,
limits the uncertainty of revenue and cash flows.
In determining the transaction price for the sale of goods, the Company considers the effects of variable consideration and the existence of significant financing
components, if any.
Some contracts for the sale of goods may provide customers with a right of return for product quality claims, volume discount, bonuses for volume/quality achievement, or
sales allowance.
These items give rise to variable consideration. The Company uses the expected value method to estimate the variable consideration because this method best predicts the
amount of variable consideration to which the Company will be entitled. The Company uses historical evidence, current information and forecasts to estimate the variable consideration. The Company reduces revenue and recognizes a contract liability
equal to the amount expected to be refunded to the customer in the form of a future rebate or credit for a retrospective price reduction, representing its obligation to return the customer’s consideration. The estimate is updated at each reporting
period date.
| (b) |
Critical accounting estimates and judgments
|
The preparation of the Company’ consolidated financial statements requires management to make judgments, estimates and assumptions that affect the application of
policies and reported amounts of assets, liabilities, revenues and expenses. The estimates and judgments are subject to change based on experience and new information which
could result in outcomes that require a material adjustment to the carrying amounts of assets or liabilities affecting future periods. The estimates and underlying assumptions are reviewed on an ongoing basis.
Financial statement areas that require significant judgement and estimates are as follows:
Leases – The Company applies judgement in determining whether a
contract contains a lease and if a lease is classified as an operating lease or a finance lease. The Company determines the lease term as the non-cancellable term of the lease, which may include options to extend or terminate the lease when it is
reasonably certain that the Company will exercise that option. That is, it considers all relevant factors that create an economic incentive for it to exercise either the renewal or termination. After the commencement date, the Company reassesses
the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise or not to exercise the option to renew or to terminate (e.g., construction of significant leasehold
improvements or significant customization to the leased asset).
10
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Estimated useful lives, impairment considerations and depreciation of property, plant
and equipment and intangible assets – The useful lives of property,
plant and equipment and intangible assets is based on management’s judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions
and the useful lives of assets.
Goodwill and indefinite-lived intangible asset impairment testing require management to make estimates in the impairment testing model. On at least an annual basis, or whenever events or changes in circumstances indicate that the carrying amount of goodwill and intangible assets has been
impaired the Company tests whether goodwill and indefinite-lived intangible assets are impaired. Impairment of definite long-lived assets is influenced by judgment in defining a reporting unit and determining the indicators of impairment, and
estimates used to measure impairment losses. In order to determine if the value of goodwill and indefinite-lived intangible assets may have been impaired, we perform a qualitative assessment to determine if it was more-likely-than-not that the
reporting unit’s carrying value is less than the fair value, indicating the potential for goodwill impairment. When applying this valuation technique, we rely on a number of factors, including historical results, business plans, and forecasts.
The reporting unit’s fair value is determined using discounted future cash flow models, which incorporate assumptions regarding future events, specifically future cash
flows, growth rates and discount rates.
Share based compensation - The fair value of
stock-based compensation expenses is estimated using the Black-Scholes option pricing model and rely on a number of assumptions including the fair value of common shares on the grant date, risk-free rate, volatility rate, annual dividend yield, the
expected term, and the estimated rate of forfeiture of options granted. Volatility is estimated by using the historical volatility of the Company.
Acquisitions of Business – Judgement is used in determining a) whether an acquisition is a business combination or an asset acquisition. We use judgement in applying the acquisition
method of accounting for business combinations and estimates to value identifiable assets and liabilities at the acquisition date. Estimates are used to determine cash flow projections, including the period of future benefit, and future growth and
discount rates, among other factors. The values allocated to the acquired assets and liabilities assumed affect the amount of goodwill recorded on acquisition. Fair value of assets acquired and liabilities assumed is discussed in Note 4 Business
combinations. Significant estimates in the discounted cash flow model include the discount rate, rate of future revenue growth and profitability of the acquired business and working capital effects. The discount rate considers the relevant risk
associated with the business-specific characteristics and the uncertainty related to the ability to achieve projected cash flows. These estimates and the resulting valuations require significant judgment. Management engages third party experts to
assist in the valuation of material acquisitions.
Put right and Warrant liability – The fair value of the warrant liability is measured using a Black Scholes pricing model. Assumptions and estimates are made in determining an
appropriate risk-free interest rate, volatility, term, dividend yield, discount due to exercise restrictions, and the fair value of common stock. Any significant adjustments to the unobservable inputs would have a direct impact on the fair value of
the warrant liability.
Inventory valuation – At the end of each
reporting period, the Company performs an assessment of inventory and records write-downs for excess and obsolete inventories based on the Company’s estimated forecast of product demand, production requirements, market conditions, regulatory
environment, and spoilage. Actual inventory losses may differ from management’s estimates and such differences could be material to the Company’s balance sheets, statements of loss and comprehensive loss and statements of cash flows.
11
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Valuation of shares issued for noncash consideration – The fair value of the shares issued for noncash consideration is measured using a Black Scholes pricing model. Assumptions and estimates are made in determining an appropriate risk-free interest rate, volatility, term, dividend yield,
discount due to exercise restrictions, and the fair value of common stock. Any significant adjustments to the unobservable inputs would have a direct impact on the fair value of the warrant liability.
| (c) |
Cash and Cash Equivalents
|
Cash and cash equivalents include cash deposits in financial institutions, other deposits that are readily convertible into cash with original maturities of three months
or less, and cash on hand. Cash balances with institutions may at times be in excess of Federal Deposit Insurance Corporation limits.
| (d) |
Accounts Receivable
|
Accounts receivables, net of the allowance for doubtful accounts, represent their estimated net realizable value, which approximates fair value. Provisions for doubtful
accounts are recorded based on historical collection experience and the age of the receivables. Receivables are written off when they are deemed uncollectible.
The Company records a bad debt expense at an amount sufficient to absorb losses inherent in its accounts receivable portfolio as of the reporting dates based on the
projection collectability. The Company applies the use of allowance method to estimate the amounts to be written off. 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 current classes and the expected future loss. This assessment incorporates all available information relevant to considering the collectability of its current classes, including considering
economic and business conditions, default trends, changes in its class composition, among other internal and external factors. The customer portfolio is reviewed on an ongoing basis and bad debt expense recorded in the consolidated statement of
operations and adjusted for current conditions and reasonable supportable forecasts.
| (e) |
Notes Receivable
|
Notes receivable consist of loans made to third parties, carried at the loan principal amount plus any accrued interest. The Company evaluates the collectability of the
loan balances based on historical collection experience. No adjustments to the loan balance have been made as of the balance sheet date.
| (f) |
Inventory
|
Inventory consists of plants, dried cannabis, cannabis trim, cannabis derivatives such as oils and edible products, and accessories. Inventory is valued at the lower of
cost and net realizable value, determined using the first in first out method (FIFO). All direct and indirect costs related to inventory are capitalized as they are incurred, and they are subsequently recorded in cost of goods sold on the statements
of loss and comprehensive loss at the time inventory is sold. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.
Pre-harvest costs include labor and direct materials to grow cannabis, which includes water, electricity, nutrients, integrated pest management, growing supplies and
allocated overhead. Post-harvest costs include costs associated with drying, trimming, blending, extracting, purifying, quality testing and allocated overhead. Shipment and fulfillment costs include the costs of packaging, labelling, courier
services, and allocated overhead.
12
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
| (g) |
Property, Plant, and Equipment
|
Property, plant, and equipment are recorded at cost, net of accumulated depreciation and impairment, if
any. Depreciation of our property and equipment is calculated using the following terms and methods:
|
Category
|
Range (in years)
|
|
|
Land and land improvements
|
Not depreciated
|
|
|
Buildings and building improvements
|
33 - 39 years
|
|
|
Machinery and equipment
|
7 years
|
|
|
Computer equipment and software
|
3 years
|
|
|
Leasehold improvements
|
Shorter of 15 years and the remaining life of the lease
|
|
|
Motor vehicles
|
3 years
|
|
|
Furniture and fixtures
|
7 years
|
|
|
Finance lease - right of use assets
|
Straight line (shorter of lease term or useful life of leased asset)
|
|
|
Construction in progress
|
Not depreciated
|
The estimated residual values and useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a
prospective basis.
When assets are retired or disposed of, the cost and accumulated amortization are removed from the respective accounts and any related gain or loss is recognized.
Maintenance and repairs are charged to expenses as incurred. Significant expenditures, which extend the useful lives of assets or increase productivity, are capitalized. When significant parts of one of our capital assets have different useful lives,
they are accounted for as separate items or components of property, plant, and equipment.
Construction in progress includes construction progress payments, deposits, engineering costs and other costs directly related to the construction of the facilities.
Expenditures are capitalized during the construction period and construction in progress is transferred to the relevant class of capital assets when the assets are available for use, at which point in time the depreciation of the asset commences.
| (h) |
Acquisition of Business and goodwill
|
The Company accounts for acquisition of business using the acquisition method in accordance with Accounting Standards Codification, ASC 805, Business Combinations which
requires recognition of assets acquired and liabilities assumed, including contingent assets and liabilities, at their respective fair values on the date of acquisition. Contingent consideration is measured at its acquisition-date fair value and
included as part of the consideration transferred in a business combination. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity.
Contingent consideration that is classified as an asset or liability is re-measured at subsequent reporting dates, with the corresponding gain or loss recognized the consolidated statements of operations. Non-controlling interests in the acquiree are
measured at fair value on acquisition date. Acquisition-related costs are recognized as general and administrative expenses in the periods in which the costs are incurred, and the services are received (except for the costs to issue debt or equity
securities which are recognized according to specific requirements). Purchase price allocations may be preliminary and, during the measurement period not to exceed one year from the date of acquisition, changes in assumptions and estimates that
result in adjustments to the fair value of assets acquired and liabilities assumed are recorded in the period the adjustments are determined. Goodwill represents the excess of the consideration transferred for the acquisition of subsidiaries over the
net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. Included in the goodwill balance is the assembled workforce acquired, which does not qualify for separate recognition. Following initial recognition,
goodwill is measured at cost less any accumulated impairment losses.
13
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
| (i) |
Intangible assets other than goodwill
|
Intangible assets include intangible assets acquired as part of acquisition of business, asset acquisitions and other business transactions. The Company records
intangible assets at cost, net of accumulated amortization and accumulated impairment losses, if any. Cost is measured based on the fair values of cash consideration paid and equity interests issued. The cost of an intangible asset acquired is its
acquisition date fair value. Amortization of definite life intangible assets is calculated on a straight -line basis over the estimated useful lives of the assets using the following terms:
|
Category
|
Range (in years)
|
|
|
License and permits
|
Indefinite life intangible asset
|
When there is no foreseeable limit on the period of time over which an intangible asset is expected to contribute to the cash flows of the Company, an intangible asset
is determined to have an indefinite life. Indefinite-lived intangible assets are not amortized but assessed for impairment annually or more frequently when indicators of impairment exist. If the carrying value of an individual indefinite-lived
intangible asset exceeds its fair value, such individual indefinite-lived intangible asset is impaired by the amount of the excess.
The estimated useful lives are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. The
Company holds licenses and permits, which are necessary for continuity of business operations, and as such the Company will continue to renew or extend these arrangements. Note that the Company has elected to expense costs incurred to renew or
extend the term of a recognized intangible asset.
| (j) |
Impairment of long-lived assets
|
The Company reviews long-lived assets, including property and equipment and definite life intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying value of an asset may not be recoverable. In order to determine if assets have been impaired, assets are grouped and tested at the lowest level for which identifiable independent cash flows are available (“asset group”). An
impairment loss is recognized when the sum of projected undiscounted cash flows is less than the carrying value of the asset group. The measurement of the impairment loss to be recognized is based on the difference between the fair value and the
carrying value of the asset group. Fair value may be determined using a market approach or income approach. The reversal of impairment losses is prohibited.
| (k) |
Impairment of goodwill and indefinite-lived intangible assets
|
Goodwill is allocated to the reporting unit in which the business that created the goodwill resides. A
reporting unit is an operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. We operate one operating segment which are our
reporting unit, and goodwill is allocated at the operating segment level. For both the annual and interim tests, the Company has the option to either (i) perform a quantitative impairment test or (ii) first perform a qualitative assessment to
determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, in which case the quantitative test would be performed. The quantitative goodwill test compares the estimated fair value of each
reporting unit with its estimated net book value (including goodwill and identifiable intangible assets). If the reporting unit’s estimated fair value exceeds its estimated net book value, goodwill is not impaired. An impairment is recognized if the estimated fair value of a reporting unit is less than its estimated net book value. As of December 31,
2020, and 2019, there were no reporting units with goodwill at-risk for impairment. The Company will
continue to monitor its goodwill and indefinite lived intangible assets for possible impairment.
14
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
| (l) |
Equity method investments
|
Investments in entities over which the Company does not have a controlling financial interest but has significant influence, are accounted for using the equity method,
with the Company’s share of losses reported in loss from equity method investments on the statements of loss and comprehensive loss. Equity method investments are recorded at cost, plus the Company’s share of undistributed earnings or losses, and
impairment, if any, within interest in equity investees on the balance sheet. Distributions received from the Company’s equity method investments are accounted for using the cumulative earnings approach.
| (m) |
Cost of goods sold
|
Cost of goods sold represents costs directly related to manufacturing and distribution of the Company’s products. Primary costs include raw materials, packaging, direct
labor, overhead, shipping and handling, the amortization of manufacturing equipment and production facilities and tariffs. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance, and property
taxes. Cost of goods sold also includes inventory valuation adjustments. The Company recognizes the cost of goods sold as the associated revenues are recognized.
| (n) |
General and administrative
|
General and administrative expenses are comprised primarily of (i) personnel related costs such as salaries, benefits, annual employee bonus expense and share-based
‘compensation costs for personnel in corporate, finance, legal, and other administrative positions; (ii) legal, accounting, consulting, and other professional fees; and (iii) corporate insurance and other facilities costs associated with our
corporate and administrative locations.
| (o) |
Selling and marketing
|
Selling expenses are comprised direct selling costs which primarily consist of (i) commissions paid to our third-party workforce, (ii) patient acquisition and
maintenance fees, (iii) cannabis regulatory fees and (iv) freight. Marketing is comprised primarily of marketing and advertising expenses.
| (p) |
Leases
|
Effective January 1, 2019, the Company adopted ASC 842 Leases (the “New Leasing Standard”) using the modified retrospective approach. The reclassifications and the
adjustments arising from the new leasing rules are therefore recognized in the opening balance sheet on January 1, 2019.
Adjustments recognized on adoption of the New Leasing Standard
The Company holds leases related to office spaces and retail dispensary facilities. Upon adoption, the Company recognized lease liabilities in relation to leases which
had previously been classified as “operating leases” under the principles of ASC 840. These were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of January 1, 2019. The
weighted-average incremental borrowing rate for lease liabilities initially recognized as of January 1, 2019, was 9.58%. The Company did not have any leases which had been previously classified as “finance leases” under the principles of ASC 840 at
the time of adoption.
15
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
The associated right-of-use assets for the Company’s leases were measured on a retrospective basis as if the new rules had always been applied. There were no onerous
lease contracts that would have required an adjustment to the right-of-use assets at the date of initial application. Note that some of the Company’s leases include options to extend the lease for additional periods ranging from 1 to 5 years. The
Company has evaluated the likelihood of exercising these options, and the effect of exercise is included in the right-of-use asset balances as of December 31, 2019, and 2020.
In applying the New Leasing Standard for the first time, the Company applied the following practical expedients permitted by the standard:
| • |
The Company elected to take the “Package of 3” practical expedients to not reassess:
|
| o |
Whether any expired or existing contracts contain leases,
|
| o |
Lease classification for any expired or existing leases, and
|
| o |
Initial direct costs for any existing leases.
|
| • |
The Company elected to take the hindsight practical expedient.
|
The Company has also elected not to reassess whether a contract is or contains a lease at the date of initial application. Instead, for contracts entered into before the
transition date, the previous determinations pursuant to ASC 840 of whether a contract is a lease have been maintained.
The impact of the change in accounting policy on January 1, 2019, is summarized below:
| • |
right-of-use assets of $26 were recognized and
|
| • |
lease liabilities of $26 were recognized.
|
Accounting Policy for Leases
Right-of-use assets and corresponding lease liabilities are recognized for all leases at the commencement date, except for short-term leases (defined as leases with a
lease term of 12 months or less. The lease payments for these contracts are generally recognized on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which the economic
benefits from the leased asset are consumed. The Company has lease agreements with lease and non-lease components and accounts for such components as a single lease component.
Lease liabilities are initially measured at the present value of the lease payments, which are not paid at the commencement date, over the lease term. Lease payments
used in lease liability calculations include:
| • |
fixed payments (including in-substance fixed payments), less any lease incentives receivable,
|
| • |
variable lease payment that are based on an index or a rate,
|
| • |
amounts expected to be payable by the lessee under residual value guarantees,
|
| • |
the exercise price of a purchase option if the lessee is reasonably certain to exercise that option and
|
| • |
payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option.
|
16
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
The lease payments are discounted using the interest rate implicit in the lease. As most of the Company’s leases do not provide an implicit rate, the Company’s estimated
incremental borrowing rate, based on the information available at commencement date, is used to determine the present value of lease payments. The implicit rate is used when readily determinable. Lease payments are split into principal and interest
portions using the effective interest method. Subsequently, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured
if there is a modification, change in the lease term, change in the in-substance fixed lease payments, or change in the assessment to purchase the underlying asset.
The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, any initial direct
costs, and any restoration costs. They are subsequently measured at cost less accumulated amortization and impairment losses. Right-of-use assets are amortized over the shorter of the lease term or the useful life of the underlying asset.
In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option or not exercise a
termination option. Extension options (or periods after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). The lease term assessment is reviewed if a significant event or a
significant change in circumstances occurs which affects this assessment and that is within the control of the Company.
| (q) |
Fair value measurements
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The carrying values of accounts receivable, and other current assets, notes receivable, notes payable current portion, accounts payable and other liabilities approximate their fair values due to their short periods to maturity. The
Company calculates the estimated fair value of financial instruments, including investments, put right liability and warrant liability based on valuation techniques using the best information available and may include quoted market prices, market
comparables, and discounted cash flow projections
| (r) |
Contingencies
|
Contingent liabilities may result from a variety of legal matters as well as from contingent consideration included in business combinations. Contingent liabilities are
recorded for asserted and unasserted claims when it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. Contingent liabilities are disclosed when there is a reasonable possibility that the ultimate loss will
exceed the recorded liability. Contingent consideration in an acquisition of business is remeasured at fair value each reporting period until the contingency is resolved and any change in fair value, from either the passage of time or events
occurring after the acquisition date, is included in earnings. Additionally, estimating the loss, or range of loss, associated with a contingency requires analysis of multiple factors, and changes in law or other developments may ultimately cause our
judgments to change. Therefore, actual losses in any future period are inherently uncertain and may be materially different from our estimate.
| (s) |
Share-Based Payments
|
The Company granted restricted stock units to eligible directors. All goods and services received in exchange for the grant of any stock-based payments are measured at
their fair value unless the fair value cannot be estimated reliably. If the Company cannot estimate reliably the fair value of the goods and services received, the Company shall measure their value indirectly by reference to the fair value of the
equity instruments granted.
17
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Equity classified share-based payments are recognized in the financial statements based upon a grant-date fair value of an award. The fair value of stock options is
estimated using the Black-Scholes option-valuation model. The Company recognizes the grant-date fair value in compensation expense on a straight-line basis over the requisite service period of awards that are expected to vest. Forfeitures are
recorded when they occur in the period. Any cumulative adjustment prior to vesting is recognized in the current period. No adjustment is made to any expense recognized in prior period if share options ultimately exercised are different to that
estimated on vesting.
| (t) |
Income Taxes
|
Income taxes are recognized in the consolidated statements of loss and comprehensive loss and are comprised of current and deferred taxes. Current tax is recognized in
connection with income for tax purposes, unrealized tax benefits and the recovery of tax paid in a prior period and measured using enacted tax rates and laws applicable to the taxation period during which the income for tax purposes arose. Deferred
tax assets and liabilities are determined based on the differences between the financial reporting and the tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are
expected to reverse. Management assesses the likelihood that a deferred tax asset will be realized, and a valuation allowance is provided to the extent that it is more likely than not that all or a portion of a deferred tax asset will not be
realized.
The Company operates various limited liability companies’, see operating subsidiaries above, that are not taxpaying entities for federal income tax purposes.
Accordingly, the taxable income or loss of these entities is allocated to the members in accordance with provisions under its operating agreements.
The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the relevant tax authority. An
uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. A change in the recognition or measurement of an unrealized tax benefit is reflected in the period during which the change occurs.
The Company records interest and penalties associated with uncertain tax positions as a component of income before taxes. Penalties and associated interest costs, if
any, are recognized in general and administrative expenses in our consolidated statements of operations. During the years ended December 31, 2020, and 2019, respectively, the Company recognized an immaterial amount of interest and penalties.
In the normal course of business, the Company is subject to examination by taxing authorities. The federal statute of limitation remains open for the 2017 tax year to
the present. The state income tax returns generally remain open for the 2017 tax year through the present.
| (u) |
Discontinued Operations
|
The Company followed ASC 360, Property, Plant, an Equipment, and ASC 205-20, Discontinued Operations, to report assets held for sale and discontinued operations. The
Company classifies assets and liabilities of a business or asset group as held for sale, and the results of its operations as income (loss) from discontinued operations, net, for all periods presented, when (i) we commit to a plan to divest a
business or asset group, actively begin marketing it for sale, and when it is deemed probable of occurrence within the next twelve months, and (ii) when the business or asset group reflects a strategic shift that has, or will have, a major effect on
the Company’s operations and its financial results. In measuring the assets and liabilities held for sale, the Company evaluates which businesses or asset groups are being marketed for sale. See Note 17 for additional information.
18
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
| (v) |
Accounting Guidance not yet adopted
|
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting
for Income Taxes (ASU 2019-12), which among other things, eliminates certain exceptions in the current rules regarding the approach for intraperiod tax allocations and the methodology for calculating income taxes in an interim period, and
clarifies the accounting for transactions that result in a step-up in the tax basis for goodwill. ASU 2019-12 is effective for annual and interim periods beginning after December 15, 2021. Early adoption is permitted. The Company is evaluating the
impact on the consolidated financial statements and method of adoption. The Company expects to implement the provisions of ASU 2019-12 effective December 31, 2022.
Investments – Equity Securities
In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321),
Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). ASU 2020-01 clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the
accounting for measuring certain purchased options and forward contracts to acquire investments. The guidance in ASU 2020-01 is effective for annual and interim periods beginning after December 15, 2021. Early adoption is permitted. The Company is
evaluating the impact on the consolidated financial statements and method of adoption. The Company expects to implement the provisions of ASU 2019-12 effective December 31, 2022.
| (w) |
Subsequent Events
|
Subsequent events have been evaluated by management through November 10, 2021, which is the date the financial statements were available to be issued.
|
NOTE 4.
|
BUSINESS COMBINATIONS
|
Common Control Transactions
The assets and liabilities assumed from the Company’s common control transactions during the year 2019 are as follows:
19
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
|
Company acquired:
|
AMMA
Investment
Group, LLC
|
Sixth Street
Enterprises
|
Blue Mountain
Holdings, LLC
|
Blue Mountain
Care, LLC
|
Blu Pharms, LLC
|
JKJ
Management
Laurel, LLC
|
Maryland
Health
Management,
LLC
|
Farmalogics
Health and
Wellness, LLC
|
Durjaya, LLC
|
Tedra Health
Management,
LLC
|
Pure Releaf N
Union, LLC
|
Globe Street
Management,
LLC
|
Nature’s
Medicines, Inc.
|
Total
|
||||||||||||||||||||||||||||||||||||||||||
|
Date of transfer:
|
1/1/2019
|
1/1/2019
|
9/30/2019
|
9/30/2019
|
9/30/2019
|
9/30/2019
|
10/2/2019
|
10/2/2019
|
10/2/2019
|
10/10/2019
|
10/10/2019
|
11/1/2019
|
11/1/2019
|
FY 2019
|
||||||||||||||||||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Cash and cash equivalents
|
$
|
2
|
$
|
647
|
$
|
39
|
$
|
191
|
$
|
323
|
$
|
64
|
$
|
59
|
$
|
349
|
$
|
3
|
$
|
9
|
$
|
128
|
$
|
196
|
$
|
119
|
$
|
2,129
|
||||||||||||||||||||||||||||
|
Accounts receivable, net
|
136
|
735
|
10
|
18
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
899
|
||||||||||||||||||||||||||||||||||||||||||
|
Prepaid expenses
|
76
|
158
|
40
|
15
|
18
|
8
|
28
|
30
|
2
|
24
|
7
|
8
|
-
|
414
|
||||||||||||||||||||||||||||||||||||||||||
|
Inventory, net
|
-
|
2,523
|
-
|
321
|
245
|
-
|
-
|
465
|
32
|
-
|
145
|
-
|
144
|
3,875
|
||||||||||||||||||||||||||||||||||||||||||
|
Other current assets
|
11
|
8
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
1
|
-
|
27
|
3
|
50
|
||||||||||||||||||||||||||||||||||||||||||
|
Propertly, plant and equipment
|
1,999
|
162
|
941
|
-
|
-
|
326
|
2,415
|
-
|
-
|
246
|
-
|
7,363
|
-
|
13,452
|
||||||||||||||||||||||||||||||||||||||||||
|
Right-of-use asset for operating leases, net
|
26
|
-
|
-
|
-
|
-
|
874
|
875
|
-
|
-
|
-
|
155
|
431
|
-
|
2,361
|
||||||||||||||||||||||||||||||||||||||||||
|
Right-of-use asset for finance leases, net
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
405
|
3,500
|
-
|
3,905
|
||||||||||||||||||||||||||||||||||||||||||
|
Goodwill
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5,578
|
-
|
5,578
|
||||||||||||||||||||||||||||||||||||||||||
|
Intangibles assets, net
|
-
|
-
|
-
|
-
|
840
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
4,702
|
5,542
|
||||||||||||||||||||||||||||||||||||||||||
|
Total assets
|
2,250
|
4,233
|
1,030
|
545
|
1,426
|
1,272
|
3,377
|
844
|
37
|
280
|
840
|
17,103
|
4,968
|
38,205
|
||||||||||||||||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Accounts payable
|
(150
|
)
|
(210
|
)
|
(1
|
)
|
(223
|
)
|
(274
|
)
|
(1
|
)
|
(128
|
)
|
(212
|
)
|
(34
|
)
|
(83
|
)
|
(12
|
)
|
(17
|
)
|
-
|
(1,345
|
)
|
|||||||||||||||||||||||||||||
|
Accrued expenses and other liabilities
|
(327
|
)
|
(254
|
)
|
-
|
(2
|
)
|
(1
|
)
|
-
|
(12
|
)
|
(18
|
)
|
(9
|
)
|
(25
|
)
|
(9
|
)
|
(950
|
)
|
-
|
(1,607
|
)
|
|||||||||||||||||||||||||||||||
|
Operating lease liability, current portion
|
(9
|
)
|
-
|
-
|
-
|
-
|
4
|
(3
|
)
|
-
|
-
|
-
|
(3
|
)
|
(73
|
)
|
-
|
(84
|
)
|
|||||||||||||||||||||||||||||||||||||
|
Finance lease liability, current portion
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(430
|
)
|
(27
|
)
|
-
|
(457
|
)
|
|||||||||||||||||||||||||||||||||||||||
|
Notes payable, current portion
|
(275
|
)
|
-
|
-
|
-
|
(88
|
)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(363
|
)
|
|||||||||||||||||||||||||||||||||||||||
|
Related party notes payable, current portion
|
-
|
-
|
-
|
-
|
-
|
-
|
(54
|
)
|
-
|
-
|
-
|
-
|
-
|
-
|
(54
|
)
|
||||||||||||||||||||||||||||||||||||||||
|
Operating lease liability, net of current portion
|
(17
|
)
|
-
|
-
|
-
|
-
|
(905
|
)
|
(889
|
)
|
-
|
-
|
-
|
(151
|
)
|
(358
|
)
|
-
|
(2,320
|
)
|
||||||||||||||||||||||||||||||||||||
|
Finance lease liability, net of current portion
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,389
|
)
|
-
|
(3,389
|
)
|
||||||||||||||||||||||||||||||||||||||||
|
Notes payable, net of current portion
|
-
|
-
|
-
|
-
|
-
|
-
|
(899
|
)
|
-
|
-
|
-
|
-
|
(2,088
|
)
|
-
|
(2,987
|
)
|
|||||||||||||||||||||||||||||||||||||||
|
Total liabilities
|
(778
|
)
|
(464
|
)
|
(1
|
)
|
(225
|
)
|
(363
|
)
|
(902
|
)
|
(1,985
|
)
|
(230
|
)
|
(43
|
)
|
(108
|
)
|
(605
|
)
|
(6,902
|
)
|
-
|
(12,606
|
)
|
|||||||||||||||||||||||||||||
|
Net assets assumed
|
$
|
1,472
|
$
|
3,769
|
$
|
1,029
|
$
|
320
|
$
|
1,063
|
$
|
370
|
$
|
1,392
|
$
|
614
|
$
|
(6
|
)
|
$
|
172
|
$
|
235
|
$
|
10,201
|
$
|
4,968
|
$
|
25,599
|
|||||||||||||||||||||||||||
20
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
AMMA Investment Group LLC
| • |
On January 1, 2019, the Company entered into an Exercise of Option and Stock Transfer Agreement (the agreement) with AMMA Investment Group, LLC (“AMMA”). AMMA is an Arizona limited liability company
which provides cannabis management services to Arizona based medical and recreational cannabis dispensaries.
|
| • |
The Company issued 12,515,400 shares of common stock (implied valued of $377), $7,641 in debt, and $739 in cash in exchange (or total consideration of $8,757) for a 46.75% ownership interest in AMMA.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the agreement effective January 1, 2019, the results of operations of AMMA were included and reported in the Company’s consolidated results.
|
| • |
The Company recognized net assets acquired of $1,472, noncontrolling interest of $858, and a retained earnings adjustment of $8,039 related to consideration transferred above the carrying value of
the interests acquired on the transfer date of January 1, 2019.
|
| • |
On April 2, 2020, the Company acquired an additional 3.25% ownership interest in AMMA in exchange for 1,000,000 shares of common stock (implied value of $271), for a cumulative ownership interest of
50.00%.
|
| • |
On May 15, 2020, the Company acquired the remaining 50.00% ownership interest in AMMA in exchange for $6,333 in cash and 13,300,000 shares of common stock (implied value of $4,925), for a cumulative
ownership interest of 100.00%.
|
Sixth Street Enterprises, Inc.
| • |
Prior to January 1, 2019, AMMA Investment Group, LLC (“AMMA”) entered into a Management Services Agreement (MSA) with Sixth Street Enterprises, Inc. (“Sixth Street”).
|
| • |
AMMA determined that Sixth Street was a VIE of AMMA Investment Group, LLC as the cannabis management service fees were not commensurate of services provided.
|
| • |
The Company re-evaluated the VIE on January 1, 2019 and concluded the primary beneficiary of Sixth Street had not changed.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the MSA effective prior to January 1, 2019, the results of operations of Sixth Street were included and reported in the Company’s consolidated results.
|
| • |
The Company recognized net assets acquired of $3,769 and noncontrolling interest of $3,769 on the transfer date of January 1, 2019.
|
Blue Mountain Holdings LLC
| • |
On September 30, 2019, the Company entered into an Exercise of Option and Stock Transfer Agreement (the agreement) with Blue Mountain Holdings, LLC (“BMH”). BMH is a Maryland limited liability
company which provides cannabis management services to Maryland based medical cannabis dispensaries, specifically Blue Mountain Care, LLC (“BMC”).
|
| • |
The Company issued 6,165,640 shares of common stock (implied valued of $1,029) in exchange for a 100.00% ownership interest in BMH.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the agreement effective September 30, 2019, the results of operations of BMH were included and reported in the Company’s consolidated results at the
beginning of the period (or January 1, 2019).
|
| • |
The Company recognized net assets acquired of $1,029 on the transfer date of September 30, 2019.
|
21
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Blue Mountain Care LLC
| • |
On July 1, 2019, Blue Mountain Holdings, LLC (“BMH”) entered into a Management Services Agreement (MSA) with Blue Mountain Care, LLC (“BMC”). BMC is a Maryland limited liability company which
operates a medical cannabis dispensary.
|
| • |
BMH determined that BMC was a VIE of Blue Mountain Holdings, LLC as the cannabis management service fees were not commensurate of services provided.
|
| • |
The Company re-evaluated the VIE on September 30, 2019 and concluded the primary beneficiary of BMC had not changed.
|
| • |
Per the consolidation guidance in ASC 810-10-55-40, the Company will also consolidate BMC on the BMH transfer date of September 30, 2019, as BMH will consolidate BMC as the primary beneficiary of the
BMC VIE.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the MSA effective July 1, 2019, the results of operations of BMC were included and reported in the Company’s consolidated results at the beginning of the
period (or January 1, 2019).
|
| • |
The Company recognized net assets acquired of $320 and noncontrolling interest of $320 on the transfer date of September 30, 2019.
|
| • |
Note that the subsequent common control transaction between the Company and BMH (noted above) does not result in a reconsideration event as the primary beneficiary of the VIE did not change.
|
| • |
On September 30, 2019, the Company entered into an Exercise of Option and Stock Transfer Agreement (the agreement) with JKJ Management Laurel, LLC (“JKJ”). JKJ is a Maryland limited liability company
which provides cannabis management services to Maryland based medical cannabis dispensaries, specifically Blu Pharms, LLC (“Blu Pharms”).
|
| • |
The Company issued 6,500,000 shares of common stock (implied valued of $370) in exchange for a 100.00% ownership interest in JKJ.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the agreement effective September 30, 2019, the results of operations of JKJ were included and reported in the Company’s consolidated results at the
beginning of the period (or January 1, 2019).
|
| • |
The Company recognized net assets acquired of $370 on the transfer date of September 30, 2019.
|
Blu Pharms LLC
| • |
JKJ determined that Blu Pharms was a VIE of JKJ Management Laurel, LLC as the cannabis management service fees were not commensurate of services provided.
|
| • |
The Company re-evaluated the VIE on September 30, 2019 and concluded the primary beneficiary of Blu Pharms had not changed.
|
| • |
Per the consolidation guidance in ASC 810-10-55-40, the Company will also consolidate Blu Pharms on the JKJ transfer date of September 30, 2019, as JKJ will consolidate Blu Pharms as the primary
beneficiary of the Blu Pharms VIE.
|
22
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the MSA effective September 30, 2019, the results of operations of Blu Pharms were included and reported in the Company’s consolidated results at the
beginning of the period (or January 1, 2019).
|
| • |
The Company recognized net assets acquired of $1,063 and noncontrolling interest of $1,063 on the transfer date of September 30, 2019.
|
Devi CT Management LLC
| • |
On October 1, 2019, the Company entered into an Exercise of Option and Stock Transfer Agreement (the agreement) with Devi CT Management, LLC (“Devi CT”). Devi CT is a Connecticut limited liability
company which provides cannabis management services to Connecticut based medical cannabis dispensaries.
|
| • |
The Company issued 12,177,933 shares of common stock (implied valued of $470) in exchange for a 100.00% ownership interest in Devi CT.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the agreement effective October 1, 2019, the results of operations of Devi CT were included and reported in the Company’s consolidated results at the
beginning of the period (or January 1, 2019).
|
| • |
The Company recognized net assets acquired of $nil on the transfer date of October 1, 2019.
|
Maryland Health Management LLC
| • |
On October 2, 2019, the Company entered into a Stock Transfer Agreement (the agreement) with Multi Nine, LLC (“Multi Nine”). Multi Nine is an Arizona limited liability company that was the majority
shareholder of Maryland Health Management, LLC (“MHM”).
|
| • |
MHM is a Maryland limited liability company which provides cannabis management services to Maryland based medical cannabis dispensaries.
|
| • |
The Company issued 20,478,427 shares of common stock (implied valued of $1,140) in exchange for an 81.88% ownership interest in MHM.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the agreement effective October 2, 2019, the results of operations of MHM were included and reported in the Company’s consolidated results at the
beginning of the period (or January 1, 2019).
|
| • |
The Company recognized net assets acquired of $1,392 and noncontrolling interest of $252 on the transfer date of October 2, 2019.
|
| • |
On May 15, 2020, the Company acquired the remaining 18.12% ownership interest in MHM with a basis of $106 in exchange for $650 in cash and 1,365,000 shares of common stock (implied value of $106),
for a cumulative ownership interest of 100.00%. The Company recorded a retained earnings adjustment of $650 related to consideration transferred above the carrying value of the noncontrolling interest acquired.
|
Farmalogics Health and Wellness LLC
| • |
On March 8, 2018, Maryland Health Management, LLC (“MHM”) entered into a Management Services Agreement (MSA) with Farmalogics Health and Wellness, LLC (“Farmalogics”). Farmalogics is a Maryland
limited liability company which operates a medical cannabis dispensary.
|
| • |
MHM determined that Farmalogics was a VIE of Maryland Health Management, LLC as the cannabis management service fees were not commensurate of services provided.
|
23
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
| • |
Immediately prior to the closing of the MSA, there was no common control of both MHM and Farmalogics, and as such the transaction was accounted for as a business combination and the results of
operations have been included in the consolidated financial statements of MHM since the date of acquisition. However, Farmalogics had no material assets or liabilities to adjust to fair value as of March 8, 2018.
|
| • |
On September 20, 2019, Jigarkumar Patel transferred his interests in Dalraa, LLC, a Virginia limited liability company owned by Jigarkumar Patel but not affiliated with the Company, to Stephanie
Jordan in a noncash exchange for her 51.00% ownership interest in Farmalogics.
|
| • |
The Company re-evaluated the Farmalogics VIE on October 2, 2019 and concluded the primary beneficiary of Farmalogics had not changed.
|
| • |
Per the consolidation guidance in ASC 810-10-55-40, the Company will also consolidate Farmalogics on the MHM transfer date of October 2, 2019, as MHM will consolidate Farmalogics as the primary
beneficiary of the Farmalogics VIE.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the MSA effective March 8, 2018, the results of operations of Farmalogics were included and reported in the Company’s consolidated results at the
beginning of the period (or January 1, 2019).
|
| • |
The Company recognized net assets acquired of $614 and noncontrolling interest of $614 on the transfer date of October 2, 2019.
|
| • |
On May 15, 2020, the Company acquired a 49.00% ownership interest in Farmalogics with a basis of $301 in exchange for $17 in cash and 35,000 shares of common stock (implied value of $284).
|
Durjaya LLC
| • |
On March 12, 2018, Maryland Health Management, LLC (“MHM”) entered into a Management Services Agreement (MSA) with Durjaya, LLC (“Durjaya”). Durjaya is a Maryland limited liability company which
operates a medical cannabis dispensary.
|
| • |
MHM determined that Durjaya was a VIE of Maryland Health Management, LLC as the cannabis management service fees were not commensurate of services provided.
|
| • |
Immediately prior to the closing of the MSA, there was no common control of both MHM and Durjaya, and as such the transaction was accounted for as a business combination and the results of operations
have been included in the consolidated financial statements of MHM since the date of acquisition. However, Durjaya had no material assets or liabilities to adjust to fair value as of March 12, 2018.
|
| • |
The Company re-evaluated the Durjaya VIE on October 2, 2019 and concluded the primary beneficiary of Durjaya had not changed.
|
| • |
Per the consolidation guidance in ASC 810-10-55-40, the Company will also consolidate Durjaya on the MHM transfer date of October 2, 2019, as MHM will consolidate Durjaya as the primary beneficiary
of the Durjaya VIE.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the MSA effective March 12, 2018, the results of operations of Durjaya were included and reported in the Company’s consolidated results at the beginning
of the period (or January 1, 2019).
|
| • |
The Company recognized net liabilities acquired of ($6) and noncontrolling interest of ($6) on the transfer date of October 2, 2019.
|
24
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Tedra Health Management LLC
| • |
On October 10, 2019, the Company entered into an Exercise of Option and Stock Transfer Agreement (the agreement) with Tedra Health Management, LLC (“THM”). THM is a Michigan limited liability company
which provides cannabis management services to Maryland based medical cannabis dispensaries.
|
| • |
The Company issued 4,000,000 shares of common stock (implied valued of $172) in exchange for a 100.00% ownership interest in THM.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the agreement effective October 10, 2019, the results of operations of THM were included and reported in the Company’s consolidated results at the
beginning of the period (or January 1, 2019).
|
| • |
The Company recognized net assets acquired of $172 on the transfer date of October 10, 2019.
|
Pure Releaf N Union LLC
| • |
On July 3, 2019, Tedra Health Management, LLC (“THM”) entered into a Management Services Agreement (MSA) with Pure Releaf N Union, LLC (“Pure Releaf”). Pure Releaf is a Michigan limited liability
company which operates a medical cannabis dispensary.
|
| • |
THM determined that Pure Releaf was a VIE of Tedra Health Management, LLC as the cannabis management service fees were not commensurate of services provided.
|
| • |
The Company re-evaluated the VIE on October 10, 2019 and concluded the primary beneficiary of Pure Releaf had not changed.
|
| • |
Per the consolidation guidance in ASC 810-10-55-40, the Company will also consolidate Pure Releaf on the THM transfer date of October 10, 2019, as THM will consolidate Pure Releaf as the primary
beneficiary of the Pure Releaf VIE.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the MSA effective July 3, 2019, the results of operations of Pure Releaf were included and reported in the Company’s consolidated results at the beginning
of the period (or January 1, 2019).
|
| • |
The Company recognized net assets acquired of $235 and noncontrolling interest of $235 on the transfer date of October 10, 2019.
|
Globe Street Management LLC
| • |
On November 1, 2019, the Company entered into an Exercise of Option and Stock Transfer Agreement (the agreement) with Globe Street Management, LLC (“GSM”) and Nature’s Medicines, Inc. (“Nature’s”).
GSM is a Massachusetts limited liability company which provides cannabis management services to Massachusetts based medical cannabis dispensaries. Natures is a Massachusetts nonprofit corporation which operates a medical cannabis dispensary.
|
| • |
The Company issued 22,666,667 shares of common stock (implied valued of $15,169) in exchange for a 100.00% ownership interest in GSM and Nature’s.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the agreement effective November 1, 2019, the results of operations of GSM were included and reported in the Company’s consolidated results as of June 1,
2019, which is the date Jigarkumar Patel obtained control of GSM.
|
| • |
The Company recognized net assets acquired of $10,201 on the transfer date of November 1, 2019.
|
25
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Natures Medicine, Inc.
| • |
On January 1, 2019, GSM entered into a Management Services Agreement (MSA) with Nature’s Medicine, Inc. (“Nature’s”). Nature’s is a Massachusetts nonprofit corporation which operates a medical
cannabis dispensary.
|
| • |
GSM determined that Nature’s was a VIE of GSM as the cannabis management service fees were not commensurate of services provided.
|
| • |
On November 1, 2019, the Company entered into an Exercise of Option and Stock Transfer Agreement (the agreement) with Globe Street Management, LLC (“GSM”) and Nature’s Medicines, Inc. (“Nature’s”).
GSM is a Massachusetts limited liability company which provides cannabis management services to Massachusetts based medical cannabis dispensaries. Nature’s is a Massachusetts nonprofit corporation which operates a medical cannabis dispensary.
|
| • |
The Company re-evaluated the VIE on November 1, 2019 and concluded the primary beneficiary of Nature’s had not changed.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the agreement effective November 1, 2019, the results of operations of Nature’s were included and reported in the Company’s consolidated results as of
June 1, 2019, which is the date Jigarkumar Patel obtained control of Nature’s.
|
| • |
The Company recognized net assets acquired of $4,968 on the transfer date of November 1, 2019.
|
Devi MI Grow LLC
| • |
On January 1, 2020, Tedra Health Management, LLC (“THM”) entered into a Management Services Agreement (MSA) with Devi MI Grow, LLC (“Devi MI Grow”). Devi MI Grow is a Michigan limited liability
company which operates a medical cannabis cultivation center.
|
| • |
THM determined that Devi MI Grow was a VIE of Tedra Health Management, LLC as the cannabis management service fees were not commensurate of services provided.
|
| • |
Per the consolidation guidance in ASC 810-10-55-40, the Company will also consolidate Devi MI Grow on January 1, 2020, as THM will consolidate Devi MI Grow as the primary beneficiary of the Devi MI
Grow VIE.
|
| • |
Pursuant to ASC 250-10 and ASC 805-50-45 and the MSA effective January 1, 2020, the results of operations of Devi MI Grow were included and reported in the Company’s consolidated results at the
beginning of the period reported per the consolidated financial statements (or January 1, 2019).
|
| • |
The Company recognized net assets acquired of $nil and noncontrolling interest of $nil on the transfer date of January 1, 2020.
|
Business Combination Transactions
The goodwill recognized for each acquisition listed below consists largely of the synergies and economies of scale expected from combining the operations of the
businesses. These synergies include the access into a new market and the use of the Company’s existing commercial infrastructure to expand sales. None of the goodwill is expected to be deductible for tax purposes.
26
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Amado Management LLC
On January 1, 2019, the Company purchased a 62.49% controlling interest in Amado Management, LLC, (“Amado”) which owns and operates a cannabis cultivation site in Amado,
Arizona. The transaction was accounted for as a business combination and the results of operations have been included in the accompanying consolidated financial statements, since the date of acquisition. The acquisition of Amado allows the Company to
be vertically integrated in Arizona. The Company used the transaction method under the market approach to fair value the noncontrolling interest. The equity issued relates to Jigarkumar Patel, CEO, interest that was assigned to the Company in
exchange for 5,997,200 shares of Devi stock. In 2020, the Company acquired the remaining noncontrolling interest of Amado for 17,752,000 shares of Devi stock and approximately $1.8 million cash. The equity interest issued was fair valued under the
market approach based on another stock transaction in the Company stock. The property acquired was fair valued under the market approach based on comparable sales in the market. In addition, the promissory note to sellers were fair valued under the
market approach, by assigning the residual value of Amado to the promissory notes to sellers. The related transaction costs were immaterial and included in general and administrative expenses in the accompanying consolidated statements of operations.
The consolidated statements of operations include revenue of $nil and net profit of $nil for the year ended December 31, 2019, respectively, as the transactions are intercompany and eliminated at year end.
The following table summarizes fair value of the total consideration:
|
Consideration
|
Amount
|
|||
|
Cash paid to sellers at closing
|
$
|
1,211
|
||
|
Fair value of equity issued
|
5,997
|
|||
|
Promissory Note to seller
|
8,831
|
|||
|
Total consideration transferred
|
16,039
|
|||
|
Noncontrolling interest
|
14,775
|
|||
|
Total (fair value of the Acquiree as a whole)
|
$
|
30,814
|
||
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands).
|
Asset
|
January 1, 2019
|
|||
|
Cash and cash equivalents $
|
18
|
|||
|
Accounts receivable
|
1
|
|||
|
Prepaid expenses
|
41
|
|||
|
Property Plant & Equipment
|
15,012
|
|||
|
Other assets
|
26
|
|||
|
Goodwill
|
18,397
|
|||
|
Total assets
|
33,495
|
|||
|
Liability
|
||||
|
Accounts payable
|
398
|
|||
|
Accrued expenses and other current liabilities
|
288
|
|||
|
Notes Payable - Related Party
|
225
|
|||
|
Notes Payable
|
1,770
|
|||
|
Total liabilities
|
2,681
|
|||
|
Net assets acquired
|
30,814
|
|||
|
Total (fair value of the Acquiree as a whole)
|
$
|
30,814
|
||
The excess of the consideration transferred over the estimated fair value of the net assets received has been recorded in goodwill. Goodwill primarily related to factors
such as synergies and market opportunities and includes assembled workforce which is not recognized separately and apart from goodwill as it is neither separable nor contractual in nature.
27
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Wayne PRV, Inc.
On October 19, 2019, the Company purchased a 100% controlling interest in Wayne PRV, Inc., which operates a dispensary in Wayne, Michigan. The transaction was accounted for as a business combination and the results
of operations have been included in the accompanying consolidated financial statements, since the date of acquisition. The addition of Wayne PRV, Inc. expands operating footprint in Michigan. The license and permits intangible fair valued under
the market approach based on another observable transaction in the market. The building and land were fair valued under the market approach, which uses prices and other relevant information generated by market transactions involving identical or
comparable items. The Company incurred $0.2 million in transaction expenses that were expensed when occurred. The Consolidated statements of operations include revenue of approximately $133 and net loss of $39 for the year ended December 31,
2019, respectively.
The following table summarizes fair value of the total consideration:
|
Consideration
|
Amount
|
|||
|
Cash paid to sellers at closing
|
$
|
2,597
|
||
|
Promissory Note to seller
|
1,700
|
|||
|
Total (fair value of the Acquiree as a whole)
|
$
|
4,297
|
||
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
|
Asset
|
October 19, 2019
|
|||
|
Inventory
|
$
|
92
|
||
|
Property Plant & Equipment
|
960
|
|||
|
Intangible
|
2,050
|
|||
|
Goodwill
|
1,195
|
|||
|
Net assets acquired
|
4,297
|
|||
|
Total (fair value of the Acquiree as a whole)
|
$
|
4,297
|
||
The excess of the consideration transferred over the estimated fair value of the net assets received has been recorded in goodwill. Goodwill primarily related to factors such as synergies and market opportunities
and includes assembled workforce which is not recognized separately and apart from goodwill as it is neither separable nor contractual in nature.
Arizona Natural Pain Solutions, Inc.
On November 3, 2020, Tide Management, LLC, consolidated subsidiary of the Company, purchased all of the outstanding interest in Arizona Natural Pain Solutions, Inc. (“ANPS”), which operates a dispensary in Phoenix,
Arizona, for cash and Devi common stock. Various stockholders of the Company represent the noncontrolling interest of Tide Management, LLC. The transaction was accounted for as a business combination and the results of operations have been
included in the accompanying consolidated financial statements, since the date of acquisition. The Company and Jigarkumar Patel guaranteed a put right of $1.26 per share on the 1,984,126 shares of equity issued to the sellers and a 12% annual
return (see Note 14). The Company accounted for this as a liability. The acquisition increases the number of dispensaries in Arizona for which the Company is currently vertically integrated. The Company incurred $273 in transaction expenses of
which $151 was expensed when occurred. The remaining $122 was capitalized as debt issuance cost. The consolidated statements of operations include revenue of $1.1 million and net profit of $266 for the year ended December 31, 2020, respectively.
28
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
The following table summarizes fair value of the total consideration:
|
Consideration
|
Amount
|
|||
|
Cash paid to sellers at closing
|
$
|
2,187
|
||
|
Fair value of put right
|
1,171
|
|||
|
Fair value of equity issued
|
1,329
|
|||
|
Total Consideration transferred
|
4,687
|
|||
|
Noncontrolling Interest
|
4,813
|
|||
|
Total (fair value of the Acquiree as a whole)
|
$
|
9,500
|
||
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
|
Asset
|
November 3, 2020
|
|||
|
Cash and cash equivalents
|
$
|
145
|
||
|
Inventory
|
243
|
|||
|
Prepaid expenses
|
125
|
|||
|
Other current assets
|
9
|
|||
|
Property Plant & Equipment
|
62
|
|||
|
Intangible
|
7,000
|
|||
|
Goodwill
|
2,342
|
|||
|
Total assets
|
9,926
|
|||
|
Liability
|
||||
|
Accrued expenses and other current liabilities
|
426
|
|||
|
Total liabilities
|
426
|
|||
|
Net assets acquired
|
9,500
|
|||
|
Total (fair value of the Acquiree as a whole)
|
$ |
9,500
|
||
The excess of the consideration transferred over the estimated fair value of the net assets received has been recorded in goodwill. Goodwill primarily related to factors such as synergies and market opportunities
and includes assembled workforce which is not recognized separately and apart from goodwill as it is neither separable nor contractual in nature.
29
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
|
NOTE 5.
|
VARIABLE INTEREST ENTITIES (“VIE”)
|
The following table presents current and noncurrent assets, current and noncurrent liabilities, and revenues and net income (loss) of the Company’s variable interest entities at and for the year ended December 31,
2020:
|
Entity
|
Current assets
|
Non-currentassets
|
Current liabilities
|
Non - current
liabilities
|
Revenue
|
Net income/(loss)
|
||||||||||||||||||
|
Tedra Health, LLC
|
$
|
-
|
$
|
1,196
|
$
|
-
|
$
|
640
|
$
|
2,291
|
$
|
(475
|
)
|
|||||||||||
|
Blue Mountain Care, LLC
|
868
|
-
|
1,840
|
-
|
7,702
|
1,238
|
||||||||||||||||||
|
Durjaya, LLC
|
995
|
1
|
||||||||||||||||||||||