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
|
973
|
-
|
6,596
|
1,311
|
||||||||||||||||||
|
Farmalogics Health and Wellness, LLC
|
987
|
-
|
1,385
|
-
|
6,954
|
1,443
|
||||||||||||||||||
|
Blu Pharms, LLC
|
533
|
840
|
1,513
|
-
|
4,363
|
325
|
||||||||||||||||||
|
Devi MI Grow, LLC
|
254
|
15,000
|
66
|
-
|
-
|
1,858
|
||||||||||||||||||
|
Pure Releaf N Union, LLC
|
700
|
149
|
142
|
150
|
1,549
|
297
|
||||||||||||||||||
|
$
|
4,337
|
$
|
17,186
|
$
|
5,919
|
$
|
790
|
$
|
29,455
|
$
|
1,037
|
|||||||||||||
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,
2019:
|
Entity
|
Current assets
|
Non-current assets
|
Current liabilities
|
Non - current
liabilities
|
Revenue
|
Net income/(loss)
|
||||||||||||||||||
|
Sixth Street Enterprises, Inc.
|
$
|
3,361
|
$
|
219
|
$
|
1,887
|
$
|
-
|
$
|
28,380
|
$
|
(429
|
)
|
|||||||||||
|
Tedra Health, LLC
|
-
|
1,087
|
-
|
452
|
561
|
(278
|
)
|
|||||||||||||||||
|
Blue Mountain Care, LLC
|
666
|
-
|
1,776
|
-
|
5,288
|
(1,198
|
)
|
|||||||||||||||||
|
Durjaya, LLC
|
798
|
-
|
280
|
-
|
813
|
(170
|
)
|
|||||||||||||||||
|
Farmalogics Health and Wellness, LLC
|
789
|
-
|
1,078
|
-4
|
6,778
|
(654
|
)
|
|||||||||||||||||
|
Blu Pharms, LLC
|
377
|
840
|
305
|
88
|
2,130
|
(647
|
)
|
|||||||||||||||||
|
Nature’s Medicines, Inc.
|
226
|
4,779
|
(891
|
)
|
-
|
316
|
(849
|
)
|
||||||||||||||||
|
Devi MI Grow, LLC
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||
|
Pure Releaf N Union, LLC
|
197
|
557
|
95
|
592
|
803
|
(529
|
)
|
|||||||||||||||||
|
$
|
6,414
|
$
|
7,482
|
$
|
4,530
|
$
|
1,128
|
$
|
45,069
|
$
|
(4,754
|
)
|
||||||||||||
Sixth Street Enterprises, Inc.
| • |
On October 1, 2017, AMMA Investment Group, LLC (“AMMA”) entered into a Management Services Agreement (MSA) with Sixth Street Enterprises, Inc. (“Sixth Street”). Sixth Street is an Arizona non-profit corporation which operates a medical
cannabis dispensary.
|
| • |
The MSA term is 10 years with the option to renew for two additional 10-year terms.
|
| • |
Effective June 3, 2019, AMMA and Sixth Street amended the MSA to decrease the monthly management fee to approximately $42 on a monthly basis.
|
| • |
The fees paid to AMMA equal a prorated shared cost pool based on average full-time employment count of AMMA. All costs incurred by AMMA in performance of the MSA shall be reimbursed by Sixth Street at cost plus an agreed upon markup.
|
| • |
The MSA gives AMMA the full authority to make business decisions on Sixth Street’s behalf, which includes approving operating and capital budgets, hiring, firing and compensating management, and determining the strategic operating
direction of 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.
|
| • |
During the year ended December 31, 2020, Sixth Street became a wholly owned subsidiary of the Company.
|
30
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Tedra Health LLC
| • |
On March 8, 2019, AMMA Investment Group, LLC (“AMMA”) entered into a Management Services Agreement (MSA) with Tedra Health, LLC (“Tedra Health”). Tedra Health is a Connecticut limited liability company which operates a medical cannabis
dispensary.
|
| • |
The MSA term is 10 years with the option to renew for two additional 10-year terms.
|
| • |
The fees paid to AMMA equal 2% of the AMMA shared cost pool. All costs incurred by AMMA in performance of the MSA shall be reimbursed by Tedra Health at cost plus an agreed upon markup.
|
| • |
The MSA gives AMMA the full authority to make business decisions on Tedra Health’s behalf, which includes approving operating and capital budgets, hiring, firing and compensating management, and determining the strategic operating
direction of Tedra Health.
|
| • |
AMMA determined that Tedra Health was a VIE of AMMA Investment Group, LLC as the cannabis management service fees were not commensurate of services provided.
|
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.
|
| • |
The MSA term is 20 years with no renewal options.
|
| • |
The fees paid to BMH equal BMC’s total revenues minus total direct expenses.
|
| • |
The MSA gives BMH the full authority to make business decisions on BMC’s behalf, which includes approving operating and capital budgets, hiring, firing and compensating management, and determining the strategic operating direction of
BMC.
|
| • |
BMH determined that BMC was a VIE of Blue Mountain Holdings, LLC as the cannabis management service fees were not commensurate of services provided.
|
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.
|
| • |
The MSA term is 20 years with no renewal options.
|
| • |
The fees paid to MHM equal BMC’s total revenues minus total direct expenses.
|
| • |
The MSA gives MHM the full authority to make business decisions on Durjaya’s behalf, which includes approving operating and capital budgets, hiring, firing and compensating management, and determining the strategic operating direction
of Durjaya.
|
| • |
MHM determined that Durjaya was a VIE of Maryland Health Management, LLC as the cannabis management service fees were not commensurate of services provided.
|
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.
|
| • |
The MSA term is 20 years with no renewal options.
|
| • |
The fees paid to MHM equal Farmalogics’ total revenues minus total direct expenses.
|
| • |
The MSA gives MHM the full authority to make business decisions on Farmalogics’ behalf, which includes approving operating and capital budgets, hiring, firing and compensating management, and determining the strategic operating
direction of Farmalogics.
|
| • |
MHM determined that Farmalogics was a VIE of Maryland Health Management, LLC as the cannabis management service fees were not commensurate of services provided.
|
31
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Blu Pharms LLC
| • |
On September 30, 2019, JKJ Management Laurel, LLC (“JKJ”) entered into a Management Services Agreement (MSA) with Blu Pharms, LLC (“Blu Pharms”). Blu Pharms is a Maryland limited liability company which operates a medical cannabis
dispensary.
|
| • |
The MSA term is 20 years with no renewal options.
|
| • |
The fees paid to JKJ equal Blu Pharms’ total revenues minus total direct expenses.
|
| • |
The MSA gives JKJ the full authority to make business decisions on Blu Pharms’ behalf, which includes approving operating and capital budgets, hiring, firing and compensating management, and determining the strategic operating
direction of Blu Pharms.
|
| • |
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.
|
Nature’s Medicines, Inc.
| • |
On January 1, 2019, Globe Street Management, LLC (“Globe Street”) entered into a Management Services Agreement (MSA) with Nature’s Medicines, Inc. (“Nature’s Medicines”). Nature’s Medicines is a Massachusetts corporation which operates
a medical cannabis dispensary.
|
| • |
The MSA term is 20 years with no renewal options.
|
| • |
The fees paid to Globe Street equal Nature’s Medicines’ total revenues minus total direct expenses.
|
| • |
The MSA gives Globe Street the full authority to make business decisions on Nature’s Medicines’ behalf, which includes approving operating and capital budgets, hiring, firing and compensating management, and determining the strategic
operating direction of Nature’s Medicines.
|
| • |
Globe Street determined that Nature’s Medicines was a VIE of Globe Street Management, LLC as the cannabis management service fees were not commensurate of services provided.
|
| • |
During the year ended December 31, 2020, Nature’s Medicines became a wholly owned subsidiary of the Company.
|
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.
|
| • |
The MSA term is 20 years with no renewal options.
|
| • |
The fees paid to THM equal Pure Releaf’s total revenues minus total direct expenses.
|
| • |
The MSA gives THM the full authority to make business decisions on Pure Releaf’s behalf, which includes approving operating and capital budgets, hiring, firing and compensating management, and determining the strategic operating
direction of Pure Releaf.
|
| • |
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.
|
32
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
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.
|
| • |
The MSA term is 20 years with no renewal options.
|
| • |
The fees paid to THM equal Devi MI Grow’s total revenues minus total direct expenses.
|
| • |
The MSA gives THM the full authority to make business decisions on Devi MI Grow’s behalf, which includes approving operating and capital budgets, hiring, firing and compensating management, and determining the strategic operating
direction of Devi MI Grow.
|
| • |
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.
|
|
NOTE 6.
|
INVENTORY
|
The Company’s inventory consisted of:
|
December 31, 2020
|
December 31, 2019
|
|||||||
|
Raw materials
|
$
|
650
|
$
|
14
|
||||
|
Work in progress
|
2,039
|
1,114
|
||||||
|
Finished goods
|
6,575
|
3,455
|
||||||
|
Total inventory, net
|
$
|
9,264
|
$
|
4,583
|
||||
|
NOTE 7.
|
EQUITY METHOD INVESTMENTS
|
The following tables present changes in the Company’s equity method investments in the years ended December 31, 2020, and 2019:
|
Entity
|
Ownership
percentage |
Balance at
December 31, 2019
|
Additions
|
Distributions
|
Share of net
income (loss)
|
Balance at
December 31, 2020
|
||||||||||||||||||
|
Taro, LLC
|
50
|
%
|
$
|
714
|
$
|
80
|
$
|
-
|
$ |
-
|
$
|
794
|
||||||||||||
|
Jais, LLC
|
49
|
%
|
2
|
92
|
-
|
(91
|
)
|
3
|
||||||||||||||||
|
Teisa, LLC
|
49
|
%
|
237
|
25
|
-
|
(12
|
)
|
250
|
||||||||||||||||
|
Dahla, LLC
|
49
|
%
|
77
|
-
|
-
|
-
|
77
|
|||||||||||||||||
|
PA Natural Medicine, LLC
|
43
|
%
|
39
|
3,002
|
(2,813
|
)
|
3,377
|
3,605
|
||||||||||||||||
|
$
|
1,069
|
$
|
3,199
|
$
|
(2,813
|
)
|
$ |
3,274
|
$
|
4,729
|
||||||||||||||
|
Entity
|
Ownership
percentage |
Balance at January
1, 2019 |
Additions
|
Distributions
|
Share of net
income (loss)
|
Balance at
December 31, 2019
|
||||||||||||||||||
|
Taro, LLC
|
50
|
%
|
$
|
- $
|
714
|
$
|
- $
|
-
|
$
|
714
|
||||||||||||||
|
Jais, LLC
|
49
|
%
|
-
|
376
|
-
|
(374
|
)
|
2
|
||||||||||||||||
|
Teisa, LLC
|
49
|
%
|
-
|
465
|
-
|
(228
|
)
|
237
|
||||||||||||||||
|
Dahla, LLC
|
49
|
%
|
-
|
150
|
-
|
(73
|
)
|
77
|
||||||||||||||||
|
PA Natural Medicine, LLC
|
17
|
%
|
-
|
39
|
-
|
-
|
39
|
|||||||||||||||||
|
$
|
-
|
$ |
1,744
|
$
|
-
|
$ |
(675
|
)
|
$
|
1,069
|
||||||||||||||
33
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Taro, LLC
On June 19, 2019, the Company issued 1,066,167 shares of common stock to Jigarkumar Patel, CEO and majority shareholder of the Company, for his 50% membership interest in Taro, LLC (“Taro”), a
California limited liability company. The beginning investment balance in Taro was calculated as the fair value of the shares issued in exchange for the membership interest, or $714. Taro had no operations from the date of the Company’s
acquisition of Mr. Patel’s membership interest through December 31, 2020. Note that Taro is not considered a business as the entity’s license application is still in process, and as such the entity has no business operations.
Jais, LLC
On August 14, 2019, the members of Jais, LLC (“Jais”), a Missouri limited liability company, entered into the Operating Agreement for Jais. The members were listed as Jusmin Patel, a
representative of the Company, and Maria Patel with 49% and 51% membership interests, respectively. The Company bore the financial burden of the startup costs and treated the 49% membership interest held by Mr. Patel, acting on behalf of the
Company, as an equity method investment. Note that Jais is not considered a business as the entity’s license application is still in process, and as such the entity has no business operations.
Teisa, LLC
On November 20, 2019, the members of Teisa, LLC (“Teisa”), an Illinois limited liability company, entered into the Operating Agreement for Teisa. The members were listed as Jigarkumar Patel,
CEO of the Company, and Patrice Johnson with 49% and 51% membership interests, respectively. The Company bore the financial burden of the startup costs and treated the 49% membership interest held by Mr. Patel, acting on behalf of the Company, as
an equity method investment. Note that Teisa is not considered a business as the entity’s license application is still in process, and as such the entity has no business operations.
Dahla, LLC
On August 22, 2019, the members of Dahla, LLC (“Dahla”), a New Jersey limited liability company, entered into the Operating Agreement for Dahla. The members were listed as Jigarkumar Patel, CEO
of the Company, and Dashiv Holdings, LLC with 49% and 51% membership interests, respectively. The Company bore the financial burden of the startup costs and treated the 49% membership interest held by Mr. Patel, acting on behalf of the Company,
as an equity method investment. Note that Dahla is not considered a business as the entity’s license application is still in process, and as such the entity has no business operations.
PA Natural Medicine, LLC
On January 1, 2019, the Company issued 2,975,000 shares of common stock to Jigarkumar Patel, CEO and majority shareholder of the Company, for his 17% membership interest in PA Natural Medicine,
LLC (“PA”), a Pennsylvania limited liability company. PA manages dispensaries throughout the state of Pennsylvania. The non-marketable equity investment has been presented at the carrying value at the time transfer occurred on January 1, 2019.
The basis was approximately $39.
On May 15, 2020, the Company issued 2,548,000 shares of common stock and approximately $1,213 for an additional 26% membership interest in PA, at which point the investment was accounted for as
an equity method investment. There are no restrictions on the assets of PA.
34
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
The following table presents current and noncurrent assets, current and noncurrent liabilities, and revenues and net income (loss) of the Company’s equity method investments at and for the year ended December 31,
2020:
|
Entity
|
Current assets
|
Non-current assets
|
Current liabilities
|
Non - current
liabilities
|
Revenue
|
Net income/(loss)
|
||||||||||||||||||
|
Taro, LLC
|
$
|
1
|
$
|
330
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
|
Jais, LLC
|
-
|
7
|
195
|
-
|
-
|
-185
|
||||||||||||||||||
|
Teisa, LLC
|
-
|
-
|
99
|
-
|
-
|
-25
|
||||||||||||||||||
|
Dahla, LLC
|
-
|
-
|
150
|
-
|
-
|
-
|
||||||||||||||||||
|
PA Natural Medicine, LLC
|
3,041
|
1,472
|
1,127
|
-
|
30,361
|
9,832
|
||||||||||||||||||
|
$
|
3,042
|
$
|
1,809
|
$
|
1,571
|
$
|
-
|
$
|
30,361
|
$
|
9,622
|
|||||||||||||
The following table presents current and noncurrent assets, current and noncurrent liabilities, and revenues and net income (loss) of the Company’s equity method investments at and for the year ended December 31,
2019:
|
Entity
|
Current assets
|
Non-current assets
|
Current liabilities
|
Non - current
liabilities
|
Revenue
|
Net income/(loss)
|
||||||||||||||||||
|
Taro, LLC
|
$
|
1
|
$
|
330
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||||
|
Jais, LLC
|
-
|
4
|
99
|
-
|
-
|
(763
|
)
|
|||||||||||||||||
|
Teisa, LLC
|
-
|
-
|
98
|
-
|
-
|
(465
|
)
|
|||||||||||||||||
|
Dahla, LLC
|
-
|
-
|
150
|
-
|
-
|
(150
|
)
|
|||||||||||||||||
|
PA Natural Medicine, LLC
|
1,548
|
1,553
|
699
|
-
|
9,373
|
2,210
|
||||||||||||||||||
|
$
|
1,549
|
$
|
1,887
|
$
|
1,046
|
$
|
-
|
$
|
9,373
|
$
|
832
|
|||||||||||||
|
NOTE 8.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment consisted of:
|
December 31, 2020
|
December 31, 2019
|
|||||||
|
Land and land improvements
|
$
|
3,311
|
$
|
2,658
|
||||
|
Buildings and building improvements
|
24,752
|
18,957
|
||||||
|
Machinery and equipment
|
3,266
|
2,044
|
||||||
|
Computer equipment and software
|
937
|
481
|
||||||
|
Leasehold improvements
|
646
|
609
|
||||||
|
Motor vehicles
|
257
|
69
|
||||||
|
Furniture and fixtures
|
2,062
|
1,686
|
||||||
|
Construction in progress
|
23,645
|
9,756
|
||||||
|
Total property, plant and equipment, gross
|
$
|
58,876
|
$
|
36,260
|
||||
|
Less: accumulated depreciation
|
(2,619
|
)
|
(950
|
)
|
||||
|
Property, plant and equipment, net
|
$
|
56,257
|
$
|
35,310
|
||||
Assets under construction represent construction in progress related to both cultivation and dispensary facilities and are not depreciated.
The Company recorded depreciation expense of $1,669 for the year ended December 31, 2020 ($511 included in cost of goods sold and $1,158 included in depreciation, in the consolidated statements of operations) and
$1,050 for the year ended December 31, 2019 ($nil included in cost of goods sold and $1,050 included in depreciation, in the consolidated statements of operations). The Company recorded $100 in depreciation in the consolidated statements of
operations for the year ended December 31, 2019 for depreciation expense related to common control entities prior to the transfer date, which is excluded from accumulated depreciation.
35
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
|
NOTE 9.
|
INTANGIBLE ASSETS AND GOODWILL
|
Intangible assets, including goodwill as of December 31, 2020, consisted of the following:
|
Gross carrying amount
|
Weighted average
useful lives (years)
|
December 31, 2018
|
Acquisitions
|
Additions
|
December 31, 2019 | |||||||||||||||
|
Indefinite life intangible assets:
|
||||||||||||||||||||
|
Licenses and permits
|
N/A
|
$
|
9,642
|
$
|
7,000 |
$
|
-
|
$
|
16,642
|
|||||||||||
|
Total intangible assets
|
9,642
|
7,000
|
-
|
16,642
|
||||||||||||||||
|
Goodwill
|
N/A |
25,170
|
2,343
|
-
|
25,513
|
|||||||||||||||
|
Total intangible assets and goodwill
|
$
|
34,812
|
$
|
9,343 |
$
|
-
|
$
|
44,155
|
||||||||||||
Intangible assets, including goodwill as of December 31, 2019 consisted of the following:
|
Gross carrying amount
|
Weighted average
useful lives (years)
|
December 31, 2018
|
Acquisitions
|
Additions
|
December 31, 2019 | |||||||||||||||
|
Indefinite life intangible assets:
|
||||||||||||||||||||
|
Licenses and permits
|
N/A
|
$
|
-
|
$
|
9,642
|
$
|
-
|
$
|
9,642
|
|||||||||||
|
Total intangible assets
|
-
|
9,642
|
-
|
9,642
|
||||||||||||||||
|
Goodwill
|
N/A |
-
|
25,170
|
-
|
25,170
|
|||||||||||||||
|
Total intangible assets and goodwill
|
$
|
-
|
$
|
34,812
|
$
|
-
|
$
|
34,812
|
||||||||||||
The Company recorded no amortization of intangible assets during the years ended December 31, 2020, or December 31, 2019, as the assets had an indefinite life.
There were no impairments identified during annual goodwill impairment testing in 2020 or 2019.
There were no intangible assets impairments identified during the year ended December 31, 2020, or December 31, 2019.
|
NOTE 10.
|
LEASES
|
The Company adopted ASC 842, Leases, on January 1, 2019. The Company
holds leases related to office spaces and retail dispensary facilities. The following is lease activity for the years ended December 31, 2020, and 2019:
Right-of-use assets
|
Operating leases
|
Finance leases
|
|||||||
|
Balance, January 1, 2019 (Adoption of ASC 842)
|
$
|
26
|
$
|
-
|
||||
|
Acquisitions
|
2,371
|
3,914
|
||||||
|
Additions
|
702
|
-
|
||||||
|
Disposals
|
-
|
-
|
||||||
|
Depreciation
|
(171
|
)
|
(62
|
)
|
||||
|
Balance, December 31, 2019
|
$
|
2,928
|
$
|
3,852
|
||||
|
Acquisitions
|
391
|
-
|
||||||
|
Additions
|
227
|
7,514
|
||||||
|
Disposals
|
-
|
(7,751
|
)
|
|||||
|
Depreciation
|
(323
|
)
|
(253
|
)
|
||||
|
Balance, December 31, 2020
|
$
|
3,223
|
$
|
3,362
|
||||
36
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
During the years ended December 31, 2020, and 2019, the Company recorded $576 and $233 of amortization on right-of-use assets included in general and
administrative expenses within the consolidated statement of operations, respectively.
Lease liabilities
|
Operating leases
|
Finance leases
|
|||||||
|
Balance, January 1, 2019 (Adoption of ASC 842)
|
$
|
(26
|
)
|
$
|
-
|
|||
|
Acquisitions
|
(2,426
|
)
|
(3,845
|
)
|
||||
|
Additions
|
(694
|
)
|
-
|
|||||
|
Disposals
|
-
|
-
|
||||||
|
Interest
|
(279
|
)
|
(189
|
)
|
||||
|
Principal payments
|
405
|
137
|
||||||
|
Balance, December 31, 2019
|
$
|
(3,020
|
)
|
$
|
(3,897
|
)
|
||
|
Less current portion
|
252
|
467
|
||||||
|
Long term lease liabilities, December 31, 2019
|
$
|
(2,768
|
)
|
$
|
(3,430
|
)
|
||
|
Balance, January 1, 2020
|
$
|
(3,020
|
)
|
$
|
(3,897
|
)
|
||
|
Acquisitions
|
(432
|
)
|
-
|
|||||
|
Additions
|
(226
|
)
|
(7,364
|
)
|
||||
|
Disposals
|
-
|
7,800
|
||||||
|
Interest
|
(323
|
)
|
(930
|
)
|
||||
|
Principal payments
|
598
|
961
|
||||||
|
Balance, December 31, 2020
|
$
|
(3,403
|
)
|
$
|
(3,430
|
)
|
||
|
Less current portion
|
632
|
32
|
||||||
|
Long term lease liabilities, December 31, 2020
|
$
|
(2,771
|
)
|
$
|
(3,398
|
)
|
||
The total cash outflow for leases for the year ended December 31, 2020, and 2019 was $1,559 and $527, respectively.
As of December 31, 2019, and 2020, the weighted average lease term remaining was 6.9 and 6.4 years, respectively. The following table provides amounts at December
31, 2020 for future minimum lease payments under non-cancelable operating leases having an initial or remaining term of more than one year:
|
Operating leases
|
Finance leases
|
|||||||
|
2021
|
$
|
873
|
$
|
280
|
||||
|
2022
|
509
|
3,460
|
||||||
|
2023
|
534
|
-
|
||||||
|
2024
|
450
|
-
|
||||||
|
2025
|
308
|
-
|
||||||
|
Thereafter
|
3,785
|
-
|
||||||
|
Total minimum lease payments
|
$
|
6,459
|
$
|
3,740
|
||||
|
Effect of discounting
|
(3,056
|
)
|
(310
|
)
|
||||
|
Present value of minimum lease payments
|
$
|
3,403
|
$
|
3,430
|
||||
|
Current portion lease obligations
|
(632
|
)
|
(32
|
)
|
||||
|
Long term lease obligations
|
$
|
2,771
|
$
|
3,398
|
||||
37
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
|
NOTE 11.
|
NOTES PAYABLE
|
Notes payable consisted of the following balances due to third parties as of December 31, 2019:
|
|
December 31, 2019
|
|||
|
Secured promissory notes dated July to October 2019, in the cumulative principal amount of $3,950. Monthly interest payments of 7-10% per annum. Principal balance due at maturity.
|
$
|
3,448
|
||
|
Settlement agreement dated September 2018, in the principal amount of $1,410 with a maturity of January 2022. Fixed monthly payments of $35. Principal balance due at maturity.
|
875
|
|||
|
Mortgage loan dated October 2017, in the principal amount of $1,050 with a maturity of November 2032. Monthly interest
payments of 4.625% per annum. Principal balance due at maturity.
|
944
|
|||
|
Loan agreements dated March 2016 to August 2019, in the cumulative principal amount of $1,896. Monthly interest
payments of 7-12% per annum. Principal balance due at maturity.
|
1,867
|
|||
|
Unsecured promissory notes dated January 2016 to May 2019, in the cumulative principal amount of $5,865. Monthly interest payments of 0-12% per annum. Principal balance due at maturity.
|
1,634
|
|||
|
Total notes payable
|
8,768
|
|||
|
Less unamortized debt discounts and issuance costs
|
-
|
|||
|
Net amount
|
8,768
|
|||
|
Less: current portion of notes payable
|
(7,731
|
)
|
||
|
Notes payable, net of current portion
|
$
|
1,037
|
||
Note that all notes payable outstanding as of December 31, 2019, were repaid in full during the year ended December 31, 2020.
Note that the Company had no outstanding notes payable due to third parties as of December 31, 2020.
Additionally, the Company had notes payable due to related parties as noted below. The noteholders are considered related parties due to (1) beneficial ownership
in Devi common stock or (2) common ownership by Jigarkumar Patel, Devi CEO. Notes payable to related parties consisted of the following as of December 31, 2019:
|
December 31, 2019
|
||||
|
Loan agreement dated August 2019, in the principal amount of $95 with a maturity of May 2020. Monthly interest payments
of 18% per annum. Principal balance due at maturity.
|
$
|
95
|
||
|
Unsecured promissory notes dated January to September 2019, in the cumulative principal amount of $10,699. Monthly
interest payments of 0-18% per annum. Principal balance due at maturity. (a)
|
10,964
|
|||
|
Advance payment by Drewry received in December 2019. Refer to paragraph below. (b)
|
1,000
|
|||
|
Total related party notes payable
|
12,059
|
|||
|
Less unamortized debt discounts and issuance costs
|
-
|
|||
|
Net amount
|
12,059
|
|||
|
Less: current portion of related party notes payable
|
(12,059
|
)
|
||
|
Related party notes payable, net of current portion
|
$
|
-
|
||
Note that all related party notes payable outstanding as of December 31, 2019, were repaid in full during the year ended December 31, 2020.
| (a) |
From July 9 to September 19, 2019, the Company entered into several unsecured promissory notes with Jigarkumar Patel (“Jigar”) in the cumulative principal amount of $2,215,
with all notes bearing 18% per annum and due within 12 months of issuance. On January 23, 2020, the Company executed a Convertible Promissory Note (“Jigarkumar Convertible Note”) with Jigar, assuming the outstanding balance of the
aforementioned unsecured promissory notes. The Jigarkumar Convertible Note bears interest of 4% per month with a maturity date of March 31, 2020. Then on May 15, 2020, Jigarkumar converted the outstanding balance of the Jigarkumar
Convertible Note to 3,435,667 shares of Devi common stock, satisfying the outstanding balance of $3,000 in full.
|
38
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
| (b) |
On December 26, 2019, the Company received an advance payment from Drewry Investments, LLC (“Drewry”) in the amount of $1,000. On January 23, 2020, the Company executed a
Convertible Promissory Note (“Drewry Convertible Note”) with Drewry, assuming the outstanding balance of the advance payment and drawing an additional $2,200 for a total principal balance of $3,200, bearing interest of 4% per month with
a maturity date of March 31, 2020. The Company then paid the outstanding balance of the Drewry Convertible Note in cash with the proceeds of the AFC Term Loan noted below.
|
Notes payable to related parties consisted of the following as of December 31, 2020:
|
December 31, 2020
|
||||
|
Credit Agreement, consisting of several delayed draw Term Loan Notes dated May to December 2020, in the cumulative
principal amount of up to $42,500 with a maturity of May 2024. Interest accues on a monthly basis at a rate of 17% per annum (13% cash interest
and 4% paid-in-kind). Lump sum payment of principal balance and any accrued, unpaid interest due at maturity.
|
$
|
41,822
|
||
|
Total related party PIK loan
|
41,822
|
|||
|
Less unamortized debt discounts and issuance costs
|
(14,430
|
)
|
||
|
Net amount
|
27,392
|
|||
|
Less: current portion of related party PIK loan
|
(1,091
|
)
|
||
|
Related party PIK loan, net of current portion
|
$
|
26,301
|
||
On May 15, 2020, the Company as guarantor entered into a syndicated Credit Agreement with Advanced Flower Capital Management, LLC (“AFC”). Note that AFC is a
related party as an affiliate of AFC is a beneficial owner of the Company’s common stock and such affiliate is entitled to appoint members of the Company’s Board of Directors. The Credit Agreement provides for a $42.5 million delayed draw term
loan facility (“AFC Term Loan”). On May 15, 2020, the Company drew $26.2 million against the AFC Term Loan facility (the “May 2020 Draw”). The Company used the initial proceeds under the AFC Term Loan facility to pay off existing secured and
unsecured promissory notes, existing mortgage loans, and finance the acquisition of equity interests in the Company’s subsidiaries held by third parties, all of which were outstanding as of December 31, 2019.
The AFC Term Loans are secured by (i) a first priority security interest in the equity interests of certain of the Company’s direct and indirect subsidiaries that
guaranteed the AFC Term Loans (the “Guarantors”), (ii) a first priority security interest in the trademarks registered with the Arizona Secretary of State and Maryland Secretary of State, held by the Company’s direct subsidiary, and (iii) a
first priority security interest in all of the Guarantors’ present and future real property assets. In the event of a change of control or other event of default, all obligations inclusive of any and all accrued and unpaid interest and fees
shall automatically become and be immediately due and payable in full. The AFC Term Loans include covenants that, among other things, limit the Company’s ability to pay dividends, conduct certain asset or equity transactions, incur
indebtedness, grant liens and dispose of material assets. The Company must meet the following covenants on a quarterly basis: (1) Minimum Adjusted EBITDA, (2) Minimum Free Cash Flow, (3) Max Total Leverage to Adjusted EBITDA Ratio, (4) Minimum
Fixed Charge Coverage Ratio, and (5) Minimum Cash Balance. The Company is in compliance with all covenants.
Additionally, related to the May 2020 Draw, the Lenders received 11,414,686 warrants (compensation warrants), exercisable to purchase one share of common shares at
an exercisable price of $0.01. In addition, the Lenders received 11,647,639 warrants (Lender warrants), exercisable to purchase one share of common shares at an exercisable price of $0.75 per share. The warrants were fair valued using the
Black-Scholes option-pricing model, see note 14 for discussion on assumptions used in the model to value the warrants, and resulted in a debt discount of $15.4 million. Using the effective interest method, the carrying amount of the notes is
the difference between the principal amount and the initial carrying value of the lender warrants. The net amount of the warrant component and issue costs are accreted using the effective interest method over the term of the note, such that the
carrying amount of the financial liability will equal the principal balance at maturity. The Company incurred cash fees of $3.7 million allocated between warrant liabilities and debt incurred for $1.4 million and $2.3 million, respectively.
Subsequent to the allocation to the warrant liabilities, $1.4 million was expensed and included in interest expense on the Consolidated Statement of Operations. In addition, $1.9 million was expensed and included within interest expense on the
consolidated statement of operations to amortize the debt discounts and issuance costs.
39
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
On October 23, 2020, the Company drew an additional $4.2 million on the AFC Term Loan facility (the “October 2020 Draw”). In conjunction with the October 2020
Draw, the Company issued 0.7 million stock warrants with an exercise price of $0.01 per share and 700,000 stock warrants with an exercise price of $0.75 per share, to purchase the Company’s Common Stock, which expires 5 years from the issuance
date. These warrants were issued to buyers of the Company’s debt and equity. The warrants were fair valued using the Black-Scholes option-pricing model and resulted in a debt discount of $0.7 million. Using the effective interest method, the
carrying amount of the notes is the difference between the principal amount and the initial carrying value of the warrants. The net amount of the equity component and issue costs are accreted using the effective interest method over the term of
the note, such that the carrying amount of the financial liability will equal the principal balance at maturity. The Company incurred cash fees of $0.2 million. The stock warrants qualify for liability classification in accordance with ASC 815,
Derivatives and Hedging.
The Company made three additional draws on the AFC Term Loan facility in July, November, and December 2020 in the cumulative principal amount of $10.6 million,
bringing the total principal amount drawn on the AFC Term Loan to $41.0 million as of December 31, 2020. No warrants or common stock were issued in conjunction with these additional draws.
Stated maturities of the above notes payable as of December 31, 2020 are as follows:
|
Annual Maturities as of
December 31, 2020
|
||||
|
2021
|
$
|
1,091
|
||
|
2022
|
-
|
|||
|
2023
|
-
|
|||
|
2024
|
40,731
|
|||
|
2025
|
-
|
|||
|
Thereafter
|
-
|
|||
|
Total
|
$
|
41,822
|
||
*Included within notes payable is $14.4 million of unamortized debt cost.
40
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
|
NOTE 12.
|
INCOME TAXES
|
The income tax provision recorded differs from the income tax obtained by applying the statutory income tax rate for the year ended December 31, 2020 of 25.91%
(December 31, 2019 – 25.91%) to the income for the year and is reconciled as follows:
|
December 31, 2020
|
December 31, 2019
|
|||||||
|
Income (loss) before taxes
|
$
|
(3,028
|
)
|
$
|
800
|
|||
|
Income tax expense (recovery) based on statutory rate
|
(784
|
)
|
207
|
|||||
|
Non-deductible expenses
|
7,875
|
6,707
|
||||||
|
Other
|
212
|
(471
|
)
|
|||||
|
Increase in valuation allowance
|
3,895
|
1,231
|
||||||
|
Income tax expense
|
$
|
11,198
|
$
|
7,674
|
||||
The Company’s income tax expense for the years ending December 31, 2020, and 2019 is entirely related to current tax expense. The Company has recorded an allowance
equal to the total amount of the deferred tax asset generated from its net operating loss carryforwards due to the uncertainty of being able to utilize such net operating loss carryforwards in future periods.
Section 280E of the Internal Revenue Code prohibits businesses engaged in the trafficking of Schedule I or Schedule II controlled substances from deducting normal
business expenses from gross income (revenue less cost of goods sold). Section 280E was originally intended to penalize criminal market operators, but because cannabis remains a Schedule I controlled substance for Federal purposes, the IRS has
subsequently applied Section 280E to state-legal cannabis businesses. Cannabis businesses operating in states that align their tax codes with the IRC are also unable to deduct normal business expenses from their state income tax returns. The
non-deductible expenses shown in the effective rate reconciliation above is comprised primarily of the impact of applying IRC Section 280E to the Company’s businesses that are involved in selling cannabis, along with other typical
non-deductible expenses such as lobbying expenses.
The Company evaluates deferred tax assets to determine the likelihood of these assets being realized in future periods. After considering the likelihood, a
valuation allowance has been recorded to offset the entire net deferred tax asset related to federal and state net operating loss carryforwards, as it is uncertain whether they will ultimately be utilized. During the year ended December 31,
2020, the valuation allowance increased by approximately $3,895 (December 31, 2019 – decrease by $1,231). The valuation allowance has been applied based on the Company’s historical results from operations. If events or circumstances change, the
valuation allowance may be adjusted at that time resulting in an income tax benefit.
The Company has available tax losses that may be carried forward to apply against future years’ income for income tax purposes in certain jurisdictions. The
Company has accumulated tax losses that expire as follows:
| Explration Year |
Federal |
State and local |
Total |
|||||||||
| 2024 |
$ | - | $ | 5,025 | $ | 5,025 | ||||||
| 2025 |
- |
14,822 |
14,822 | |||||||||
| Indefinite |
17,766 |
- |
17,766 | |||||||||
| Total |
$ | 17,766 | 19,847 |
$ | 37,613 | |||||||
41
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
The statute of limitations on tax returns for the Internal Revenue Service and Arizona Department of Revenue are 3 and 4 years respectively. Net operating losses
remains open for examination beyond these statute of limitations for both the Internal Revenue Service and Arizona Department of Revenue.
Utilization of net operating loss carryforwards may be subject to limitations in the event of a change in ownership as defined under U.S. IRC Section 382, and
similar state provisions. An “ownership change” is generally defined as a cumulative change in the ownership interest of significant stockholders over a three-year period of more than 50 percentage points. A formal Section 382 study has not
been prepared, so the exact effects of the ownership change are not known at this time.
In March 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted. The Act, among other provisions, reinstates the ability of
corporations to carry net operating losses back to the five preceding tax years, has increased the excess interest limitation on modified taxable income from 30 percent to 50 percent. The Company has made a reasonable estimate of the effects on
existing deferred tax balances and has concluded that the Act has not had a significant on the deferred tax balances.
|
NOTE 13.
|
SHARE-BASED COMPENSATION
|
Restricted Stock Units
The Company issue to our directors restricted stock units (“RSUs”), which consist of time-based awards. RSUs provide the recipients with the right to shares of
common stock following a specified vesting period. Time-based awards vest quarterly.
On June 3, 2020, the Company granted 60,000 restricted stock units. These restricted stock units vest in four equal quarterly installments through 2021.
|
|
Number of
Units
|
Weighted
Average
Grant Date
Fair Value
|
||||||
| RSU s unvested at December 31, 2019 |
- |
$ | - | |||||
| Granted |
60,000 |
0.67 |
||||||
| Vested |
(30,000 | ) | 0.67 |
|||||
| Cancelled |
- |
- |
||||||
| RSU s unvested at December 31, 2020 | 30,000 |
$ | 0.67 | |||||
During the year ended December 31, 2020, the Company recorded approximately $23 of share-based compensation expense for restricted stock units granted and vested
during the period.
|
NOTE 14.
|
STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTEREST
|
Description of the Company’s Securities
At formation, the Company authorized 1,000,000 shares of common stock, with a par value of $0.10 per share and each share entitling the holder to one vote at every
meeting of the stockholders. On September 19, 2019, the Company filed a Certificate of Amendment of Certificate of Incorporation, whereby the Company effected a 1,000-to-1 forward stock split and amended the total authorized shares of common
stock to 180,000,000 shares with a par value of $0.0001 per share. The Company subsequently filed a Certificate of Amendment of Certificate of Incorporation on April 29, 2020, to increase the number of shares authorized from 180,000,000 to
250,000,000 with a par value of $0.0001 per share. Then on December 14, 2020, the Company filed an Amended & Restated Certificate of Incorporation increasing the number of shares authorized from 250,000,000 to 350,000,000 with a par value
of $0.0001.
42
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
No preferred stock or other class of common stock has been authorized.
Warrants
On June 19, 2019, the Company entered into a Common Stock Purchase Agreement with issued warrants to Drewry Investments, LLC (“Drewry”). Drewry purchased 9.8
million common stock at a price of $1.00 per share. As part of this common stock purchase, the Company granted Drewry an option to purchase additional 50 million shares at an exercisable price of $1.00 per share, after the stock split. The
warrants are exercisable if Drewry raised additional $50 million within 1 year from the grant date. The Company did not record any share-based compensation expense for stock warrants granted in 2019. The stocks warrant qualifies for equity
classification in accordance with ASC 815, Derivatives and Hedging.
In addition to the liability warrants discussed in Note 11, on May 10, 2020, the Company issued stock warrants (“compensation warrants”) to a shareholder for
services rendered. The warrant option to purchase 1,088,733 at an exercise price of $0.01 per share, which expires 10 years from the issuance date. The stock warrant qualifies for equity classification in accordance with ASC 815, Derivatives and Hedging.
On May 10, 2020, the Company issued 300,000 stock warrants (“compensation warrants”) for services. The warrant option to purchase stock warrants at $0.01 per
share, which expires 10 years from the issuance date. The warrants are exercisable once the performance criteria of selling a dispensary in Maryland to Devi. The stock warrant qualifies for equity classification in accordance with ASC 815, Derivatives and Hedging. Subsequent to year-end, the warrants were cancelled. There was no impact to the financial statements as the performance criteria was
not met.
On May 15, 2020, the Company issued 1,600,000 stock warrants (“compensation warrants”) for services, related to executing the financing transaction with AFC. The
warrant option to purchase stock warrants at $0.01 per share, which expires 10 years from the issuance date. The stock warrant qualifies for equity classification in accordance with ASC 815, Derivatives and Hedging.
The Company recorded $0.7 million share-based compensation expense for compensation warrants issued during the year ended December 31, 2020. The fair value of the
stock warrants classified as equity granted was determined using the Black-Scholes option-pricing model with the following assumptions at the time of grant:
|
2020
|
2019
|
|||||||
|
Risk-Free Annual Interest Rate
|
0.26
|
%
|
N/A
|
|||||
|
Expected Annual Dividend Yield
|
0
|
%
|
N/A
|
|||||
|
Expected Stock Price Volatility
|
85
|
%
|
N/A
|
|||||
|
Expected term
|
10.0
|
N/A
|
||||||
43
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
There were no compensation warrants issued during the year ended December 31, 2019.
A summary of the status of the stock warrants outstanding, on an as-converted basis for shares of common stock, is as follows:
|
Number of
Stock Warrants
|
Weighted-average
Exercise Price
|
|||||||
|
Balance as of January 1, 2019
|
-
|
$
|
-
|
|||||
|
Issued
|
50,000,000
|
1.00
|
||||||
|
Balance as of December 31, 2019
|
50,000,000
|
1.00
|
||||||
|
Issued
|
26,051,058
|
0.34
|
||||||
|
Forfeited
|
(50,000,000
|
)
|
1.00
|
|||||
|
Balance as of December 31, 2020
|
26,051,058
|
$
|
0.34
|
|||||
The fair value of the stock warrants classified as liability (Note 14) was $11.5 million and $nil as of December 31, 2020, and 2019, respectively. The fair value
of the stock warrants classified as liability granted was determined using the Black-Scholes option-pricing model with the following assumptions at the time of grant:
|
2020
|
2019
|
|||||||
|
Risk-Free Annual Interest Rate
|
0.44
|
%
|
N/A
|
|||||
|
Expected Annual Dividend Yield
|
0
|
%
|
N/A
|
|||||
|
Expected Stock Price Volatility
|
85
|
%
|
N/A
|
|||||
|
Expected term
|
5.0
|
1.0
|
||||||
Volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly traded cannabis companies.
The expected life in years represents the period of time that stock warrants issued are expected to be outstanding. The risk-free rate is based on US Treasury strip rate with a remaining term approximately equal to the expected life of the
warrants.
During the years ended December 31, 2020, and 2019, the weighted-average fair value of the stock warrants granted was $0.67 per warrant. As of December 31, 2020,
and 2019, stock warrants outstanding have a weighted-average remaining contractual life of 0.67 years.
44
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Shares Issued
During the years ended December 31, 2020, and 2019, the Company issued the following shares, net of share issuance costs, as a result of business combinations and
other equity-settled transactions:
|
|
Shares issued in the year ended
|
||||||||
|
December 31, 2019
|
December 31, 2020
|
Footnote
|
|||||||
|
Initial Funding of Devi by Drewry Investments, LLC
|
14,150,000
|
-
|
FN 14
|
||||||
|
Acquisition of AMMA Investment Group, LLC
|
12,515,400
|
14,300,000
|
FN 4
|
||||||
|
Acquisition of Amado Management, LLC
|
5,997,200
|
17,752,000
|
FN 4
|
||||||
|
Secondary Funding of Devi by J Brothers Investments, LLC
|
1,000,000
|
-
|
FN 14
|
||||||
|
Acquisition of minority interest in Taro, LLC
|
1,066,167
|
-
|
FN 7
|
||||||
|
Acquisition of minority interest in PA Natural Medicine, LLC
|
2,975,000
|
2,548,000
|
FN 7
|
||||||
|
Acquisition of Blue Mountain Holdings, LLC
|
6,165,640
|
-
|
FN 4
|
||||||
|
Acquisition of JKJ Management Laurel, LLC
|
6,500,000
|
-
|
FN 4
|
||||||
|
Acquisition of Devi CT Management, LLC
|
12,177,933
|
-
|
FN 4
|
||||||
|
Acquisition of Globe Street Management, LLC
|
22,666,667
|
-
|
FN 4
|
||||||
|
Acquisition of Maryland Health Management, LLC
|
20,478,427
|
1,365,000
|
FN 4
|
||||||
|
Acquisition of Tedra Health Management
|
4,000,000
|
-
|
FN 4
|
||||||
|
Acquisition of Farmalogics Health and Wellness, LLC minority interest
|
-
|
35,000
|
FN 4
|
||||||
|
Drewry Cash Contributions
|
14,800,000
|
3,456,000
|
FN 14
|
||||||
|
J Brothers Cash Contributions
|
3,100,010
|
-
|
FN 14
|
||||||
|
Satisfaction of notes payable
|
-
|
8,500,000
|
FN 14
|
||||||
|
Satisfaction of convertible notes payable
|
-
|
3,435,667
|
FN 11
|
||||||
|
Cancellation of Drewry warrants
|
-
|
15,290,000
|
FN 14
|
||||||
|
Acquisition of Arizona Natural Pain Solutions, LLC
|
-
|
1,984,126
|
FN 4
|
||||||
|
Total shares of common stock issued
|
127,592,444
|
68,665,793
|
|||||||
For ease of comparability, the following equity transactions have been presented net of the impact of the 1,000-to-1 forward stock split, which took place on
September 19, 2019.
Initial Funding of Devi by Drewry Investments, LLC
Between January 1 and January 30, 2019, the Company issued 10,107,000 shares of common stock to Drewry Investments, LLC (“Drewry”) in exchange for $5,000 as part
of the initial funding of the Company pursuant to the Contribution Agreement dated January 1, 2019, and subsequently amended on February 12, 2019, and June 19, 2019 (the “Contribution Agreement”). On March 4, 2019, the Company issued an
additional 4,043,000 shares to Drewry in exchange for $2,000, satisfying Drewry’s responsibility for the initial funding of the Company. This resulted in a cumulative 14,150,000 shares issued to Drewry as part of the initial funding, reflecting
a price of $0.49 per share.
Secondary Funding of Devi by J Brothers Investments, LLC
Pursuant to the Contribution Agreement, on January 30, 2019, the Company issued 1,000,000 shares of common stock to J Brothers Investments, LLC (“JBrothers”) in
exchange for cash and asset contributions made to entities intended to be acquired by the Company totaling $1,000 in value, reflecting a price of $1.00 per share.
Drewry Cash Contributions
On June 19, 2019, the Company entered into a Common Stock Purchase Agreement with Drewry (the “Drewry 2019 Agreement”) whereby the Company would issue up to
10,000,000 shares of common stock at a price of $1.000 per share. Between June 3 and July 11, 2019, Drewry contributed $9,800 in cash in exchange for 9,800,000 shares of common stock pursuant to the terms of the Drewry 2019 Agreement.
45
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
On September 26, 2019, the Company entered into the First Amendment to the Drewry Agreement (the “Drewry Amendment”) whereby the Company agreed to issue up to
5,000,000 additional shares of common stock at a price of $1.00 per share. Between October 16 and November 5, 2019, Drewry contributed $4,995 in exchange for 5,000,000 shares of common stock pursuant to the terms of Drewry Amendment.
On May 15, 2020, the Company entered into a Common Stock Purchase Agreement with Drewry (the “Drewry 2020 Agreement”) whereby the Company would issue 3,456,000
shares of common stock in exchange for $3,000 in cash, reflecting a price of $0.87 per share.
JBrothers Cash Contributions
On October 17, 2019, the Company entered into a Common Stock Purchase Agreement with JBrothers (the “JBrothers Agreement”) whereby the Company would issue
3,100,010 shares of common stock in exchange for $3,100 in cash, reflecting a price of $1.00 per share.
Satisfaction of Notes Payable
On March 10, 2020, the Company entered into an agreement with Weldon Development, LLC (“Weldon”) to satisfy the balance of the unsecured promissory note issued to
Weldon in conjunction with the purchase of Weldon’s minority interest in AMMA Investment Group, LLC. Immediately prior to the closing of this agreement, the outstanding balance of the unsecured promissory note was $4,500. Pursuant to the terms
of the agreement, the Company issued 6,000,000 shares of common stock to satisfy the $4,500 outstanding balance of the note, reflecting a price of $0.75 per share.
On May 7, 2020, the Company entered into a Loan Payoff Letter with, a related party, Marvele, LLC (“Marvele”) to satisfy the balance of the unsecured promissory
note issued to Marvele in conjunction with purchase of Marvele’s minority interest in Amado Management, LLC. Per the Loan Payoff Letter, the Company issued 2,500,000 shares of common stock to satisfy the $1,500 outstanding balance of the note,
reflecting a price of $0.60 per share and the remaining balance of the note was paid in cash.
Cancellation of Drewry Warrants
On May 15, 2020, the Company and Drewry entered into a Warrant Cancellation Agreement, providing for the cancellation of the 50,000,000 liability warrants made in
favor of Drewry in exchange for the issuance of 15,290,000 additional shares. The shares were valued at $0.67 per share, and the Company recorded stock-based compensation expense of $10,245 related to the issuance.
Noncontrolling Interests
The net change in the noncontrolling interests is as follows:
|
Amado
Management,
LLC
|
AMMA
Investment
Group, LLc
|
Sixth Street
Enterprises,
Inc.
|
Tedra
Health,
LLC
|
Blue
Mountain
Care, LLC
|
Blu
Pharms,
LLC
|
Maryland Health
Management,
LLC |
Durjaya,
LLC
|
Farmalogics
Health &
Wellness, LLC
|
Pure Releaf N
Union, LLC
|
Tide
Management,
LLC
|
Total |
|||||||||||||||||||||||||||||||||||||
|
Balance, December 31, 2018
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||
|
Additions to non-controlling interest
|
14,775
|
858
|
3,769
|
54
|
320 |
1,063
|
252 |
(6 | ) | 614 |
235 |
- |
21,934 |
|||||||||||||||||||||||||||||||||||
|
Purchase of non-controlling interest
|
-
|
(74
|
)
|
-
|
472
|
-
|
-
|
- |
- |
- |
- |
- |
398 |
|||||||||||||||||||||||||||||||||||
|
Net income attributable to non-controlling interest
|
(4,458
|
)
|
(4,259
|
)
|
20,530
|
(526
|
)
|
-
|
-
|
(102 | ) | - |
- |
- |
- |
11,185 |
||||||||||||||||||||||||||||||||
|
Balance, December 31, 2019
|
$
|
10,317
|
$
|
(3,475
|
)
|
$
|
24,299
|
$
|
-
|
$
|
320
|
$
|
1,063
|
150 |
$ | (6 | ) | $ | 614 | $ | 235 | $ | - | $ | 33,517 | |||||||||||||||||||||||
|
Additions to non-controlling interest
|
-
|
-
|
-
|
-
|
-
|
-
|
- |
- |
- |
- |
5,350 |
5,350 |
||||||||||||||||||||||||||||||||||||
|
Purchase of non-controlling interest
|
(9,374
|
)
|
5,476
|
(36,155
|
)
|
-
|
-
|
-
|
(106 | ) | - |
(301 | ) | - |
- |
(40,460 | ) | |||||||||||||||||||||||||||||||
|
Net income attributable to non-controlling interest
|
(943
|
)
|
(2,001
|
)
|
11,856
|
-
|
-
|
-
|
(44 | ) | - |
- |
- |
179 |
9,047 |
|||||||||||||||||||||||||||||||||
|
Balance, December 31, 2020
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
320
|
$
|
1,063
|
$ | - | $ | (6 | ) | $ | 313 | $ | 235 | $ |
5,529 |
$ | 7,454 |
46
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
|
NOTE 15.
|
FAIR VALUE AND RISK MANAGEMENT
|
The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value,
which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers:
| • |
Level 1 – defined as quoted market prices in active markets for identical assets or liabilities
|
| • |
Level 2 – defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in
markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market or other inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities and
|
| • |
Level 3 – defined as unobservable inputs that are not corroborated by market data.
|
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable assets or liabilities.
The Company measures the put right and warrant liability on a recurring basis using Level 3 inputs as defined under ASC 820, Fair Value Measurement and
Disclosures. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period.
During the year ended December 31, 2020, and December 31, 2019, the Company issued 26.1 million and 50.0 million stock warrants, respectively. Certain stock
warrants are accounted for as a warrant liability (23,062,325 liability warrants and 50,000,000 liability warrants as of December 31, 2020, and 2019, respectively). The estimated fair value of the liability is recorded using significant
unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument. Increases or decreases in the fair value of the Company’s liability associated with the warrant liability are reflected as “change
in the fair value of the put right and warrant liability” in the consolidated statements of operations for the respective period.
The warrant liability is fair valued using a Black-Scholes model and methodologies and significant grant-date assumptions are disclosed in Note 12. There was no
change in the fair value from the initial valuation date.
The Company granted a one-time option (put right) to the sellers of ANPS as part of the Membership Interest purchase agreement. The put right gives the holder the
right to sell some or all of the stock consideration received as part of the acquisition on May 31, 2024 (“exercise date”) for $1.26 per share adjusted at a rate of 12% per annum, until the exercise date. The Company recorded $1,171 as the fair
value of the put right as a liability at the acquisition date. The fair value was determined using the Black-Scholes model and assumptions included below, with the residual value of the consideration recorded to the common stock issued. There
was no material change in the fair value of the put right as of December 31, 2020, since the acquisition date. The fair value of the put right could differ from these estimates if any assumption below were to change; with the corresponding
impact to the fair value of equity issued.
47
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
|
2020
|
2019
|
|||||||
|
Risk-Free Annual Interest Rate
|
0.44
|
%
|
N/A
|
|||||
|
Exercise price
|
$
|
1.26
|
N/A
|
|||||
|
Share price
|
$
|
0.67
|
N/A
|
|||||
|
Expected Stock Price Volatility
|
80
|
%
|
N/A
|
|||||
|
Expected term
|
4.0
|
N/A
|
||||||
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2020:
|
Level 1
|
Level 2 |
Level 3
|
Total
|
|||||||||||||
|
Financial Liability
|
||||||||||||||||
|
Put right
|
$
|
-
|
$ | - |
$
|
1,171
|
$
|
1,171
|
||||||||
|
Warrant liability
|
- |
- |
11,494
|
11,494
|
||||||||||||
|
Financial Liability Total
|
$ | - | $ | - |
$
|
12,665
|
$
|
12,665
|
||||||||
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2019:
|
Level 1
|
Level 2 |
Level 3
|
Total
|
|||||||||||||
|
Financial Liability
|
||||||||||||||||
|
Put right
|
$ | - | $ | - | $ | - |
$
|
-
|
||||||||
|
Warrant liability
|
- |
- |
- |
-
|
||||||||||||
|
Financial Liability Total
|
$ | - | $ | - | $ | - |
$
|
-
|
||||||||
|
NOTE 16.
|
COMMITMENTS AND CONTINGENCIES
|
Regulatory Environment
The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines,
restrictions on its operations, or losses of permits or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation as of
December 31, 2020, marijuana regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.
Claims & Legal Proceedings
From time to time, the Company may be involved in legal proceedings, including litigation or regulatory proceedings relating to claims arising out of operations in
the normal course of business. In accordance with the current accounting standards for loss contingencies under Accounting Standard Codification Topic 450, we establish reserves for litigation-related matters that arise from the ordinary course
of our business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. Litigation claims and proceedings of all types are subject to many
uncertain factors that generally cannot be predicted with assurance. By their nature, the amount of the contingency and the timing of a contingent event and any resulting accounting recognition are subject to our judgment of such events and our
estimates of the amounts. Below we provide a description of potentially material legal proceedings and claims.
48
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Litigation Assessment
The Company has evaluated its claims and the foregoing matters to assess the likelihood of any unfavorable outcome and to estimate, if possible, the amount of
potential loss as it relates to the litigation discussed above. Based on this assessment and estimate, which includes an understanding of the Company’s intention to vigorously prosecute its claims, the Company believes that any defenses of any
of the counterparties lack merit, and the likelihood of any recoveries by any of the counterparties against the Company appears remote. This assessment and estimate are based on the information available to management as of the date of these
financial statements and involves a significant amount of management judgment, including the inherent difficulty associated with assessing litigation matters in their early stages. As a result, the actual outcome or loss may differ materially
from those envisioned by the current assessment and estimate. Our failure to successfully prosecute or settle these claims could have a material adverse effect on our financial condition, revenue and profitability and could cause the market
value of our subordinate voting shares to decline. The Company monitors and evaluates prior settled claims to ensure the Company is in compliance with any and all requirements.
Commitments
On March 4, 2020, the Company engaged Elite Construction, LLC (“Elite”) to perform engineering and construction services related to the build-out of a cultivation
and dispensary site in Battle Creek, Michigan. Pursuant to the terms of the bid made by Elite, the Company was obligated to pay $3,836 for work performed under Phase 1 of construction with a remaining obligation to pay $671 as of December 31,
2020, which was subsequently paid in 2021. Certain amounts related to this contract have been recorded to construction in progress.
Loan Commitments
The AFC Term Loans are secured by (i) a first priority security interest in the equity interests of certain of the Company’s direct and indirect subsidiaries that
guaranteed the AFC Term Loans (the “Guarantors”), (ii) a first priority security interest in the trademarks registered with the Arizona Secretary of State and Maryland Secretary of State, held by the Company’s direct subsidiary, and (iii) a
first priority security interest in all of the Guarantors’ present and future real property assets. In the event of a change of control or other event of default, all obligations inclusive of any and all accrued and unpaid interest and fees
shall automatically become and be immediately due and payable in full. The AFC Term Loans include restrictions that, among other things, limit the Company’s ability to pay dividends, conduct certain asset or equity transactions, incur
indebtedness, grant liens and dispose of material assets. The Company must meet the following covenants on a quarterly basis: (1) Minimum Adjusted EBITDA, (2) Minimum Free Cash Flow, (3) Max Total Leverage to Adjusted EBITDA Ratio, (4) Minimum
Fixed Charge Coverage Ratio, and (5) Minimum Cash Balance. The Company is in compliance with all covenants.
49
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
|
NOTE 17.
|
DISCONTINUED OPERATIONS
|
Tedra Health LLC
On March 8, 2019, AMMA Investment Group, LLC (“AMMA”) entered into a Management Services Agreement (MSA) with Tedra Health, LLC (“Tedra Health”). Tedra Health is a
Connecticut limited liability company which operates a medical cannabis dispensary. AMMA determined that Tedra Health 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 March 8, 2019 and concluded the primary beneficiary of Tedra Health had not changed. Pursuant to ASC 250-10 and ASC 805-50-45 and the MSA effective March 8, 2019, the results of operations of Tedra Health
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 $54 and noncontrolling interest of $54 on the transfer date of March 8, 2019.
During the year ended December 31, 2020, the Company decided to discontinue operating activities related to Tedra Health, LLC, (“Tedra”) which owns and operates a
medical marijuana dispensary in the state of Connecticut. On October 2, 2020, Tedra entered into an Asset Purchase Agreement with FFD West, LLC (“FFD”) to sell and transfer all of its rights, title, and interest in designated purchased assets
to FFD in exchange for $4,200 in cash, $400 in escrow and a $500 promissory note. This transaction included all contracts held by Tedra, medical marijuana license, operating lease, inventory, and property, plant & equipment. The gain on
discontinued operations was approximately $3,800.
Discontinued operations are presented separately from continuing operations in the consolidated statements of operations and the consolidated statement of cash
flows.
The following table represents the financial results associated with discontinued operations as reflected in the Company’s consolidated statements of operations:
|
For the Year Ended
|
||||||||
|
2020
|
2019
|
|||||||
|
Revenue, net of discounts
|
$
|
2,291
|
$
|
561
|
||||
|
Cost of goods sold
|
(1,670
|
)
|
(386
|
)
|
||||
|
Gross profit
|
621
|
175
|
||||||
|
Operating expenses
|
||||||||
|
General and administrative
|
782
|
853
|
||||||
|
Selling and marketing
|
26
|
35
|
||||||
|
Depreciation and amortization
|
78
|
48
|
||||||
|
Total operating expenses
|
886
|
936
|
||||||
|
Operating income/(loss)
|
(265
|
)
|
(761
|
)
|
||||
|
Other (expense) income
|
||||||||
|
Interest expense
|
-
|
(3
|
)
|
|||||
|
Income/(loss) before taxes and non-controlling interest
|
(265
|
)
|
(764
|
)
|
||||
|
Income taxes
|
(109
|
)
|
(37
|
)
|
||||
|
Net income/(loss) before non-controlling interest
|
(374
|
)
|
(801
|
)
|
||||
|
Net income (loss) attributed to non-controlling interest
|
-
|
523
|
||||||
|
Net income/(loss) attributed to Devi Holdings, Inc.
|
$
|
(374
|
)
|
$
|
(278
|
)
|
||
50
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
The following table is a summary of the assets and liabilities of discontinued operations:
|
For the period ended December 31
|
||||||||
|
2020
|
2019
|
|||||||
|
Cash and cash equivalents
|
$
|
168
|
$
|
65
|
||||
|
Accounts receivable, net
|
-
|
2
|
||||||
|
Prepaid expenses
|
11
|
14
|
||||||
|
Inventory, net
|
244
|
96
|
||||||
|
Property, plant and equipment, net
|
507
|
576
|
||||||
|
Operating lease right-of-use asset, net
|
266
|
334
|
||||||
|
Total assets held for sale
|
1,196
|
1,087
|
||||||
|
Accounts payable
|
(197
|
)
|
(40
|
)
|
||||
|
Accrued expenses and other liabilities
|
(176
|
)
|
(76
|
)
|
||||
|
Operating lease liability, net of current portion
|
(267
|
)
|
(336
|
)
|
||||
|
Total liabilities associated with assets held for sale
|
$
|
(640
|
)
|
$
|
(452
|
)
|
||
The following table is a summary of the property, plant, and equipment of discontinued operations:
|
December 31,
2020
|
December 31,
2019
|
|||||||
|
Machinery and equipment
|
$
|
107
|
$
|
103
|
||||
|
Computer equipment and software
|
41
|
41
|
||||||
|
Leasehold improvements
|
475
|
470
|
||||||
|
Furniture and fixtures
|
10
|
10
|
||||||
|
Total property, plant and equipment, gross
|
633
|
624
|
||||||
|
Less: accumulated depreciation
|
(126
|
)
|
(48
|
)
|
||||
|
Property, plant and equipment, net
|
$
|
507
|
$
|
576
|
||||
|
NOTE 18.
|
SUBSEQUENT EVENTS
|
Drewry Sale Agreement
On June 9, 2021, the Company entered into an agreement (the “Drewry Sale Agreement”) with Drewry Investments LLC (“Drewry”), David Dozzo, Luciano Gabriano, Michael
Steele, and Avonlea Ventures Inc. (collectively, the “Drewry Parties”) to purchase the outstanding shares of Devi Common Stock held by the Drewry Parties and the 13.997% membership interest in Tide Management, LLC held by Drewry. As of June 9,
2021, the Drewry Parties owned 47,896,000 shares and had the right to acquire 3,455,842 additional shares of Devi common stock pursuant to warrants, for a total of 51,351,842 shares of Devi common stock. Additionally, as compensation for prior
consulting related services provided to the Company by Drewry, the Company agreed to issue an additional 2,000,000 shares of Devi common stock, increasing the total shares held by Drewry to 53,351,842.
Per the Drewry Sale Agreement, the Company agreed to pay the Drewry Parties a total of $80,028 in exchange for the shares and $1,500 in exchange for the Drewry
Parties’ 13.997% membership interest in Tide Management, LLC. Note that prior to the closing of the Drewry Sale Agreement, the Drewry Parties exercised, on a cashless basis, all of its existing warrants to acquire shares of Devi common stock
pursuant to the exercise process set forth in the Warrants. The Closing Date of the Agreement was determined to be no later than July 31, 2021.
51
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Capital Raise
On July 30, 2021, the Company completed a Common Stock Purchase Agreement with a group of institutional and individual investors, pursuant to which Devi sold an
aggregate of 29,872,607 shares at a price of $1.57 per share for gross proceeds of $46.9 million. On August 4, 2021, several individuals entered into the same Common Stock Purchase Agreement as Additional Purchasers, pursuant to which Devi sold
an additional 2,575,088 shares at the same price of $1.57 per share for gross proceeds of $4.0 million. The total gross proceeds following the closing of this Agreement were $50.9 million, of which 5% of the gross proceeds were payable to the
placement agent (“Seaport Global Securities LLC”).
On October 14, 2021, the Company completed a Common Stock Purchase Agreement with a group of related party investors, pursuant to which Devi sold an aggregate
16,725,908 shares at a price of $1.50 per share for gross proceeds of $25.0 million. There were no fees or costs associated with this capital raise.
The Company also completed a Common Stock Purchase Agreement with individual investor, pursuant to which Devi sold an aggregate 318,471 shares at a price of $1.57
per share for gross proceeds of $0.5 million, of which 5% of the gross proceeds were payable to the placement agent (“Seaport Global Securities LLC”). The total gross proceeds following the closing of both agreements were $25.5 million. In
connection with the Common Stock Purchase Agreement, the Company issued 4.3 million stock warrants for services, related to executing the financing transaction with AFC. The warrant provided the holder the right to purchase the Company’s stock
at $1.80 per share, and which expires on July 30, 2024. The Company is in the process of evaluating the classification of these warrants.
Drewry Assignment of Loan Interests
On June 9, 2021, the Company entered into an Assignment Agreement (the “Assignment Agreement”) with Drewry Investments LLC (“Assignor”) whereby Drewry agreed to
irrevocably sell and assign all of their rights and interests as a Lender under the Credit Agreement to AFC Management, LLC.
Amended and Restated Credit Agreement
On July 30, 2021, the Company entered into an Amended and Restated Credit Agreement (“Amended Credit Agreement”) with AFC Management, LLC, A BDC Warehouse LLC, AFC
Gamma, Inc. AFC Management LLC (collectively “AFC”) to borrow an additional $30.0 million, increasing the existing non-revolving term loan to $72.5
million. Terms and conditions to the Credit Agreement (see Note 11 Notes Payable) remained substantially unchanged with interest payments due monthly at an interest rate of 13% per annum. Tranche 2 Term Loans drawn under the Amended Credit
Agreement will have paid-in-kind interest (“PIK”) of 2%.
Bridge Credit Agreement
On July 30, 2021, Devi Holdings, Inc. (“Borrower”) entered into a Credit Agreement (the “Bridge Credit Agreement”) with Flower Loan Holdco, LLC and J Brothers
Investments LLC, a related party. The Company entered into term loan notes with Flower Loan Holdco, LLC and J Brothers Investments LLC (collectively the “Bridge Loans”) in the amounts of $32.4 million less an original issue discount of $759 and
$2.0 million less a discount of $40, respectively. The interest rate for the Bridge Loans is 20.00% per annum and will increase on March 31, 2022, to a rate per annum equal to 30.00%. The maturity date of these term loans is August 7, 2024. The
proceeds from the Bridge Loans were used for the Drewry Sale Agreement as described above.
52
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Additionally, Jigarkumar Patel granted, assigned, and pledged to secure the obligations under the term loans through all right, title and interest in Aumega Health
and Wellness, LLC (“Aumega”), which holds a 17% membership interest in PA Natural Medicine, LLC (“PA”). This membership interest in PA held by Aumega represents a portion of the Company’s 43% noncontrolling membership interest in PA. The Aumega
guaranty constitutes a continuing and irrevocable guaranty and shall remain in full force and effect until the term loans have been paid in full.
On October 15, 2021, the Company repaid the bridge loan in full with the proceeds from the capital raise mentioned above.
Promissory Note issued for real estate purchase
On May 27, 2021, the Company issued a promissory note in the principal amount of $700 to HRG Battle Creek, LLC, a Michigan limited liability company, related to
the Company’s purchase of real estate in Emmett Township, Michigan. The note shall be paid back through monthly interest-only payments beginning the first day of the first full month 30 days after the closing date of the transaction with
lump-sum principal payments made every 12 months on the anniversary of the closing date. The first interest-only payment will be due July 1, 2021, and the maturity date of the note will be June 30, 2024. The note is secured by the real property
acquired by the Company from HRG Battle Creek, LLC.
Acquisitions
On September 13, 2021, Natures NM Management LLC, wholly owned subsidiary of Devi Holdings, Inc., purchased all of the interest in PurLife Management Group, LLC
(“PurLife”), which provides management services to PurLife, Inc., a New Mexico nonprofit corporation, and MJ Express-O, Inc., a New Mexico nonprofit corporation, which is a vertically integrated cannabis company for $10 million cash, $14.2
million promissory note and approximately 1,600,000 shares of Devi Holdings, Inc. In addition, 0.4 million warrants were issued at an exercise price of $1.80 per share, which expires on September 13, 2024. Management is evaluating the fair
value and the classification of the warrants. The acquisition of PurLife gives the Company an opportunity to enter the New Mexico cannabis market. Management is evaluating the transaction cost and, fair value of consideration transferred, and
assets and liabilities assumed, because the information was not available at the time the financial statements were issued.
On September 20, 2021, Devi Holdings, Inc. purchased all of the membership interest in MW Biosystems, LLC, an Arizona limited liability company as well as control
of the board of directors of Cannabis Research Group, Inc., an Arizona nonprofit corporation, (collectively, “CRG”) for $19 million. The acquisition of CRG expands the Company’s current dispensary locations in Arizona. Management is evaluating
the transaction cost and, fair value of the consideration transferred, and assets and liabilities assumed, because the information was not available at the time the financial statements were issued.
On October 27, 2021, AMMA Investment Group, LLC, subsidiary of Devi Holdings, Inc., purchased certain assets and liabilities in Tolleson Supply Company, LLC, an
Arizona limited liability company, (“Tolleson”), which cultivates cannabis products, for $0.4 million cash, $0.6 note payable and 2,053,333 shares of Devi Holdings, Inc. The acquisition of Tolleson gives the Company an opportunity to expand the
cultivation production in the state of Arizona. Management is evaluating the transaction cost and, fair value of consideration transferred, and assets and liabilities assumed, because the information was not available at the time the financial
statements were issued.
53
Notes to the Consolidated Financial Statements
in thousands of United States dollars, unless otherwise noted
Cannabis License Update
In July 2021, the Company was notified by the state of Georgia that Nature’s GA, LLC, joint venture, won a license to sell cannabis in the state.
In October 2021, the Company was notified by the state of Illinois that Teisa, LLC, joint venture, did not win a license to sell cannabis in the state of Illinois.
Subsequently, the Company wrote off the entire investment in Teisa LLC, which was $490.
PA Natural Medicine LLC interest sale
On October 1, 2021 (the “Closing Date”), the Company, as part of a group of sellers, sold its equity investment of 43% in PA Natural Medicine LLC (“PA”) to CSAC
Acquisition PA II Corp. (the “Buyer”) which is a subsidiary of AYR Wellness, Inc. (“the Parent”). The Buyer acquired all of the issued and outstanding membership interests of PA in exchange for aggregate cash consideration of $35.2 million
(which includes closing cash net of working capital, transaction expenses, and reserves), purchase promissory notes of $25 million, stock consideration of $20 million in Parent subordinate shares, and a right to earn-out consideration. The
pro-rata share of cash consideration paid at closing received by the Company was $15.2 million. The proceeds were used to payoff the Bridge loan, which included the assignment of the promissory note receivable from the buyer, at a discount, to
Flower Loan Holdco, LLC. The purchase promissory notes have interest payable quarterly at a rate of 8% per annum, with aggregate principal payments of $500 payable quarterly and the remaining principal balance payable on the third anniversary
of issuance.
One-half of all shares acquired by the Buyer will be subject to a six-month lockup period after the Closing Date and the remaining half of shares acquired will be
subject to a 12-month lockup period. However, Aumega, a subsidiary of the Company that owns the Company’s 43% investment, will not be required to enter into a lockup agreement. Aumega shares will only be subject to a four-month statutory
holding period under Canadian securities laws.
For calendar year 2021 (the “measurement period”), the Company is eligible for its pro-rata share of earn-out consideration, the total of which will not exceed $40
million. Consideration for earn-out consideration, if any, will be paid in a combination of cash, promissory notes, and stock. Earn-out promissory notes will have interest payable quarterly at a rate of 8% per annum, with principal payments
of $500 payable quarterly and the remaining principal balance payable on the third anniversary of issuance.
Amado Land Purchase
On July 16, 2021, the Company entered into a Purchase and Sale Agreement (the “Mulligan Agreement”) with Mulligan Holdings, LLC, an Arizona limited liability
company, to purchase real estate located in Amado, Arizona for total consideration of $4,550. Pursuant to the terms of the Mulligan Agreement, the purchase price shall be held in escrow pending the satisfactory results of feasibility studies
and inspections of the property within 45 days of the closing of the agreement. On August 23, 2021, the Company entered into the First Amendment to the Mulligan Agreement extending the period for completing the feasibility studies and
inspections to September 10, 2021, and the deadline for close of escrow to September 15, 2021. The transaction closed on September 7, 2021.
54
Exhibit 99.2
Devi Holdings, Inc.
Condensed Consolidated Interim Statement of Operations
(Unaudited)
For the six months ended
June 30, 2021
(Expressed in U.S. Dollars)
DEVI HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS (UNAUDITED)
|
Condensed Consolidated Interim Statement of Operations for six months ended June 30, 2021
|
1
|
|
Notes to Condensed Consolidated Interim Statement of Operations
|
2-12
|
DEVI HOLDINGS, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Amounts expressed in thousands of United States dollars, except share data)
|
Six months ended
June 30,
2021
|
||||
|
Unaudited
|
||||
|
Revenue, net of discounts
|
$
|
54,615
|
||
|
Cost of goods sold
|
(29,465
|
)
|
||
|
Gross profit
|
25,150
|
|||
|
Operating expenses
|
||||
|
General and administrative
|
15,669
|
|||
|
Selling and marketing
|
1,234
|
|||
|
Share-based compensation
|
1,977
|
|||
|
Depreciation
|
750
|
|||
|
Total operating expenses
|
19,630
|
|||
|
Operating income
|
5,520
|
|||
|
Other (expense) income
|
||||
|
Gain on sale of Tedra Health, LLC
|
3,278
|
|||
|
Loss on disposal of assets
|
(275
|
)
|
||
|
Income from equity method investments
|
3,383
|
|||
|
Other income
|
4
|
|||
|
Change in the fair value of the put right and warrant liability
|
(6,013
|
)
|
||
|
Interest income
|
75
|
|||
|
Interest expense
|
(3,721
|
)
|
||
|
Amortization of debt costs related to related party PIK loan
|
(2,236
|
)
|
||
|
Income before taxes and non controlling interest
|
15
|
|||
|
Income taxes
|
(7,005
|
)
|
||
|
Loss from continuing operations before non controlling interest
|
(6,990
|
)
|
||
|
Net loss from discontinued operations, net of tax
|
(42
|
)
|
||
|
Net loss before non controlling interest
|
(7,032
|
)
|
||
|
Net income attributed to non controlling interest
|
1,534
|
|||
|
Net loss attributed to Devi Holdings, Inc.
|
$
|
(8,566
|
)
|
|
See accompanying Notes to Condensed Consolidated Statement of Operations
1
DEVI HOLDINGS INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
Amounts expressed in thousands of United States dollars, unless otherwise noted
|
NOTE 1.
|
BASIS OF PRESENTATION
|
The accompanying Condensed Consolidated Interim Statement of Operations of the Company have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”) for interim financial information as of June 30, 2021, and on the going concern basis. Under the going concern basis, the historical cost convention, except for certain financial instruments that are
measured at fair value as described herein.
In the opinion of management, the accompanying Condensed Consolidated Interim Statement of Operations reflect all normal recurring adjustments necessary to present
fairly the Company’s Condensed Consolidated Interim Statement of Operations for the six-month period ended June 30, 2021. The Condensed Consolidated Interim Statement of Operations are not necessarily indicative of the results of operations to be
expected for any subsequent interim period or for the fiscal year ended December 31, 2021. The accompanying Condensed Consolidated Interim Statement of Operations and notes thereto should be read in conjunction with the audited consolidated
financial statements for the year ended December 31, 2020.
|
NOTE 2.
|
SIGNIFICANT ACCOUNTING POLICIES
|
The accounting policies that we follow are set forth in Note 2 – Significant Accounting Policies of the Notes to Consolidated Financial Statement in our Annual Report.
There were no significant updates or revisions to our accounting policies during the six months ended June 30, 2021.
|
NOTE 3.
|
REVENUE RECOGNITION
|
The Company generates revenue from wholesale and retail sales of cannabis. The Company recognizes revenue when it satisfies a performance obligation in an amount
reflecting the consideration to which it expects to be entitled. The Company has identified the promise to transfer products, each of which is distinct, to be the performance obligation.
2
DEVI HOLDINGS INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
Amounts expressed in thousands of United States dollars, unless otherwise noted
|
NOTE 3.
|
REVENUE RECOGNITION - continued
|
Substantially all of the Company’s revenue is recognized following the transfer of control of the products to the customer, which occurs upon delivery. The nature of the
Company’s business gives rise to variable consideration, including sales discounts, rebates, allowances, and returns that generally decrease the transaction price which reduces revenue. These variable amounts are generally credited to the customer,
based on achieving certain levels of sales activity, product returns or price concessions.
Variable consideration is estimated at the most likely amount that is expected to be earned. Estimated amounts are included in the transaction price to the extent it is
probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.
Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Any shipping and handling fees charged to customers
are reported within revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The Company does not have any significant financing components as payment is received at or shortly after the point of sale.
Costs incurred to obtain a contract will be expensed as incurred when the amortization period is less than a year.
|
NOTE 4.
|
ASSETS & LIABILITIES HELD FOR SALE
|
Tedra Health, LLC
On February 1, 2021, the Company and other owners of Tedra Health, LLC (collectively, “the Seller Parties”), which own and operate a medical marijuana dispensary
facility in the state of Connecticut, sold the existing assets of Tedra Health, LLC to an unrelated third party. The purchase price paid by the buyer was $5.1 million in cash and a secured promissory note. Following the payment in full of an
outstanding $60 donation agreement owed by Tedra Health, LLC to the town of Mansfield, CT, the portion of net proceeds received by the Company for its ownership interests in Tedra Health, LLC totaled approximately $5.1 million. The carrying value of
the assets derecognized resulted in a gain of $3.3 million.
|
NOTE 5.
|
DEPRECIATION AND AMORTIZATION EXPENSE
|
Depreciation expense for property, plant and equipment for the six months ended June 30, 2021, was $837 in cost of goods sold and $750 in general and administrative
expense within the Condensed Consolidated Interim Statement of Operations.
Amortization expense for deferred debt issuance costs for the six months ended June 30, 2021, was $2.2 million in general and administrative.
3
DEVI HOLDINGS INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
Amounts expressed in thousands of United States dollars, unless otherwise noted
|
NOTE 6.
|
LEASES
|
We determine if a contract contains a lease at inception. The Company holds leases related to office spaces and retail dispensary facilities.
During the six months ended June 30, 2021, the Company recorded operating lease expense and finance lease expense of $308 and $45, respectively, for amortization on right-of-use assets included in general and administrative expense within the
Condensed Consolidated Interim Statement of Operations. During the six months ended June 30, 2021, the Company recorded operating lease expense and finance lease expense of $166 and $124, respectively, for interest expense on lease liabilities.
During the six months ended June 30, 2021, the Company recorded operating lease expense of $467 which includes short-term lease costs of $21.
|
NOTE 7.
|
NOTES PAYABLE – INTEREST EXPENSE
|
Promissory Note issued for real estate purchase
On May 27, 2021, the Company issued a promissory note in the principal amount of $700 to HRG, Battle Creek, LLC, a Michigan limited liability company, related to the
Company’s purchase of real estate in Emmett Township, Michigan. The term of the note is for monthly interest-only payments, 12% interest rate, beginning the first day of the first full month 30 days after the closing date of the transaction and
lump-sum principal payments made every 12 months on the anniversary of the closing date. The first interest- only payment is due July 1, 2021, and the maturity date of the note will be June 30, 2024. The note is secured by the real property acquired
by the Company from HRG Battle Creek, LLC.
Total interest expense for notes payable for the six months ended June 30, 2021, was $3.7 million. Included in total interest expense is interest expense for related
party notes payable due to beneficial ownership in the Company. Interest expense for related parties for the six months ending June 30, 2021, was $3.7 million.
|
NOTE 8.
|
SHARE-BASED COMPENSATION EXPENSE
|
During the six months ended June 30, 2021, the Company recorded approximately share-based compensation expense of $17 for restricted stock units granted and vested
during the period. Additionally, as compensation for prior consulting related services provided to the Company by Drewry Investments LLC (“Drewry”), the Company agreed to issue an additional 2,000,000 shares of Devi common stock at a fair value of
$0.98 per share, which resulted in share-based compensation expense of $1,960.
4
DEVI HOLDINGS INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
Amounts expressed in thousands of United States dollars, unless otherwise noted
|
NOTE 9.
|
INCOME TAXES
|
The income tax provision recorded differs from the income tax obtained by applying the statutory income tax rate for the period ended June 30, 2021, of 25.91% to the
income for the year and is reconciled as follows:
|
June 30, 2021
|
||||
|
Income before taxes
|
$
|
15
|
||
|
Income tax expense based on statutory rate
|
4
|
|||
|
Non-deductible expenses
|
4,380
|
|||
|
Other
|
(268
|
)
|
||
|
Increase in valuation allowance
|
2,889
|
|||
|
Income tax expense
|
$
|
7,005
|
||
The Company’s income tax expense for the six months ended June 30, 2021, is entirely related to current tax expense.
The Company has available tax losses that may be carried forward to apply against future years’ income for income tax purposes in certain jurisdictions. The Company has
accumulated tax losses that expire as follows:
|
Expiration year
|
Federal
|
State and local
|
Total
|
|||||||||
|
2024
|
$
|
-
|
$
|
5,025
|
$
|
5,025
|
||||||
|
2025
|
-
|
22,414
|
22,414
|
|||||||||
|
2026
|
-
|
13,126
|
13,126
|
|||||||||
|
Indefinite
|
35,237
|
-
|
35,237
|
|||||||||
|
Total
|
$ | 35,237 |
$
|
40,565
|
$
|
75,802
|
||||||
5
DEVI HOLDINGS INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
Amounts expressed in thousands of United States dollars, unless otherwise noted
|
NOTE 9.
|
INCOME TAXES - continued
|
The statute of limitations on tax returns for the Internal Revenue Service and Arizona Department of Revenue are 3 and 4 years respectively. Net operating losses remains
open for examination beyond these statute of limitations for both the Internal Revenue Service and Arizona Department of Revenue.
Utilization of net operating loss carryforwards may be subject to limitations in the event of a change in ownership as defined under U.S. IRC Section 382, and similar
state provisions. An “ownership change” is generally defined as a cumulative change in the ownership interest of significant stockholders over a three-year period of more than 50 percentage points. A formal Section 382 study has not been prepared, so
the exact effects of the ownership change are not known at this time.
In March 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted. The Act, among other provisions, reinstates the ability of corporations to
carry net operating losses back to the five preceding tax years, has increased the excess interest limitation on modified taxable income from 30 percent to 50 percent. The Company has made a reasonable estimate of the effects on existing deferred tax
balances and has concluded that the Act has not had a significant on the deferred tax balances.
|
NOTE 10.
|
PUT RIGHT AND WARRANT LIABILITY
|
During the year ended December 31, 2020, the Company issued 24.7 million stock warrants. The stock warrants are accounted for as a warrant
liability. The estimated fair value of the liabilities is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument. Increases or decreases in the fair value of the
Company’s liabilities associated with the warrant liability are reflected as “Change in the fair value of the put right and warrant liability” in the Condensed Consolidated Interim Statement of Operations.
During the six months ended June 30, 2021, the change in the warrant liability and put right liability was a credit of $6,251 and a charge of
$238, respectively, in the Condensed Consolidated Interim Statement of Operations. During the six months ended June 30, 2021, the weighted-average fair value of the stock warrants granted was $0.75 per warrant. As of June 30, 2021, stock warrants
outstanding have a weighted-average remaining contractual life of 0.34 years.
No warrants were issued in the six months ended June 30, 2021.
6
DEVI HOLDINGS INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
Amounts expressed in thousands of United States dollars, unless otherwise noted
|
Note 11.
|
COMMITMENTS AND CONTINGENCIES
|
Regulatory Environment
The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines,
restrictions on its operations, or losses of permits or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation as of June 30,
2021, marijuana regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.
Claims & Legal Proceedings
From time to time, the Company may be involved in legal proceedings, including litigation or regulatory proceedings relating to claims arising out of operations in the
normal course of business. In accordance with the current accounting standards for loss contingencies under Accounting Standard Codification Topic 450, we establish reserves for litigation-related matters that arise from the ordinary course of our
business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. Litigation claims and proceedings of all types are subject to many uncertain factors
that generally cannot be predicted with assurance. By their nature, the amount of the contingency and the timing of a contingent event and any resulting accounting recognition are subject to our judgment of such events and our estimates of the
amounts. Below we provide a description of potentially material legal proceedings and claims.
Litigation Assessment
The Company has evaluated its claims and the foregoing matters to assess the likelihood of any unfavorable outcome and to estimate, if possible, the amount of potential
loss as it relates to the litigation discussed above. Based on this assessment and estimate, which includes an understanding of the Company’s intention to vigorously prosecute its claims, the Company believes that any defenses of any of the
counterparties lack merit, and the likelihood of any recoveries by any of the counterparties against the Company appears remote. This assessment and estimate are based on the information available to management as of the date of this financial
statement and involves a significant amount of management judgment, including the inherent difficulty associated with assessing litigation matters in their early stages. As a result, the actual outcome or loss may differ materially from those
envisioned by the current assessment and estimate. Our failure to successfully prosecute or settle these claims could have a material adverse effect on our financial condition, revenue and profitability and could cause the market value of our
subordinate voting shares to decline.
7
DEVI HOLDINGS INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
Amounts expressed in thousands of United States dollars, unless otherwise noted
|
NOTE 11.
|
COMMITMENTS AND CONTINGENCIES - continued
|
Loan Commitments
The AFC Term Loans are secured by (i) a first priority security interest in the equity interests of certain of the Company’s direct and indirect subsidiaries that
guaranteed the AFC Term Loans (the “Guarantors”), (ii) a first priority security interest in the trademarks registered with the Arizona Secretary of State and Maryland Secretary of State, held by the Company’s direct subsidiary, and (iii) a first
priority security interest in all of the Guarantors’ present and future real property assets. In the event of a change of control or other event of default, all obligations inclusive of any and all accrued and unpaid interest and fees shall
automatically become and be immediately due and payable in full. The AFC Term Loans include restrictions that, among other things, limit the Company’s ability to pay dividends, conduct certain asset or equity transactions, and incur indebtedness,
grant liens and dispose of material assets. The Company must meet the following covenants on a quarterly basis: (1) Minimum Adjusted EBITDA, (2) Minimum Free Cash Flow, (3) Max Total Leverage to Adjusted EBITDA Ratio, (4) Minimum Fixed Charge
Coverage Ratio, and (5) Minimum Cash Balance. The Company is in compliance with all covenants as of June 30, 2021.
|
Note 12.
|
SUBSEQUENT EVENTS
|
Drewry Sale Agreement
On June 9, 2021, the Company entered into an agreement (the “Drewry Sale Agreement”) with Drewry Investments LLC (“Drewry”), David Dozzo, Luciano Gabriano, Michael
Steele, and Avonlea Ventures Inc. (collectively, the “Drewry Parties”) to purchase the outstanding shares of Devi Common Stock held by the Drewry Parties and the 13.997% membership interest in Tide Management, LLC held by Drewry. As of June 9, 2021,
the Drewry Parties owned 47,896,000 shares and had the right to acquire 3,455,842 additional shares of Devi Common Stock pursuant to Warrants, for a total of 51,351,842 shares of the Company Common Stock. Additionally, as compensation for prior
consulting related services provided to the Company by Drewry, the Company agreed to issue an addition 2,000,000 shares of Devi Common Stock, increasing the total shares held by Drewry to 53,351,842.
Per the Drewry Sale Agreement, the Company agreed to pay the Drewry Parties a total of $80,028 in exchange for the shares and $1,500 in exchange for the 13.997%
membership interest in Tide Management, LLC. Note that prior to the closing of the Drewry Sale Agreement, the Drewry Parties exercised, on a cashless basis, all of its existing warrants to acquire shares of Devi Common Stock pursuant to the exercise
process set forth in the Warrants. The Closing Date of the Agreement was determined to be no later than July 31, 2021.
8
DEVI HOLDINGS INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
Amounts expressed in thousands of United States dollars, unless otherwise noted
|
Note 12.
|
SUBSEQUENT EVENTS - continued
|
Amado Land Purchase
On July 16, 2021, the Company entered into a Purchase and Sale Agreement (the “Mulligan Agreement”) with Mulligan Holdings, LLC, an Arizona limited liability company, to
purchase real estate located in Amado, Arizona for total consideration of $4,550. Pursuant to the terms of the Mulligan Agreement, the purchase price shall be held in escrow pending the satisfactory results of feasibility studies and inspections of
the property within 45 days of the closing of the agreement. On August 23, 2021, the Company entered into the First Amendment to the Mulligan Agreement extending the period for completing the feasibility studies and inspections to September 10, 2021,
and the deadline for close of escrow to September 15, 2021. The transaction closed on September 7, 2021.
Capital Raises
On July 30, 2021, the Company completed a Common Stock Purchase Agreement with a group of institutional and individual investors, pursuant to which the Company sold an
aggregate of 29,872,607 shares at a price of $1.57 per share for gross proceeds of $46.9 million. On August 4, 2021, several individuals entered into the same terms Common Stock Purchase Agreement as Additional Purchasers, pursuant to which Devi sold
an additional 2,575,088 shares at the same price of $1.57 per share for gross proceeds of $4.0 million. The total gross proceeds following the closing of this Agreement were $50.9 million, of which 5% of the gross proceeds
were payable to the placement agent (“Seaport Global Securities LLC”).
On October 14, 2021, the Company completed a Common Stock Purchase Agreement with a group of related party investors, pursuant to which Devi sold an aggregate 16,725,908
shares at a price of $1.50 per share for gross proceeds of $25.0 million.
In addition, to the related party Common Stock Purchase Agreement, the Company completed a Common Stock Purchase Agreement with individual investor, pursuant to which
Devi sold an aggregate 318,471 shares at a price of $1.57 per share for gross proceeds of $0.5 million of which 5% of the gross proceeds were payable to the placement agent (“Seaport Global Securities LLC”). The total gross proceeds following the
closing of both agreements were $25.5 million. In connection with the Common Stock Purchase Agreement, the Company issued 4.3 million stock warrants for services, related to executing the financing transaction with AFC. The warrant provided the
holder the right to purchase the Company’s stock at $1.80 per share, and which expires on July 30, 2024. The warrants were fair valued using the Black-Scholes option-pricing model and the fair value of the warrants were $0.61 per warrant. The company
is in the process of evaluating the classification of these warrants.
9
DEVI HOLDINGS INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
Amounts expressed in thousands of United States dollars, unless otherwise noted
|
Note 12.
|
SUBSEQUENT EVENTS - continued
|
Drewry Assignment of Loan Interests
On June 9, 2021, the Company entered into an Assignment Agreement (the “Assignment Agreement”) with Drewry Investments LLC (“Assignor”) which agreed to irrevocably sell
and assign all of their rights and interests as a Lender under the Credit Agreement to AFC Management, LLC.
Amended and Restated Credit Agreement
On July 30, 2021, the Company entered into an Amended and Restated Credit Agreement (“Amended Credit Agreement”) with AFC Management, LLC, A BDC Warehouse LLC, AFC
Gamma, Inc. AFC Management LLC (collectively “AFC”) to borrow an additional $30.0 million, increasing the existing non-revolving term loan to $72.5 million. Terms and conditions to the Credit Agreement remained substantially unchanged with interest
payments due monthly at an interest rate of 13% per annum. Tranche 2 Term Loans drawn under the Amended Credit Agreement with have PIK of 2%.
Bridge Credit Agreement
On July 30, 2021, Devi Holdings, Inc. (“Borrower”) entered into a Credit Agreement (the “Bridge Credit Agreement”) with Flower Loan Holdco, LLC and J Brothers
Investments LLC, a related party. The Company entered into term loan notes with Flower Loan Holdco, LLC and J Brothers Investments, LLC (collectively the “Bridge Loans”) in the amounts of $32.4 million less an original issue discount of $759 and $2.0
million less a discount of $40, respectively. The interest rate for the Bridge Loans is 20.00% per annum and will increase on March 31, 2022, to a rate per annum equal to 30.00%. The maturity date of these term loans is August 7, 2024. The proceeds
from the Bridge Loans were used for the Drewry Sale Agreement as described above.
Additionally, Jigarkumar Patel granted, assigned, and pledged to secure the obligations under the term loans through all right, title and interest in Aumega Health and
Wellness, LLC (“Aumega”), which holds a 17% membership interest in PA Natural Medicine, LLC (“PA”). This membership interest in PA held by Aumega represents a portion of the Company’s 43% noncontrolling membership interest in PA. The Aumega guaranty
constitutes a continuing and irrevocable guaranty and shall remain in full force and effect until the term loans have been paid in full.
On October 15, 2021, the Company repaid the Bridge Loans in full with the proceeds from the capital raise mentioned above.
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DEVI HOLDINGS INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
Amounts expressed in thousands of United States dollars, unless otherwise noted
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Note 12.
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SUBSEQUENT EVENTS - continued
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Acquisitions
On September 3, 2021, Devi Holdings, Inc. issued 510,000 shares of the Company common stock for the 51% majority ownership of Jais, LLC, which holds a license in the
state of Missouri and was previously an equity method investment. The transaction does not meet the definition of a business, as such, will not be recognized as a business combination.
On September 13, 2021, Natures NM Management LLC, wholly owned subsidiary of Devi Holdings, Inc., purchased all of the interest in PurLife Management Group, LLC
(“PurLife”), which provides management services to PurLife, Inc., a New Mexico nonprofit corporation, and MJ Express-O, Inc., a New Mexico nonprofit corporation, which is a vertically integrated cannabis company for $10 million cash, $14.2 million
promissory note and approximately 1,600,000 shares of Devi Holdings, Inc. In addition, 0.4 million warrants were issued at an exercise price of $1.80 per share, which expires on September 13, 2024. Management is evaluating the fair value and the
classification of the warrants. The acquisition of PurLife gives the Company an opportunity to enter the New Mexico cannabis market. Management is evaluating the transaction cost and, fair value of consideration transferred, and assets and
liabilities assumed, because the information was not available at the time the financial statements were issued.
On September 20, 2021, Devi Holdings, Inc. purchased all of the membership interest in MW Biosystems, LLC, an Arizona limited liability company as well as control of the
board of directors of Cannabis Research Group, Inc., an Arizona nonprofit corporation, (collectively, “CRG”) for $19 million. The acquisition of CRG expands the Company’s current dispensary locations in Arizona. Management is evaluating the
transaction cost and, fair value of the consideration transferred, and assets and liabilities assumed, because the information was not available at the time the financial statements were issued.
Cannabis License Update
In July 2021, the Company was notified by the state of Georgia that Nature’s GA, LLC, joint venture, won a license to sell cannabis in the state.
In October 2021, the Company was notified by the state of Illinois that Teisa, LLC, joint venture, did not win a license to sell cannabis in the state of Illinois.
Subsequently, the Company wrote off the entire investment in Teisa LLC, which was $490.
Sale of Equity Method Investment
On October 1, 2021 (the “Closing Date”), the Company, as part of a group of sellers, sold its equity investment of 43% in PA Natural Medicine LLC (“PA”) to CSAC
Acquisition PA II Corp. (the “Buyer”) which is a subsidiary of AYR Wellness, Inc. (“the Parent”). The Buyer acquired all of the issued and outstanding
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DEVI HOLDINGS INC. and SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
Amounts expressed in thousands of United States dollars, unless otherwise noted
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Note 12.
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SUBSEQUENT EVENTS - continued
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membership interests of PA in exchange for aggregate cash consideration of $35.2 million (which includes closing cash net of working capital, transaction expenses, and
reserves), purchase promissory notes of $25 million, stock consideration of $20 million in Parent subordinate shares, and a right to earn-out consideration. The pro-rata share of cash consideration paid at closing received by the Company was $15.2
million. The proceeds were used to pay off the Bridge Loans, which included the assignment of the promissory note receivable from the buyer, at a discount, to Flower Loan Holdco, LLC. The purchase promissory notes have interest payable quarterly at a
rate of 8% per annum, with aggregate principal payments of $500 payable quarterly and the remaining principal balance payable on the third anniversary of issuance.
One-half of all shares acquired by the Buyer will be subject to a six-month lockup period after the Closing Date and the remaining half of shares acquired will be
subject to a 12-month lockup period. However, Aumega, a subsidiary of the Company that owns the Company’s 43% investment, will not be required to enter into a lockup agreement. Aumega shares will only be subject to a four-month statutory holding
period under Canadian securities laws.
For calendar year 2021 (the “measurement period”), the Company is eligible for its pro-rata share of earn-out consideration, the total of which will not exceed $40
million. Consideration for earn-out consideration, if any, will be paid in a combination of cash, promissory notes, and stock. Earn-out promissory notes will have interest payable quarterly at a rate of 8% per annum, with principal payments of $500
payable quarterly and the remaining principal balance payable on the third anniversary of issuance.
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