UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-56422

TILT Holdings Inc.

(Exact name of registrant as specified in its charter)


British Columbia		83-2097293
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

2801 E. Camelback Road #180
Phoenix, Arizona		85016
(Address of principal executive offices)		(Zip code)

(623) 887-4990

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 30, 2023, there were 334,360,238 common shares, without par value, of TILT Holdings Inc. outstanding, excluding limited partnership units of Jimmy Jang, L.P. exchangeable for 43,821,379 common shares.

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TILT HOLDINGS INC.

INDEX

PART I — FINANCIAL INFORMATION	5

Item 1. Financial Statements (Unaudited)	5

Condensed Consolidated Balance Sheets as of March 31, 2023 (Unaudited) and December 31, 2022	5

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2023 and 2022 (Unaudited)	6

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2023 and 2022 (Unaudited)	7

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022 (Unaudited)	8

Notes to the Condensed Consolidated Financial Statements (Unaudited)	9

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3. Quantitative and Qualitative Disclosures About Market Risk	38

Item 4. Controls and Procedures	38

PART II — OTHER INFORMATION	39

Item 1. Legal Proceedings	39

Item 1A. Risk Factors	39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42

Item 3. Defaults Upon Senior Securities	42

Item 4. Mine Safety Disclosures	42

Item 5. Other Information	42

Item 6. Exhibits	43

Signatures	45

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USE OF NAMES AND CURRENCY

In this Quarterly Report on Form 10-Q, unless the context otherwise requires, the terms “we,” “us,” “our,” “Company,” or “TILT” refer to TILT Holdings Inc. together with its wholly-owned subsidiaries.

Unless otherwise indicated, all references to “$,” “US$” or “USD$” in this Quarterly Report on Form 10-Q refer to United States dollars, and all references to “C$” or “CAD$” refer to Canadian dollars.

DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking information” and “forward-looking statements” within the meaning of applicable Canadian and United States (“U.S.”) securities laws (collectively, “forward-looking statements”). Such statements include, but are not limited to, statements with respect to expectations, projections, or other characterizations of future events or circumstances, and our objectives, goals, strategies, beliefs, intentions, plans, estimates, projections and outlook, including statements relating to our plans and objectives, or estimates or predictions of actions of customers, suppliers, competitors or regulatory authorities. These statements are subject to certain risks, assumptions and uncertainties that could cause actual results to differ materially from those included in the forward-looking statements. The words “believe”, “plan”, “intend”, “estimate”, “expect”, “likely”, “potential”, “proposed,” “scheduled,” “forecast” or “anticipate”, and similar expressions, as well as future or conditional verbs such as “will”, “should”, “would,” “may”, “might” and “could” identify forward-looking statements.

Management of the Company has based the forward-looking statements on its current views with respect to future events and financial performance and has made assumptions and applied certain factors regarding, among other things: future product pricing; costs of inputs; the Company’s ability to successfully market its products to its anticipated clients; the Company’s reliance on its key personnel; certain regulatory requirements; the application of federal and state environmental laws; the impact of increasing competition; the ability to obtain additional financing on favorable terms; the receipt of applicable regulatory approvals; and the regulatory environments in which the Company operates. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. The Company’s forward-looking statements are expressly qualified in their entirety by this cautionary statement. The purpose of forward-looking statements is to provide the reader with a description of management’s expectations, and such forward-looking statements may not be appropriate for any other purpose.

By its nature, forward-looking information is subject to risks and uncertainties, and there are a variety of risk factors, many of which are beyond the control of the Company, and that may cause actual outcomes to differ materially from those discussed in the forward-looking statements. Such factors include, among others, the status of cannabis as a controlled substance under the U.S. Federal Controlled Substances Act (“CSA”); risks related to the enforcement activities by the U.S. Department of Justice (“DOJ”); reputational risk to third parties; risks associated with banking, financial transactions and anti-money laundering laws and regulations; risks related to federal and state forfeiture laws; the risk of heightened security by regulatory authorities; risks related to the Company’s ability to continue as a going concern; risks related to the potential negative impact of regulatory scrutiny on raising capital; risks related to regulatory or political change; risks due to industry immaturity or limited comparable, competitive or established industry best practices; risks related to the uncertainty surrounding existing protection from U.S. federal prosecution relating to cannabis laws; risks related to uncertainty with respect to geo-political disruptions; risks related to regulatory changes in relation to vaporization devices and subsequent impacts to interstate commerce, registrations and revenue reporting requirements, and potential excise tax applicability; risks relating to tax status; risks associated with the Company’s business model; risks related to the transition of the Company’s leadership; risks related to the Company’s dependency on skilled labor, equipment, parts, components and key inputs; risks related to the reliance on third party suppliers; risks related to adverse economic conditions, labor shortages, supply chain disruptions, inflationary pressures and increasing interest rates; the uncertainty of the impact of the coronavirus (“COVID-19”) pandemic on the Company and on the operations of the Company; risks that the Company’s actual financial position and results of operations may differ materially from the expectations of the Company’s management; risks related to the costs and obligations relating to the Company’s investment in infrastructure, growth, regulatory compliance and operations; risks related to the Company’s

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dependency on regulatory approvals and licenses to conduct its business; risks related to the potential for changes in laws, regulations and guidelines which could adversely affect the Company’s future business; risks related to a failure on the part of the Company to comply with applicable regulations; risks related to the legal, regulatory and scientific status of cannabis; risks related to the Company’s ability to find suitable candidates and capital necessary to complete strategic alliances or partnerships; risks related to the Company’s ability to successfully identify and execute future acquisitions or dispositions; risks related to indebtedness and the Company’s ability to extend, refinance or repay such indebtedness; risks related to the Company’s ability to develop its products; risks related to the Company’s ability to achieve successful cultivation; risks related to adverse environmental conditions, accidents and labor disputes; risks related to the Company’s ability to turn a profit or generate immediate revenues; risks related to limitations on the permissible ownership of licenses; risks related to constraints on marketing the Company’s products under varying state laws; risks related to the potential results of future clinical research; risks related to the Company’s ability to effectively manage its growth and operations; risks related to the regulation of medical cannabis by the U.S. Food and Drug Administration (“FDA”); risks related to the differing local rules and regulations and the impact this may have on the Company’s ability to expand into new markets; risks related to the protection and enforcement of intellectual property rights and allegations that the Company is in violation of intellectual property rights of third parties; risks relating to access to banking; risks relating to disclosure of personal information to government or regulatory entities; risks related to potential requirement to disclose personal identifying information to government or regulatory entities; risk that the Company may be forced to litigate or defend its intellectual property rights, or to defend against claims by third parties against the Company relating to intellectual property rights;risks related to data privacy laws, rules and regulations; risks relating to fraudulent activity by employees, contractors and consultants, risks regarding the enforceability of contracts; risk of litigation generally; risks relating to increasing competition in the industry; risks relating to the Company’s ability to secure adequate or reliable sources of funding; risks relating to product recalls; risks relating to reliance on technology systems that may be subject to cyber-attacks or security breaches; risks that the Company’s officers and directors may be engaged in a range of business activities resulting in conflicts of interest; risks that the Company’s officers, directors and other parties may exert significant influence on the Company; risks relating to the Company’s inability to successfully implement adequate internal controls over financial reporting; risks relating to restrictions on entry to the U.S. for the Company’s Canadian individuals; risks relating to consumer perception; risks relating to the potential that bond requirements and insurance premiums may be economically prohibitive; risks relating to global economic and political instability and conflicts, such as the conflict between Russia and Ukraine; the risk that the Company’s web presence’s visibility is not limited by geography; risks relating to volatility in the market price of the Company’s securities; risks related to price volatility of publicly traded securities; risks related to dilution of the Company’s securities; risks related to the Company’s securities being currently quoted on the OTCQX; and other factors beyond our control, as more particularly described under the heading “Risk Factors” in this Quarterly Report on Form 10-Q and the Form 10-K for the fiscal year ended December 31, 2022 filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) on March 16, 2023 (the “Form 10-K”) and on the System for Electronic Document Analysis and Retrieval (“SEDAR”) at www.sedar.com.

Readers are cautioned that the foregoing list is not exhaustive of all factors and assumptions which may have been used. Although we have attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such forward-looking information and statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such information and statements. Accordingly, readers should not place undue reliance on forward-looking information and statements. The forward-looking information and statements contained herein are presented for the purposes of assisting readers in understanding our expected financial and operating performance and our plans and objectives and may not be appropriate for other purposes.

The forward-looking information and statements contained in this Quarterly Report on Form 10-Q represent our views and expectations as of the date of this Quarterly Report on Form 10-Q. We anticipate that subsequent events and developments may cause our views to change. However, while we may elect to update such forward-looking information and statements at a future time, we have no current intention of doing so except to the extent required by applicable law.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

TILT HOLDINGS INC.

Condensed Consolidated Balance Sheets

(Amounts Expressed in Thousands of United States Dollars, Except for Share Amounts)


	March 31, 2023		December 31, 2022
	(unaudited)		(audited)
ASSETS
Current assets
Cash and cash equivalents	$	3,891	$	2,202
Restricted cash		1,298		1,298
Trade receivables, net		26,129		26,698
Inventories		45,905		52,909
Loans receivable, current portion		252		516
Prepaid expenses and other current assets		2,079		1,979
Assets held for sale		185		325
Total current assets		79,739		85,927

Non-current assets
Property, plant and equipment, net		59,439		67,937
Right-of-use assets – finance, net		4,094		4,351
Right-of-use assets – operating, net		12,629		740
Investments		6,402		6,402
Intangible assets, net		99,450		102,714
Loans receivable, net of current portion		5,705		3,703
Goodwill		20,751		20,751
Other assets		1,473		1,453
TOTAL ASSETS	$	289,682	$	293,978

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities	$	50,624	$	58,170
Income taxes payable		1,476		979
Deferred revenue		4,745		5,760
Finance lease liability, current portion		1,105		1,075
Operating lease liability, current portion		83		135
Notes payable, current portion		5,540		59,378
Total current liabilities		63,573		125,497

Non-current liabilities
Finance lease liability, net of current portion		3,959		4,245
Operating lease liability, net of current portion		12,795		701
Notes payable, net of discount, net of current portion		43,356		350
Massachusetts lease liability		40,201		40,022
Deferred tax liability		2,157		1,373
Other liabilities		1,593		273
TOTAL LIABILITIES		167,634		172,461

Shareholders’ equity
Common shares, without par value, unlimited shares authorized, 377,886,135 and 377,515,391 issued and outstanding as of March 31, 2023 and December 31, 2022, respectively		858,405		858,143
Additional paid-in capital		225,225		225,127
Warrants		5,835		796
Accumulated other comprehensive income		986		988
Accumulated deficit		(968,578)		(963,703)
TOTAL SHAREHOLDERS’ EQUITY		121,873		121,351

Non-controlling interest		175		166
TOTAL EQUITY		122,048		121,517
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	289,682	$	293,978

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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TILT HOLDINGS INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

(Amounts Expressed in Thousands of United States Dollars, Except Share and Per Share Amounts)


	Three Months Ended
	March 31,		March 31,
	2023		2022
Revenues, net	$	42,264	$	42,352
Cost of goods sold		(33,468)		(32,999)
Gross profit		8,796		9,353

Operating expenses:
Wages and benefits		5,784		5,168
General and administrative		5,620		4,779
Sales and marketing		404		407
Share-based compensation		293		1,226
Depreciation and amortization		4,129		4,558
Impairment loss and loss on disposal of assets		188		697
Total operating expenses		16,418		16,835
Operating loss		(7,622)		(7,482)

Other income (expense):
Interest income		64		18
Other income		97		3
Change in fair value of warrant liability		—		(2,163)
Gain on sale of assets		8,401		1
Unrealized loss on investment		—		(45)
Loan receivable losses		(388)		(517)
Interest expense		(4,092)		(2,781)
Total other income (expense)		4,082		(5,484)
Loss from operations before income tax and non-controlling interest		(3,540)		(12,966)

Income taxes
Income tax (expense) benefit		(1,326)		1,332
Net loss before non-controlling interest		(4,866)		(11,634)
Less: Net (loss) income attributable to non-controlling interest		(9)		5
Net loss attributable to TILT Holdings Inc.	$	(4,875)	$	(11,629)

Other comprehensive loss
Net loss	$	(4,866)	$	(11,634)
Foreign currency translation differences		(2)		1
Comprehensive loss before non-controlling interest		(4,868)		(11,633)
Less: Net (loss) income attributable to non-controlling interest		(9)		5
Comprehensive loss attributable to TILT Holdings Inc.	$	(4,877)	$	(11,628)


Weighted average number of shares outstanding:
Basic		377,697,175		374,607,212
Net loss per common share attributable to TILT Holdings Inc.
Basic	$	(0.01)	$	(0.03)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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TILT HOLDINGS INC.

Condensed Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(Amounts Expressed in Thousands of United States Dollars, Except Share Amounts)


									Accumulated Other						Shareholders'
	Common Shares				Additional				Comprehensive		Accumulated		Non-Controlling		Equity
	Shares		Amount		Paid in Capital		Warrants		Income (Loss)		Deficit		Interest		Total
Balance - December 31, 2022	377,515,391	$	858,143	$	225,127	$	796	$	988	$	(963,703)	$	166	$	121,517
Share-based compensation	—		—		31		—		—		—		—		31
Warrants expired	—		—		67		(67)		—		—		—		—
Issuance and vesting of restricted share units	370,744		209		—		—		—		—		—		209
Shares reserved for contingent consideration	—		53		—		—		—		—		—		53
Warrants issued as part of debt modification	—						5,106								5,106
Comprehensive (loss) income for the period	—		—		—		—		(2)		(4,875)		9		(4,868)
Balance - March 31, 2023	377,886,135	$	858,405	$	225,225	$	5,835	$	986	$	(968,578)	$	175	$	122,048


								Accumulated Other						Shareholders’
	Common Shares			Additional				Comprehensive		Accumulated		Non-Controlling		Equity
	Shares	Amount		Paid in Capital		Warrants		Income		Deficit		Interest		Total
Balance - December 31, 2021	374,082,759	$	854,952	$	224,835	$	952	$	999	$	(856,248)	$	175	$	225,665
Share-based compensation	—		—		81		—		—		—		—		81
Issuance and vesting of restricted share units	1,220,468		888		—		—		—		—		—		888
Shares reserved for contingent consideration	—		257		—		—		—		—		—		257
Comprehensive income (loss) for the period	—		—		—		—		1		(11,629)		(5)		(11,633)
Balance - March 31, 2022	375,303,227	$	856,097	$	224,916	$	952	$	1,000	$	(867,877)	$	170	$	215,258

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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TILT HOLDINGS INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Amounts Expressed in Thousands of United States Dollars)


	Three Months Ended
	March 31, 2023		March 31, 2022
Cash flows from operating activities:
Net loss	$	(4,866)	$	(11,634)
Adjustments to reconcile net loss to net cash provided by operating activities:
Unrealized loss on investments		—		45
Gain on sale of assets		(8,401)		(1)
Depreciation and amortization		5,496		5,888
Amortization of operating lease right of use assets		484		280
Change in allowance for doubtful accounts		150		(115)
Non-cash interest income		(67)		(18)
Deferred tax		784		(1,831)
Share-based compensation		293		1,226
Accretion of debt discount		291		771
Change in fair value of warrant liability		—		2,163
Loan receivable losses		388		517
Impairment loss and loss on disposal of assets		188		697
Non-cash interest expense		2,037		1,225
Net change in working capital items:
Trade receivables, net		419		3,654
Inventories		7,004		5,969
Prepaid expenses and other current assets		(120)		46
Accounts payable and accrued liabilities		212		(3,500)
Income tax payable		497		407
Deferred revenue		(1,015)		(1,586)
Net cash provided by operating activities		3,774		4,203

Cash flows from investing activities:
Purchases of property, plant, and equipment		(125)		(491)
Proceeds from sale of property, plant and equipment		15,000		3
Repayment of loan receivable, net of advances		(2,059)		(287)
Net cash provided by (used in) investing activities		12,816		(775)

Cash flows from financing activities:
Payments on lease liability		(1,788)		(632)
Repayments on notes payable		(10,325)		—
Repayments on Revolving Facility		(29,073)		(32,529)
Debt issuance costs		(1,029)		—
Proceeds from Revolving Facility		27,316		32,012
Net cash used in financing activities		(14,899)		(1,149)

Effect of foreign exchange on cash and cash equivalents		(2)		1

Net change in cash and cash equivalents and restricted cash		1,689		2,280

Cash and cash equivalents and restricted cash, beginning of year		3,500		6,952

Cash and cash equivalents and restricted cash, end of year	$	5,189	$	9,232

Supplemental disclosures of non-cash investing and financing activities:
Increases to right of use assets related to Pennsylvania Transaction	$	11,974	$	—
Increase to operating lease liability related to Pennsylvania Transaction	$	11,880	$	—
Reclassification from accounts payable and accrued liabilities to notes payable related to 2023 New Notes (see Note 10)	$	8,260	$	—
Warrants issued related to 2023 Notes (equity classified)	$	5,106	$	—
Noteholder representative fee related to 2023 Refinanced Notes	$	1,620	$	—

Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,760	$	1,044
Cash paid for income taxes	$	—	$	—

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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1. Nature and Continuance of Operations

TILT Holdings Inc. (“TILT” or the “Company”) is a business solutions provider to the global cannabis industry offering a diverse range of value-added products and services to industry participants. Through a portfolio of companies providing technology, hardware, cultivation and production, TILT services brands and cannabis retailers in regulated markets across 39 states in the United States (“U.S.”), as well as Canada, Israel, Mexico, South America, and the European Union.

TILT was incorporated under the laws of Nevada pursuant to NRS Chapter 78 on June 22, 2018. The Company was continued under the Business Corporations Act (British Columbia) pursuant to a Certificate of Continuance dated November 14, 2018. The Company is a reporting issuer in Canada in the Provinces of British Columbia, Alberta, and Ontario and its common shares are listed for trading on the NEO Exchange under the symbol “TILT.” In addition, the common shares are quoted on the OTCQX in the U.S. under the symbol “TLLTF.” The Company’s head office is in Phoenix, Arizona and its registered office is located at 745 Thurlow Street, #2400 Vancouver, BC V6C 0C5 Canada.

Going Concern

The Company has experienced operating losses since its inception and expects to continue to incur losses in the development of its business. The Company incurred a comprehensive loss of $4,877 during the three months ended March 31, 2023 and has an accumulated deficit of $968,578 as of March 31, 2023. Additionally, as of March 31, 2023, the Company had positive working capital of $16,166 (compared to negative working capital of $39,570 as of December 31, 2022).

During the three months ended March 31, 2023, the Company completed the following transactions (i) Pennsylvania Transaction (as defined below), (ii) refinancing of the 2019 Junior Notes (as defined below) and (iii) extension of the maturity date and increased the amount available under the Revolving Facility (as defined below).

On February 15, 2023, the Company completed its previously announced sale-leaseback transaction with Innovative Industrial Properties, Inc. (“IIP”) pertaining to its White Haven, Pennsylvania facility (“White Haven Facility”) for $15,000 with net proceeds used towards repayment of debt and working capital (the “Pennsylvania Transaction”).

On February 15, 2023, the Company repaid the remaining balance of the senior secured promissory notes issued on November 1, 2019 (the “ 2019 Senior Notes”), retiring the remainder of its 2019 senior debt facility previously extended to February 28, 2023, with no further obligations.

On March 13, 2023, the Company, through its subsidiary Jupiter Research LLC (“Jupiter”), entered into an amendment to its existing $10,000 asset-based revolving credit facility (the “Revolving Facility”) to increase the amount available under the Revolving Facility to $12,500 and extend the maturity date to July 21, 2024. Additionally, borrowings under the Revolving Facility will bear interest at the prime rate plus 3%, and is secured by Jupiter’s inventory, accounts receivable and related property. The amendment also includes a guaranty by the Company in the amount of $6,000.

For further details regarding these transactions, see Note 5 – Property, Plant and Equipment and Note 10 – Notes Payable and Note 12 – Leases.

The Company’s operating plans for the next 12 months include (i) revenue growth from the sale of existing products and the introduction of new products across all operating segments; (ii) reducing production and operational costs as a result of efficiencies in cannabis operations; (iii) reducing supply chain costs; (iv) reducing and delaying overhead and other certain expenditures; and (v) obtaining other financings as necessary.

The Company believes the actions discussed above will most likely occur, and that these actions will help to mitigate any substantial doubt raised by our historical operating results and satisfy our estimated liquidity needs for the 12 months following the issuance of these condensed consolidated financial statements. However, subsequent to Q1 2023, a primary supplier significantly changed the payment terms of the Company’s trade payable. This was an unexpected event impacting

All dollar amounts expressed in thousands, except per share amounts

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short-term liquidity, therefore, the Company must seek additional financing to satisfy the transition of the new payment terms and provide working capital for the business. As a result, the Company cannot predict with certainty the outcome of its actions to generate liquidity as discussed above, including the availability of additional financing as necessary, or whether such actions would generate the expected liquidity as currently planned. Therefore, management has concluded there is substantial doubt about the Company’s ability to continue as a going concern within 12 months after the date of this filing. The financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern. See Part II, Item 1A, Risk Factors for further details.

COVID-19 Pandemic and Global Conflicts

In March 2020, the World Health Organization categorized coronavirus disease 2019 (“COVID-19”) as a global pandemic. The Company continues to implement and evaluate actions to strengthen its financial position and support the continuity of its business and operations.

The impact of the COVID-19 pandemic and geopolitical conflicts, including the recent war in Ukraine, created much uncertainty in the global marketplace. There are many uncertainties regarding these events, and the Company is closely monitoring the ongoing impact on all aspects of its business, including how it will impact its services, customers, employees, vendors, and business partners now and in the future. While the COVID-19 pandemic and recent geopolitical conflicts did not materially adversely affect the Company’s financial results and business operations in the three months ended March 31, 2023, the Company is unable to predict the impact that these events will have on its future financial position and operating results due to numerous uncertainties.

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated unaudited interim financial statements have been prepared in accordance with (i) United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information, and (ii) the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of our management, our condensed consolidated unaudited financial statements and accompanying notes (the “Financial Statements”) include all normal recurring adjustments that are necessary for the fair statement of the interim periods presented. Interim results of operations are not necessarily indicative of results for the full year, or any other period. The Financial Statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (“Form 10-K”), as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 16, 2023 and with the relevant Canadian securities regulatory authorities under our profile on SEDAR. Except as noted below, there have been no material changes to the Company's significant accounting policies and estimates during the three months ended March 31, 2023. Certain information, footnotes and disclosures normally included in the annual financial statements, prepared in accordance with U.S. GAAP, have been condensed or omitted in accordance with SEC rules and regulations.

The financial data included in the Financial Statements contain all normal and recurring adjustments necessary to state fairly the consolidated financial condition, results of operations, statements of stockholder’s equity, and cash flows of the Company for the three months ended March 31, 2023 and 2022. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the current year ending December 31, 2023.

Principles of Consolidation

The Financial Statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its subsidiaries, as well as the accounts of any entities over which the Company has a controlling financial interest in accordance with Accounting Standards Codification (“ASC”) 810 Consolidation. All transactions and balances between these entities have been eliminated upon consolidation.

All dollar amounts expressed in thousands, except per share amounts

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Reclassifications

Certain amounts in the Company's prior period consolidated financial statements have been reclassified to conform to the current period presentation. During the three months ended March 31, 2023, the Company reclassified $4,741 of the Massachusetts Lease Liability (as defined in Note 11 — Massachusetts Lease Liability) previously included in current liabilities on the consolidated balance sheet as of December 31, 2022 into the Massachusetts lease liability in noncurrent liabilities. See Note 11 — Massachusetts Lease Liability for additional information.

Use of Estimates

The preparation of these Financial Statements requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, and revenue and expenses. Actual results may differ from these estimates.

Restricted Cash

The Company had $1,298 in restricted cash as of both March 31, 2023 and December 31, 2022. Included in restricted cash was a certificate of deposit related to Jupiter customs bonds totaling $1,252 as of both March 31, 2023 and December 31, 2022.

Estimated Useful Lives and Depreciation of Property, Plant and Equipment

Depreciation of property, plant and equipment is dependent upon estimates of useful lives which are determined through the exercise of 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.

Depreciation is provided on a straight-line basis over the following estimated useful lives:


Machinery and equipment	2 – 7 years
Furniture and fixtures	3 – 10 years
Autos and trucks	5 years
Buildings and land improvements	5 – 39 years
Leasehold improvements	Lesser of useful life of lease term
Greenhouse - agricultural structure	5 – 15 years
Land	Not depreciated

The assets’ residual values, useful lives and methods of depreciation are reviewed annually and adjusted prospectively, if appropriate. Buildings, leaseholds and land improvements are amortized over the shorter of either useful life or term of the lease. Gains or losses on disposal of an item are determined by comparing the proceeds from disposal with the carrying amount of the item and recognized in the consolidated statements of operations and comprehensive loss.

Recently Adopted and Issued Accounting Pronouncements

Recent accounting pronouncements, other than those below, issued by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material effect on the Company’s present or future financial statements.

All dollar amounts expressed in thousands, except per share amounts

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Recently Adopted Accounting Pronouncements

In August 2020, the FASB issued an accounting standards update (“ASU”) 2020-06 Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) — Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which is intended to simplify the recognition of convertible instruments and contracts in an entity’s own equity. ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, revises the derivatives scope exception, and makes targeted improvements to the related earnings per share guidance. ASU 2020-06 became effective for the Company in the first quarter of 2022. The adoption of this standard did not have any impact on the Company’s Financial Statements.

In May 2021, the FASB issued ASU 2021-04, Earnings per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) — Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. ASU 2021-04 clarifies whether an issuer should account for a modification or an exchange of freestanding equity-classified written call options that remain equity classified after modification or exchange as (1) an adjustment to equity and if so, the related earnings per share effects, if any, or (2) an expense, and if so, the manner and pattern of recognition. ASC 2021-04 became effective for the Company on January 1, 2022. The adoption of this standard did not have an impact on the Company’s Financial Statements.

Recently Issued Accounting Pronouncements

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. ASU 2021-08 requires that an entity (acquirer) recognize and measure contract assets and contract liabilities in accordance with Topic 606 (Revenue from Contracts with Customers) as if the entity had originated the contracts. ASU 2021-08 is effective for the Company beginning January 1, 2023. The Company will consider adopting this ASU and the effects of adoption on the Company’s financial statements when it next completes a business combination.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. This guidance was effective upon issuance as of March 12, 2020 and may be adopted as reference rate reform activities occur through December 31, 2022. The FASB subsequently issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the cessation date of certain LIBOR from December 31, 2022 to June 30, 2023. We have not yet applied any of the expedients and exceptions and do not expect this guidance to have a material impact on our financial statements.

3. Fair Value Measurements

A number of the Company’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers all related factors of the asset by market participants in which the Company would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

All dollar amounts expressed in thousands, except per share amounts

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When measuring the fair value of an asset or a liability, the Company uses observable market data as far as possible. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

●

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

●

Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices).

●

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Items Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis, including their levels in the fair value hierarchy were as follows:


	As of March 31, 2023
	Fair value hierarchy
Fair value of assets	Level 1		Level 2		Level 3
Cash and cash equivalents	$	3,891	$	—	$	—
Restricted cash		1,298		—		—
Investments		2		—		—
Total	$	5,191	$	—	$	—


	As of December 31, 2022
	Fair value hierarchy
Fair value of assets	Level 1		Level 2		Level 3
Cash and cash equivalents	$	2,202	$	—	$	—
Restricted cash		1,298		—		—
Investments		2		—		—
Total	$	3,502	$	—	$	—

The Akerna Corp. (“Akerna”) marketable security balance included in investments has Level 1 inputs. The HERBL Inc. (“HERBL”) balance included in investments is recorded at cost and excluded from the schedule above. The Big Toe Ventures LLC (“Big Toe”) balance included in investments was initially recorded at cost, but impairment was subsequently identified and the balance was adjusted to zero as an approximation of fair value using Level 3 inputs during the year ended December 31, 2022. There were no adjustments made during the three months ended March 31, 2023.

During the three months ended March 31, 2022, the Company recorded a loss of $45 related to its investment in Akerna, which is included in unrealized loss on investment on the condensed consolidated statements of operations and comprehensive loss. No losses were recorded related to the Company’s investments during the three months ended March 31, 2023.

During the three months ended March 31, 2022, the Company recorded a loss of $2,163 on the change in fair value of its warrant liability. This loss is included in other income (expense) in the condensed consolidated statements of operations and comprehensive loss. There was no warrant liability as of March 31, 2023.

The carrying amount of the Company’s term loan approximates its fair value based upon market interest rates available to the Company for debt of similar risk and maturities, a Level 3 input. See Note 10 — Notes Payable for additional information. Additionally, the carrying amount of the Company’s loans receivable, net of related current expected credit losses, approximates their fair values. See Note 8 — Loans Receivable for additional information. The carrying amounts of all financial assets and liabilities, other than notes payable and loans receivables, approximate their fair values. There were no transfers between the levels of fair value hierarchy during the three months ended March 31, 2023 and 2022.

All dollar amounts expressed in thousands, except per share amounts

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4. Inventories

The Company’s inventories consisted of the following:


	March 31,		December 31,
	2023		2022
Raw Material - cannabis plants	$	2,918	$	3,383
Raw Material - other materials		718		763
Work in progress		11,446		11,268
Finished goods		28,111		34,779
Supplies and accessories		2,712		2,716
Total Inventories	$	45,905	$	52,909

5. Property, Plant and Equipment

The property, plant and equipment consisted of the following:


	March 31, 2023		December 31, 2022
Land	$	6,266	$	6,434
Land improvements		—		461
Machinery & equipment		13,481		13,692
Furniture & fixtures		784		790
Buildings		45,107		51,987
Greenhouse - agricultural structure		6,769		8,196
Leasehold improvements		9,795		9,955
Construction in progress		605		610
Autos & trucks		256		256
Total cost		83,063		92,381
Less: accumulated depreciation		(23,624)		(24,444)
Total property, plant and equipment	$	59,439	$	67,937

During the three months ended March 31, 2023 and 2022, the Company recognized depreciation expense of $1,975 and $1,952, respectively. Depreciation expense is included in cost of goods sold and depreciation and amortization in the condensed consolidated statements of operations and comprehensive loss.

During the three months ended March 31, 2023, the Company completed the Pennsylvania Transaction and determined that control of the White Haven Facility transferred to the buyer, resulting in a sale of the White Haven Facility. The Company received cash proceeds of $15,000 and derecognized the property, plant and equipment with a carrying value of $6,599, resulting in a gain on sale of assets of $8,401. See Note 12 — Leases for additional information.

During the three months ended March 31, 2022, the Company recorded a gain on sale of assets of $1. This gain, along with the gain on sale of assets related to the Pennysylvania Transaction, are included in gain on sale of assets in the condensed consolidated statements of operations and comprehensive loss.

In connection with management’s ongoing multi-phase plans to produce high-quality flowers, during the three months ended March 31, 2022, the Company replaced existing lights with new market-standard LED lights. As a result, the Company recorded a loss on disposal in the amount of $697, which represented the carrying value of existing lights. This loss is included in impairment loss and loss on disposal of assets in the condensed consolidated statements of operations and comprehensive loss.

All dollar amounts expressed in thousands, except per share amounts

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6. Investments

The Company’s investments included the following:


Investment	March 31, 2023		December 31, 2022
HERBL, Inc.	$	6,400	$	6,400
Akerna		2		2
Total Investments	$	6,402	$	6,402

The Company recorded the investments in HERBL and Big Toe in accordance with a measurement alternative due to the lack of readily determinable fair values. The measurement alternative allows the Company to record the investments at cost, less impairment, if any, and subsequently adjust for observable price changes of identical or similar investments of the same issuer. The Company intends to hold its investment in HERBL until HERBL executes its next equity financing. The Company has an arrangement with HERBL that, upon such equity financing, if the fair value of HERBL’s class B common shares is less than the initial cost, HERBL will issue additional shares to make up the difference. During 2022, the Company identified an impairment and adjusted the balance of its investment in Big Toe to zero. The Company has not applied impairment or price adjustments to the original cost of HERBL through March 31, 2023.

During the three months ended March 31, 2022, the Company recorded an unrealized loss of $45 from the investment in Akerna. This loss is included in unrealized loss on investment in the condensed consolidated statements of operations and comprehensive loss. There was no loss recorded during the three months ended March 31, 2023.

7. Intangible Assets

Intangible asset balances consisted of the following:


Intangible assets	March 31, 2023		December 31, 2022
Customer relationships	$	85,300	$	85,300
Trademarks		29,000		29,000
License rights⁽¹⁾		6,540		6,540
Management agreements		926		926
Patents & technologies		32,900		32,900
Backlog and non-competition agreements		10,406		10,406
Total intangible assets, at cost		165,072		165,072
Less: Accumulated amortization		(65,622)		(62,358)
Total intangible assets, net	$	99,450	$	102,714

_____________

(1)License rights primarily consists of indefinite-lived intangible assets, which pertain to licenses for cultivation and processing, are not subject to amortization and are tested annually for impairment. Refer to Note 2 — Basis of Presentation and Summary of Significant Accounting Policies of the Company’s audited consolidated financial statements and accompanying notes as of and for the years ended December 31, 2022 and 2021 filed on Form 10-K for further information pertaining to the Company’s accounting policies for its intangible assets.

Amortization expense for the three months ended March 31, 2023 and 2022, was $3,264 and $3,676, respectively. This amortization expense is included in depreciation and amortization in the condensed consolidated statements of operations and comprehensive loss.

All dollar amounts expressed in thousands, except per share amounts

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The following table outlines the estimated future annual amortization expense related to intangible assets as of March 31, 2023:


	Estimated
Years ended December 31,	amortization
Remainder of 2023	$	9,792
2024		13,056
2025		13,056
2026		12,899
2027		12,899
Thereafter		31,369
	$	93,071

8. Loans Receivable

A breakdown of the loans receivable terms and balances are as follows:


Loans receivable	March 31, 2023		December 31, 2022
Teneo Fund SPVi LLC Note	$	5,911	$	5,911
Pharma EU, LLC Note		1,410		1,410
A&R Note		710		710
SSZ and Elev8 Note		1,002		1,002
Pure Hana Synergy Note		224		224
Little Beach Harvest Note		4,325		2,199
Total loans receivable	$	13,582	$	11,456
Less allowance for expected credit losses		(7,625)		(7,237)
Loans receivable, net of expected credit losses		5,957		4,219
Less current portion of loan receivable		(252)		(516)
Loans receivable, long-term	$	5,705	$	3,703

The Little Beach Harvest loan receivable balance is subject to an interest rate of 9.0%. Accrued interest receivable was $132 as of March 31, 2023 and is included in loans receivable on the condensed consolidated balance sheets. Interest income was $64 and $4 for the three months ended March 31, 2023 and 2022, respectively, and included in interest income on the condensed consolidated statements of income and comprehensive loss.

At each reporting date, the Company assesses whether loans receivables are credit impaired by applying the guidance in ASC 326. A financial asset is considered “credit impaired” when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Credit impairment is based on observable data such as significant financial difficulty of the debtor and a breach of contract such as a default or being past due. During the three months ended March 31, 2023, the Company recorded an additional $388 of allowance for expected credit losses due to revised collectability estimates.

Current expected credit loss (“CECL”) reserves are measured by the Company on a probability-weighted basis based on historical experience, current conditions, and reasonable and supportable forecasts. Our assessment includes a variety of factors, including underlying credit, relative maturity dates of the loans, economic considerations, as well as ongoing legal and other regulatory developments in the industry. The process includes consideration for the assumed recovery rate from underlying collateral, with adjustments for time value of money and estimated costs for obtaining and selling the collateral. Given the repayment profile and underlying terms of such loans, CECL reserves are generally estimated over the contractual term of the loan.

All dollar amounts expressed in thousands, except per share amounts

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The following tables present an analysis of the credit quality of loans receivable, together with impairment losses recognized based on lifetime CECL reserves:


	As of March 31, 2023
Nature of collateral	Gross amounts		Loan losses		Net
Security interest in assets of counterparty	$	11,948		(6,177)	$	5,771
Third party guarantee		1,410		(1,224)		186
No collateral		224		(224)		—
Net loans receivable	$	13,582	$	(7,625)	$	5,957


	As of December 31, 2022
Nature of collateral	Gross amounts		Loan losses		Net
Security interest in assets of counterparty	$	9,822	$	(5,915)	$	3,907
Third party guarantee		1,410		(1,098)		312
No collateral		224		(224)		—
Net loans receivable	$	11,456	$	(7,237)	$	4,219

9. Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following: