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Table of Contents

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 June 30, 2023

OR

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

For the transition period from to

Commission file number: 000-56422

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 July 31, 2023, there were 334,707,482 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.

Table of Contents

TILT HOLDINGS INC.

INDEX

PART I — FINANCIAL INFORMATION

5

Item 1. Financial Statements (Unaudited)

5

Condensed Consolidated Balance Sheets as of June 30, 2023 (Unaudited) and December 31, 2022

5

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2023 and 2022 (Unaudited)

6

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2023 and 2022 (Unaudited)

7

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 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

33

Item 3. Quantitative and Qualitative Disclosures About Market Risk

42

Item 4. Controls and Procedures

42

PART II — OTHER INFORMATION

43

Item 1. Legal Proceedings

43

Item 1A. Risk Factors

43

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

48

Item 3. Defaults Upon Senior Securities

48

Item 4. Mine Safety Disclosures

48

Item 5. Other Information

48

Item 6. Exhibits

49

Signatures

51

2

Table of Contents

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”); risks related to the Company’s ability to continue as a going concern; 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 scrutiny by regulatory authorities; 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 for the quarter ended June 30, 2023, the Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, 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)

    

June 30, 2023

    

December 31, 2022

(unaudited)

(audited)

ASSETS

Current assets

Cash and cash equivalents

$

2,815

$

2,202

Restricted cash

1,298

1,298

Trade receivables, net

26,086

26,698

Inventories

36,826

52,909

Loans receivable, current portion

516

Prepaid expenses and other current assets

1,698

1,979

Assets held for sale

325

Total current assets

68,723

85,927

Non-current assets

Property, plant and equipment, net

54,319

67,937

Right-of-use assets – finance, net

2,631

4,351

Right-of-use assets – operating, net

12,518

740

Investments

2

6,402

Intangible assets, net

95,457

102,714

Loans receivable, net of current portion

1,355

3,703

Deferred tax asset

1,008

Goodwill

20,751

20,751

Other assets

1,454

1,453

TOTAL ASSETS

$

258,218

$

293,978

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Accounts payable and accrued liabilities

$

43,147

$

58,170

Income taxes payable

1,826

979

Deferred revenue

5,404

5,760

Finance lease liability, current portion

1,136

1,075

Operating lease liability, current portion

81

135

Notes payable, current portion

11,532

59,378

Total current liabilities

63,126

125,497

Non-current liabilities

Finance lease liability, net of current portion

3,663

4,245

Operating lease liability, net of current portion

12,776

701

Notes payable, net of discount, net of current portion

45,504

350

Massachusetts lease liability

40,386

40,022

Deferred tax liability

1,373

Other liabilities

1,413

273

TOTAL LIABILITIES

166,868

172,461

Shareholders’ equity

Common shares, without par value, unlimited shares authorized, 378,528,861 and 377,515,391 issued and outstanding as of June 30, 2023 and December 31, 2022, respectively

856,044

858,143

Additional paid-in capital

225,228

225,127

Warrants

5,835

796

Accumulated other comprehensive income

983

988

Accumulated deficit

(995,473)

(963,703)

TOTAL SHAREHOLDERS’ EQUITY

92,617

121,351

Non-controlling interest

(1,267)

166

TOTAL EQUITY

91,350

121,517

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

258,218

$

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 June 30, 

Six Months Ended June 30, 

2023

2022

2023

2022

Revenues, net

$

41,599

$

47,055

$

83,863

$

89,407

Cost of goods sold

(37,559)

(36,110)

(71,027)

(69,109)

Gross profit

4,040

10,945

12,836

20,298

Operating expenses:

Wages and benefits

5,871

6,335

11,655

11,503

General and administrative

4,529

5,585

10,149

10,364

Sales and marketing

290

586

694

993

Share-based compensation expense (benefit)

(2,358)

786

(2,065)

2,012

Depreciation and amortization

4,712

4,560

8,841

9,118

Impairment loss and loss on disposal of assets

4,947

6,669

5,135

7,366

Total operating expenses

17,991

24,521

34,409

41,356

Operating loss

(13,951)

(13,576)

(21,573)

(21,058)

Other income (expense):

Interest income

(64)

56

74

Other income

3

4

100

7

Change in fair value of warrant liability

3,913

1,750

Gain on sale of assets

8,401

1

Unrealized loss on investment

(6,400)

(49)

(6,400)

(94)

Loan receivable losses

(5,200)

(504)

(5,588)

(1,021)

Loss on foreign currency exchange

(1)

(1)

Interest expense

(5,466)

(3,796)

(9,558)

(6,577)

Total other expense

(17,128)

(376)

(13,046)

(5,860)

Loss from operations before income tax and non-controlling interest

(31,079)

(13,952)

(34,619)

(26,918)

Income taxes

Income tax benefit

2,742

6,898

1,416

8,230

Net loss before non-controlling interest

(28,337)

(7,054)

(33,203)

(18,688)

Less: Net income attributable to non-controlling interest

1,442

3

1,433

8

Net loss attributable to TILT Holdings Inc.

$

(26,895)

$

(7,051)

$

(31,770)

$

(18,680)

Other comprehensive loss

Net loss before non-controlling interest

$

(28,337)

$

(7,054)

$

(33,203)

$

(18,688)

Foreign currency translation differences

(3)

(3)

(5)

(2)

Comprehensive loss before non-controlling interest

(28,340)

(7,057)

(33,208)

(18,690)

Less: Net income attributable to non-controlling interest

1,442

3

1,433

8

Comprehensive loss attributable to TILT Holdings Inc.

$

(26,898)

$

(7,054)

$

(31,775)

$

(18,682)

Weighted average number of shares outstanding:

Basic and diluted

378,296,093

375,538,599

377,998,289

375,075,478

Net loss per common share attributable to TILT Holdings Inc.

Basic and diluted

$

(0.07)

$

(0.02)

$

(0.08)

$

(0.05)

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

Share-based compensation

3

3

Issuance and vesting (forfeiture) of restricted share units

642,726

(1,074)

(1,074)

Shares reserved for contingent consideration

(1,287)

(1,287)

Comprehensive loss for the period

(3)

(26,895)

(1,442)

(28,340)

Balance - June 30, 2023

378,528,861

$

856,044

$

225,228

$

5,835

$

983

$

(995,473)

$

(1,267)

$

91,350

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, 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

Share-based compensation

18

18

Issuance and vesting of restricted share units

473,048

508

508

Shares reserved for contingent consideration

261

261

Comprehensive loss for the period

(3)

(7,051)

(3)

(7,057)

Balance - June 30, 2022

375,776,275

$

856,866

$

224,934

$

952

$

997

$

(874,928)

$

167

$

208,988

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)

Six Months Ended June 30, 

    

2023

    

2022

Cash flows from operating activities:

Net loss

$

(33,203)

$

(18,688)

Adjustments to reconcile net loss to net cash provided by operating activities:

Unrealized loss on investments

6,400

94

(Gain) loss on sale of assets and other

(8,379)

9

Depreciation and amortization

11,490

11,813

Amortization of operating lease right of use assets

1,185

483

Change in allowance for doubtful accounts

369

(119)

Non-cash interest income

(15)

Deferred tax

(2,381)

(9,487)

Share-based compensation expense (benefit)

(2,065)

2,012

Accretion of debt discount

404

1,580

Change in fair value of warrant liability

(1,750)

Loan receivable losses

5,588

1,021

Impairment loss and loss on disposal of assets

5,135

7,366

Inventory adjustments

5,103

516

Non-cash interest expense

6,289

2,195

Net change in working capital items:

Trade receivables, net

243

2,505

Inventories

10,980

4,837

Prepaid expenses and other current assets

280

(693)

Accounts payable and accrued liabilities

(7,489)

452

Income tax payable

847

1,052

Deferred revenue

(356)

(1,420)

Net cash provided by operating activities

440

3,763

Cash flows from investing activities:

Purchases of property, plant, and equipment

(326)

(13,979)

Proceeds from sale of property, plant and equipment

15,000

3

Repayment of loan receivable, net of advances

(2,792)

(826)

Net cash provided by (used in) investing activities

11,882

(14,802)

Cash flows from financing activities:

Payments on lease liability

(3,862)

(1,190)

Repayments on notes payable and Massachusetts Lease Liability

(10,324)

(319)

Repayments on Revolving Facility

(59,572)

(67,304)

Debt issuance costs

(1,213)

Proceeds from Revolving Facility

59,267

67,583

Proceeds from notes payable and Massachusetts Lease Liability

4,000

40,000

Net cash (used in) provided by financing activities

(11,704)

38,770

Effect of foreign exchange on cash and cash equivalents

(5)

(2)

Net change in cash and cash equivalents and restricted cash

613

27,729

Cash and cash equivalents and restricted cash, beginning of year

3,500

6,952

Cash and cash equivalents and restricted cash, end of year

$

4,113

$

34,681

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 11)

$

8,260

$

Warrants issued related to 2023 Notes (equity classified)

$

5,106

$

Noteholder representative fee related to 2023 Refinanced Notes

$

1,620

$

Non-cash debt issuance cost

$

500

$

Decreases to right of use assets related to Taunton Facility transactions

$

$

3,940

Decreases to operating lease liability related to Taunton Facility transactions

$

$

4,454

Decreases to property, plant, and equipment related to Taunton Facility transactions

$

$

514

Supplemental disclosure of cash flow information:

Cash paid for interest

$

2,814

$

2,075

Cash paid for income taxes

$

$

61

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 Cboe Canada formerly known as 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 may continue to incur losses in the development of its business. The Company incurred a comprehensive loss of $31,775 during the six months ended June 30, 2023 and has an accumulated deficit of $995,473 as of June 30, 2023. Additionally, as of June 30, 2023, the Company had positive working capital of $5,597 (compared to negative working capital of $39,570 as of December 31, 2022).

During the six months ended June 30, 2023, the Company (i) completed the Pennsylvania Transaction (as defined below), (ii) refinanced the 2019 Junior Notes (as defined below), (iii) extended the maturity date of and increased the amount available under the Revolving Facility (as defined below) and (iv) obtained additional funds through the 2023 Bridge Notes (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 entered into the NPA Amendment (as defined below) relating to the refinancing of the 2019 Junior Notes (as defined below) and issued the 2023 Refinanced Notes (as defined below) and the 2023 New Notes (as defined below). See Note 11 — Notes Payable for defined terms and more information. 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.

On May 15, 2023, the Company and its subsidiaries issued senior secured promissory notes in the aggregate principal amount of $4,500 (the “2023 Bridge Notes”). The 2023 Bridge Notes provided gross cash proceeds of $4,000 with an original issue discount of $500 and require monthly payments of $750 starting July 1, 2023. The 2023 Bridge Notes bear interest at the greater of 16% or the prime rate plus 8.5%, payable monthly, with a maturity date of December 1, 2023.

For further details regarding these transactions, see Note 5 — Property, Plant and Equipment and Assets Held for Sale, Note 11 — Notes Payable and Note 13 — Leases.

All dollar amounts expressed in thousands, except per share amounts

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The Company’s operating plans for the next 12 months include (i) increasing 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 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, during the second quarter of 2023, a primary supplier significantly changed the payment terms of the Company’s trade payable. This was an unexpected event impacting short-term liquidity, therefore, the Company secured additional financing through the 2023 Bridge Notes to satisfy the transition of the new payment terms and provide working capital for the business. However, the issuance of the 2023 Bridge Notes caused the Company to have to obtain a waiver of the financial covenant defaults expected to occur for the 2023 Refinanced Notes (defined below) and 2023 New Notes (defined below). As a result of the waiver, the Company had to pay default interest rates on its 2023 Refinanced Notes and 2023 New Notes, which resulted in an increase from 16.5% as of March 31, 2023 to 24.75% as of June 30, 2023. See Note 11 — Notes Payable for additional information.

As a result of this and other factors, 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 in response to the COVID-19 pandemic.

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 six months ended June 30, 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 (iii) 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 (the “Form 10-K”), as filed with the U.S. Securities and Exchange Commission (the “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 six months ended June 30, 2023. Certain information, footnotes and disclosures normally included

All dollar amounts expressed in thousands, except per share amounts

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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 six months ended June 30, 2023 and 2022. Operating results for the six months ended June 30, 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.

Reclassifications

Certain amounts in the Company's prior period consolidated financial statements have been reclassified to conform to the current period presentation.

During the six months ended June 30, 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.

During the six months ended June 30, 2023, the Company reclassified $516 of inventory valuation adjustments previously included in inventories under net change in working capital adjustments on the condensed consolidated statement of cash flows as of June 30, 2022 into inventory adjustments. See Note 4 — Inventories 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 June 30, 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 June 30, 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. 

All dollar amounts expressed in thousands, except per share amounts

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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 the 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.

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 ado