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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 March 31, 2024

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 April 30, 2024, there were 343,625,630 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 March 31, 2024 (Unaudited) and December 31, 2023

5

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2024 and 2023 (Unaudited)

6

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2024 and 2023 (Unaudited)

7

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023 (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

29

Item 3. Quantitative and Qualitative Disclosures About Market Risk

36

Item 4. Controls and Procedures

36

PART II — OTHER INFORMATION

38

Item 1. Legal Proceedings

38

Item 1A. Risk Factors

38

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

38

Item 3. Defaults Upon Senior Securities

38

Item 4. Mine Safety Disclosures

38

Item 5. Other Information

39

Item 6. Exhibits

40

Signatures

42

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

CAUTIONARY NOTE 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 the Company’s objectives, goals, strategies, beliefs, intentions, plans, estimates, projections and outlook, including statements relating to the Company’s 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 Company’s ability to successfully execute its operating plan for the next 12 months; the Company’s ability to obtain additional financing on favorable terms; the Company’s ability to defer principal and interest payments on certain notes; the Company’s ability to successfully negotiate a mutually agreeable waiver and forbearance agreement with certain noteholders; 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; risks related to the enforcement activities by the U.S. Department of Justice; 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 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; 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

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Company’s 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; 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 the 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 the potential that bond requirements and insurance premiums may be economically prohibitive; risks relating to global economic and political instability and conflicts; 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 OTCQB; and other factors beyond our control, as more particularly described under the heading “Risk Factors” in the Form 10-K for the fiscal year ended December 31, 2023 filed by the Company with the U.S. Securities and Exchange Commission (the “SEC”) on March 22, 2024 (the “Form 10-K”) and on the System for Electronic Document Analysis and Retrieval Plus (“SEDAR+”) at www.sedarplus.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, 2024

    

December 31, 2023

(unaudited)

(audited)

ASSETS

Current assets

Cash and cash equivalents

$

2,219

$

2,034

Restricted cash

1,300

1,298

Trade receivables, net

17,777

17,919

Inventories

36,838

32,908

Prepaid expenses and other current assets

1,749

2,115

Assets held for sale

Total current assets

59,883

56,274

Non-current assets

Property, plant and equipment, net

49,847

51,185

Right-of-use assets – finance, net

2,048

2,242

Right-of-use assets – operating, net

12,266

12,296

Investments

1

Intangible assets, net

81,563

84,801

Loans receivable

1,030

1,066

Deferred tax asset

5,524

3,657

Goodwill

17,721

17,721

Other assets

1,945

1,945

TOTAL ASSETS

$

231,827

$

231,188

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities

Accounts payable and accrued liabilities

$

53,601

$

49,098

Income taxes payable

2,772

2,564

Deferred revenue

4,241

6,083

Finance lease liability, current portion

1,238

1,203

Operating lease liability, current portion

82

72

Notes payable, current portion

29,128

17,052

Total current liabilities

91,062

76,072

Non-current liabilities

Finance lease liability, net of current portion

2,721

3,041

Operating lease liability, net of current portion

12,791

12,743

Notes payable, net of discount, net of current portion

30,545

35,108

Massachusetts lease liability

40,977

40,774

Other liabilities

889

1,057

TOTAL LIABILITIES

178,985

168,795

Shareholders’ equity

Common shares, without par value, unlimited shares authorized, 387,447,009 and 384,833,546 issued and outstanding as of March 31, 2024 and December 31, 2023, respectively

856,512

856,422

Additional paid-in capital

225,267

225,250

Warrants

5,835

5,835

Accumulated other comprehensive income

966

973

Accumulated deficit

(1,035,738)

(1,026,087)

TOTAL SHAREHOLDERS’ EQUITY

52,842

62,393

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$

231,827

$

231,188

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

5

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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, 

2024

2023

Revenues, net

$

37,504

$

42,264

Cost of goods sold

(30,787)

(33,468)

Gross profit

6,717

8,796

Operating expenses:

Wages and benefits

4,496

5,784

General and administrative

3,483

5,620

Sales and marketing

142

404

Share-based compensation expense

107

293

Depreciation and amortization

3,866

4,129

Impairment loss

12

188

Total operating expenses

12,106

16,418

Operating loss

(5,389)

(7,622)

Other income (expense):

Interest income

2

64

Other income

204

97

Gain on sale of assets

8,401

Unrealized loss on investment

(1)

Loan receivable losses

(388)

Loss on foreign currency exchange

(4)

Interest expense

(6,043)

(4,092)

Total other income (expense)

(5,842)

4,082

Loss from operations before income tax and non-controlling interest

(11,231)

(3,540)

Income taxes:

Income tax benefit (expense)

1,580

(1,326)

Net loss before non-controlling interest

(9,651)

(4,866)

Less: Net loss attributable to non-controlling interest

(9)

Net loss attributable to TILT Holdings Inc.

$

(9,651)

$

(4,875)

Other comprehensive loss:

Net loss before non-controlling interest

$

(9,651)

$

(4,866)

Foreign currency translation differences

(7)

(2)

Comprehensive loss before non-controlling interest

(9,658)

(4,868)

Less: Net loss attributable to non-controlling interest

(9)

Comprehensive loss attributable to TILT Holdings Inc.

$

(9,658)

$

(4,877)

Weighted average number of shares outstanding:

Basic and diluted

385,723,847

377,697,175

Net loss per common share attributable to TILT Holdings Inc.

Basic and diluted

$

(0.03)

$

(0.01)

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, 2023

    

384,833,546

    

$

856,422

    

$

225,250

    

$

5,835

    

$

973

    

$

(1,026,087)

    

$

    

$

62,393

Share-based compensation

17

17

Issuance and vesting of restricted share units

2,613,463

90

90

Comprehensive loss for the period

(7)

(9,651)

(9,658)

Balance - March 31, 2024

387,447,009

$

856,512

$

225,267

$

5,835

$

966

$

(1,035,738)

$

$

52,842

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

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, 

    

2024

    

2023

Cash flows from operating activities:

Net loss

$

(9,651)

$

(4,866)

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

Unrealized loss on investments

1

Gain on sale of assets and other

(717)

(8,401)

Depreciation and amortization

4,980

5,496

Amortization of operating lease right of use assets

704

484

Change in allowance for doubtful accounts

19

150

Non-cash interest income

(67)

Deferred tax

(1,867)

784

Share-based compensation expense

107

293

Accretion (adjustment) of debt discount

(34)

291

Loan receivable losses

388

Impairment loss and loss on disposal of assets

12

188

Inventory adjustments

13

225

Non-cash interest expense

4,030

2,037

Net change in working capital items:

Trade receivables, net

123

419

Inventories

(3,943)

6,779

Prepaid expenses and other current assets

366

(120)

Accounts payable and accrued liabilities

5,052

212

Income tax payable

208

497

Deferred revenue

(1,842)

(1,015)

Net cash (used in) provided by operating activities

(2,439)

3,774

Cash flows from investing activities:

Purchases of property, plant, and equipment

(221)

(125)

Proceeds from sale of property, plant and equipment

15,000

Repayment of loan receivable, net of advances

36

(2,059)

Net cash (used in) provided by investing activities

(185)

12,816

Cash flows from financing activities:

Payments on lease liability

(901)

(1,788)

Repayments on notes payable and Massachusetts Lease Liability

(10,325)

Repayments on Revolving Facility

(25,067)

(29,073)

Debt issuance costs

(1,029)

Proceeds from Revolving Facility

28,787

27,316

Net cash provided by (used in) financing activities

2,819

(14,899)

Effect of foreign exchange on cash and cash equivalents

(8)

(2)

Net change in cash and cash equivalents and restricted cash

187

1,689

Cash and cash equivalents and restricted cash, beginning of year

3,332

3,500

Cash and cash equivalents and restricted cash, end of year

$

3,519

$

5,189

Supplemental disclosures of non-cash investing and financing activities:

Increases to right of use assets related to Ohio facility

$

80

$

Increases to operating lease liability related to Ohio facility

$

80

$

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

$

1,501

$

2,962

Cash paid for income taxes

$

80

$

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

All dollar amounts expressed in thousands, except per share amounts

8

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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 40 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 OTCQB in the U.S. under the symbol “TLLTF.” The Company’s head office is in Phoenix, Arizona and its registered office is located at Suite 2400, 745 Thurlow Street., Vancouver, BC V6C 0C5 Canada.

Liquidity and 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 $9,658 during the three months ended March 31, 2024 and has an accumulated deficit of $1,035,738 as of March 31, 2024. Additionally, as of March 31, 2024, the Company had negative working capital of $31,179 compared to negative working capital of $19,798 as of December 31, 2023. The negative working capital was mainly related to certain notes payable becoming due within the next 12 months, including the Company’s asset-based revolving credit facility (the “Revolving Facility”), the employee retention credit note, and obligation under the 2023 Refinanced Notes and 2023 New Notes (each defined below). See Note 10 — Notes Payable for additional information.

During the three months ended March 31, 2024, the Company drew proceeds of $28,787 and made principal and interest payments of $25,387 on its Revolving Facility. Noteholder fees of $167 were also paid to the Note Holders (as defined below) related to the 2023 Refinanced Notes (as defined below).

On February 15, 2023 (the “Effective Date”), the Company and its subsidiaries, Jimmy Jang, L.P. (“JJ LP”), Baker Technologies, Inc. and subsidiaries (collectively, “Baker”), Commonwealth Alternative Care (“CAC”), and Jupiter Research LLC (“Jupiter”) (collectively, the “Subsidiary Borrowers”) entered into a first amendment (the “NPA Amendment”) to its existing junior secured note purchase agreement (the “2019 Junior Notes NPA”) with Jordan Geotas, as the noteholder representative (the “Noteholder Representative”) on behalf of the noteholders under the 2019 Junior Notes NPA (the “Note Holders”) and refinanced $38,000 in aggregate principal amount of secured promissory notes issued originally under the 2019 Junior Notes NPA (the “2023 Refinanced Notes”).

Pursuant to the NPA Amendment, the Subsidiary Borrowers also issued by way of private placement secured promissory notes (the “2023 New Notes”) in the aggregate principal amount of $8,260 to the Note Holders with a maturity date of February 15, 2027. The consideration for the 2023 New Notes was paid by an offset of an existing unsecured obligation owed by the Subsidiary Borrowers to the Note Holders. See Note 10 — Notes Payable for additional information.

On March 13, 2023, the Company, through its subsidiary Jupiter, entered into an amendment to its existing $10,000 Revolving Facility to increase the amount available under the Revolving Facility to $12,500 and extend the maturity date to July 21, 2024. The Revolving Facility bears interest at the prime rate plus 3%.

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 which started July 1, 2023. The 2023 Bridge Notes

All dollar amounts expressed in thousands, except per share amounts

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bore interest at the greater of 16% or the prime rate plus 8.5%, payable monthly, with a maturity date of December 1, 2023.

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; (v) obtaining other financings as necessary; and (vi) deferring principal and interest payments on the 2023 Refinanced Notes.

The Company believes that successfully implementing these operating plans 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 issuance of the 2023 Bridge Notes to satisfy the transition of the new payment terms and provide working capital for the business. The issuance of the 2023 Bridge Notes required the Company to have to obtain a waiver of the financial covenant defaults expected to occur for the 2023 Refinanced Notes and 2023 New Notes. 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 25.0% as of June 30, 2023. On October 2, 2023, the Company and the Subsidiary Borrowers entered into the Limited Waiver and Continued Forbearance Agreement (the “October Forbearance Agreement”) with the Noteholder Representative on behalf of the Note Holders under the 2019 Junior Notes NPA. The October Forbearance Agreement reduced the interest rate on the 2023 Refinanced Notes to 17.0% as of September 30, 2023. Despite the Company’s ability to secure a lower interest rate on the 2023 Refinanced Notes, the 17.0% interest rate is considered high and the 2023 New Notes remain at the default interest rate of 25.0%.

The interest payments required under these rates will constrain the Company’s liquidity while these rates remain in effect. While, as of the date of this filing, the Company is not in compliance with certain payment obligations and covenants under the 2023 Refinanced Notes and the 2023 New Notes, the Note Holders have not provided the requisite notice of an event of default under these notes. The Company is currently negotiating a waiver and forbearance agreement with the Note Holders to address such non-compliance. As of March 31, 2024, the Company used a default rate of 26.0% to accrue interest on the 2023 Refinanced Notes due to this noncompliance. The 26.0% interest rate represents the prime rate of 8.5% plus 8.5%, the 8% default interest rate, and the 1% annual increase pursuant to the NPA Amendment, as the principal balance was more than $30,000 as of the first anniversary of the Effective Date. The Company can provide no assurance that the parties will reach a mutually agreeable resolution. See Note 10 — 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. These financial statements do not include any adjustments that might become necessary should the Company be unable to continue as a going concern.

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, (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, 2023 (the “Form 10-K”), as filed with the SEC on March 22, 2024 and with the relevant

All dollar amounts expressed in thousands, except per share amounts

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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, 2024. 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, 2024 and 2023. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the current year ending December 31, 2024.

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 three months ended March 31, 2024, the Company reclassified $225 of inventory valuation adjustments previously included in inventories under net change in working capital adjustments on the condensed consolidated statement of cash flows for the three months ended March 31, 2023 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 $1,300 and $1,298 in restricted cash as of March 31, 2024 and December 31, 2023, respectively. Included in restricted cash was a certificate of deposit related to Jupiter customs bonds totaling $1,254 and $1,253 as of March 31, 2024 and December 31, 2023, respectively.

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 Issued Accounting Pronouncements

In November 2023, the FASB issued accounting standards update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which improves reportable segment disclosure requirements. These improvements include enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”) and included within each reported measure of segment profit or loss, the CODM’s title and position, the measures the CODM uses to measure segment profit or loss, and how the CODM uses those measures. This guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning December 15, 2024 with early adoption permitted. The Company adopted this standard on January 1, 2024 and does not anticipate any impact on its Financial Statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires public companies to annually disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, certain information about income taxes paid, and certain information disaggregated between federal, state, and/or domestic, and foreign. This guidance is effective for public business entities after December 15, 2024, with early adoption permitted. The Company expects to adopt this standard on January 1, 2025 and does not anticipate any impact to its 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).

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

As of March 31, 2024

Fair value hierarchy

Fair value of assets

    

Level 1

    

Level 2

    

Level 3

Cash and cash equivalents

$

2,219

$

$

Restricted cash

1,300

Investments

Total

$

3,519

$

$

As of December 31, 2023

Fair value hierarchy

Fair value of assets

    

Level 1

    

Level 2

    

Level 3

Cash and cash equivalents

$

2,034

$

$

Restricted cash

1,298

Investments

1

Total

$

3,333

$

$

Investments

The Akerna Corp. (“Akerna”) marketable security balance included in investments has Level 1 inputs. During the three months ended March 31, 2024, the Company recorded a loss of $1 related to its investment in Akerna. This loss 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.

The HERBL Inc. (“HERBL”) investment is recorded at cost and excluded from the schedule above. During the three months ended June 30, 2023, the Company noted declining conditions in its investment in HERBL and performed impairment testing. The Company concluded that the balance of its investment was not recoverable due to HERBL entering into receivership in June 2023 and recorded an impairment of $6,400 on its investment in HERBL, bringing the balance of its investment to zero. These losses are included in unrealized loss on investment on the condensed consolidated statements of operations and comprehensive loss. The balance was $0 as of both March 31, 2024 and December 31, 2023.

See Note 6 — Investments for additional information about the Akerna and HERBL investments.

All dollar amounts expressed in thousands, except per share amounts

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Financial Instruments

The carrying amount of the Company’s notes payable, which are recorded at amortized cost, approximates their 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 expected credit losses, approximates their fair values. See Note 8 — Loans Receivable for additional information. There were no transfers between the levels of fair value hierarchy during each of the three months ended March 31, 2024 and 2023.

4. Inventories

The Company’s inventories consisted of the following:

    

March 31,  2024

    

December 31,  2023

Raw Material - cannabis plants

$

3,153

$

2,651

Raw Material - other materials

502

483

Work in progress

12,592

13,380

Finished goods

19,018

14,758

Supplies and accessories

1,573

1,636

Total Inventories

$

36,838

$

32,908

During the three months ended March 31, 2024 and 2023, the Company recorded total inventory adjustments of $13 and $225, respectively. These amounts are included in cost of goods sold on the condensed consolidated statements of operations and comprehensive loss.

5. Property, Plant and Equipment and Assets Held for Sale

The Company’s property, plant and equipment consisted of the following:

    

March 31, 2024

    

December 31, 2023

Land

$

6,266

$

6,266

Machinery & equipment

13,358

13,250

Furniture & fixtures

752

751

Buildings

45,100

45,107

Greenhouse - agricultural structure

6,769

6,769

Leasehold improvements

10,402

10,380

Construction in progress

322

306

Autos & trucks

275

275

Total cost

83,244

83,104

Less: Accumulated depreciation

(33,397)

(31,919)

Total property, plant and equipment

$

49,847

$

51,185

During the three months ended March 31, 2024 and 2023, the Company recognized depreciation expense of $1,548 and $1,975, respectively. Depreciation expense is included in cost of goods sold and depreciation and amortization in the condensed consolidated statements of operations and comprehensive loss.

On February 15, 2023, the Company completed the sale and leaseback of its facility in White Haven, Pennsylvania (the “White Haven Facility”) to the buyer (the “Pennsylvania Transaction”). The Company received cash proceeds of $15,000 and derecognized the property, plant and equipment with a net carrying value of $6,599, resulting in a gain on sale of assets of $8,401. See Note 12 — Leases for additional information.

All dollar amounts expressed in thousands, except per share amounts

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Assets Held for Sale

During the six months ended June 30, 2023, it was determined that the assets held for sale had a fair market value less costs to sell of zero. As a result, the Company recorded an impairment loss of $325 to bring these assets held for sale to fair market value less costs to sell. This loss is included in impairment loss and loss on disposal of assets in the condensed consolidated statements of operations and comprehensive loss, and the assets are still held for sale as of March 31, 2024.

6. Investments

The Company’s investments included the following:

Investment

    

March 31, 2024

    

December 31, 2023

HERBL, Inc.

$

$

Akerna

1

Total Investments

$

$

1

The Company recorded the investment in HERBL 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 intended to hold its investment in HERBL until HERBL executed its next equity financing. The Company had an arrangement with HERBL that, upon such equity financing, if the fair value of HERBL’s class B common shares was less than the initial cost, HERBL would issue additional shares to make up the difference. However, during June 2023, the Company determined that it was not probable that HERBL would issue additional shares to bring the Company’s investment up to its initial cost as HERBL entered into receivership in June 2023. Therefore, the Company recorded a loss of $6,400 on its investment in HERBL to adjust the balance to zero.

During the three months ended March 31, 2024, the Company recorded an unrealized loss of $1 from its 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, 2024

    

December 31, 2023

Customer relationships

$

85,300

$

85,300

Trademarks

29,000

29,000

License rights(1)

2,361

2,361

Patents & technologies

32,900

32,900

Backlog and non-competition agreements

10,406

10,406

Total intangible assets, at cost

159,967

159,967

Less: Accumulated amortization

(78,404)

(75,166)

Total intangible assets, net

$

81,563

$

84,801

(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, 2023 and 2022 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, 2024 and 2023 was $3,238 and $3,264, 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 for intangible assets as of March 31, 2024:

Estimated

Years ended December 31, 

amortization

Remainder of 2024

$

9,715

2025

12,953

2026

12,796

2027

12,796

2028

12,778

Thereafter

18,325

$

79,363

8. Loans Receivable

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

Loans receivable

    

March 31, 2024

    

December 31, 2023

Teneo Fund SPVi LLC Note

$

5,586

$

5,622

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

Total loans receivable

$

8,932

$

8,968

Less allowance for expected credit losses

(7,902)

(7,902)

Loans receivable

$

1,030

$

1,066

Little Beach Harvest Note

In June 2023, the Company determined that it may not be able to collect the full amount of its loan receivable from Little Beach Harvest (the “Little Beach Harvest Note”). As a result, the Company did not record any interest income for the three months ended March 31, 2024.

On September 1, 2023, due to a strategic shift to focus on the Company’s core business, the Company divested its interests in its joint venture in Standard Farms New York LLC (“SFNY”) pursuant to a membership interest purchase agreement (“MIPA”) by and among SFNY Holdings Inc. (“SFNY Holdings”), SFNY, each wholly owned subsidiaries of the Company, and CGSF Investments, LLC (“CGSF”), a wholly owned subsidiary of PowerFund Holdings II LLC (the “CGSF/SFNY Divestiture”). As a result, the Company wrote off the principal of the Little Beach Harvest Note as well as related accrued interest totaling $5,135 and the balance no longer exists.

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

Impairment

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, 2024, the Company did not record additional allowance for expected credit losses related to its remaining loans receivable.

All dollar amounts expressed in thousands, except per share amounts

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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.

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, 2024

Nature of collateral

    

Gross amounts

    

Loan losses

    

Net

Security interest in assets of counterparty

$

7,298

$

(6,268)

$

1,030

Third party guarantee

1,410

(1,410)

No collateral

224

(224)

Net loans receivable

$

8,932

$

(7,902)

$

1,030

As of December 31, 2023

Nature of collateral

    

Gross amounts

    

Loan losses

    

Net

Security interest in assets of counterparty

$

7,334

$

(6,268)

$

1,066

Third party guarantee

1,410

(1,410)

No collateral

224

(224)

Net loans receivable

$

8,968

$

(7,902)

$

1,066

9.     Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consisted of the following: