On October 19, 2019, the Company purchased a 100% controlling interest in Wayne PRV, Inc., which operates a dispensary in Wayne, Michigan. The transaction was accounted for as a business combination and the results of operations have been included in the accompanying consolidated financial statements, since the date of acquisition. The addition of Wayne PRV, Inc. expands operating footprint in Michigan. The license and permits intangible fair valued under the market approach based on another observable transaction in the market. The building and land were fair valued under the market approach, which uses prices and other relevant information generated by market transactions involving identical or comparable items. The Company incurred $0.2 million in transaction expenses that were expensed when occurred. The Consolidated statements of operations include revenue of approximately $133 and net loss of $39 for the year ended December 31, 2019, respectively.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
The excess of the consideration transferred over the estimated fair value of the net assets received has been recorded in goodwill. Goodwill primarily related to factors such as synergies and market opportunities and includes assembled workforce which is not recognized separately and apart from goodwill as it is neither separable nor contractual in nature.
On November 3, 2020, Tide Management, LLC, consolidated subsidiary of the Company, purchased all of the outstanding interest in Arizona Natural Pain Solutions, Inc. (“ANPS”), which operates a dispensary in Phoenix, Arizona, for cash and Devi common stock. Various stockholders of the Company represent the noncontrolling interest of Tide Management, LLC. The transaction was accounted for as a business combination and the results of operations have been included in the accompanying consolidated financial statements, since the date of acquisition. The Company and Jigarkumar Patel guaranteed a put right of $1.26 per share on the 1,984,126 shares of equity issued to the sellers and a 12% annual return (see Note 14). The Company accounted for this as a liability. The acquisition increases the number of dispensaries in Arizona for which the Company is currently vertically integrated. The Company incurred $273 in transaction expenses of which $151 was expensed when occurred. The remaining $122 was capitalized as debt issuance cost. The consolidated statements of operations include revenue of $1.1 million and net profit of $266 for the year ended December 31, 2020, respectively.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date.
The excess of the consideration transferred over the estimated fair value of the net assets received has been recorded in goodwill. Goodwill primarily related to factors such as synergies and market opportunities and includes assembled workforce which is not recognized separately and apart from goodwill as it is neither separable nor contractual in nature.
The following table presents current and noncurrent assets, current and noncurrent liabilities, and revenues and net income (loss) of the Company’s variable interest entities at and for the year ended December 31, 2020:
The following table presents current and noncurrent assets, current and noncurrent liabilities, and revenues and net income (loss) of the Company’s variable interest entities at and for the year ended December 31, 2019:
The following tables present changes in the Company’s equity method investments in the years ended December 31, 2020, and 2019:
On June 19, 2019, the Company issued 1,066,167 shares of common stock to Jigarkumar Patel, CEO and majority shareholder of the Company, for his 50% membership interest in Taro, LLC (“Taro”), a California limited liability company. The beginning investment balance in Taro was calculated as the fair value of the shares issued in exchange for the membership interest, or $714. Taro had no operations from the date of the Company’s acquisition of Mr. Patel’s membership interest through December 31, 2020. Note that Taro is not considered a business as the entity’s license application is still in process, and as such the entity has no business operations.
On August 14, 2019, the members of Jais, LLC (“Jais”), a Missouri limited liability company, entered into the Operating Agreement for Jais. The members were listed as Jusmin Patel, a representative of the Company, and Maria Patel with 49% and 51% membership interests, respectively. The Company bore the financial burden of the startup costs and treated the 49% membership interest held by Mr. Patel, acting on behalf of the Company, as an equity method investment. Note that Jais is not considered a business as the entity’s license application is still in process, and as such the entity has no business operations.
On November 20, 2019, the members of Teisa, LLC (“Teisa”), an Illinois limited liability company, entered into the Operating Agreement for Teisa. The members were listed as Jigarkumar Patel, CEO of the Company, and Patrice Johnson with 49% and 51% membership interests, respectively. The Company bore the financial burden of the startup costs and treated the 49% membership interest held by Mr. Patel, acting on behalf of the Company, as an equity method investment. Note that Teisa is not considered a business as the entity’s license application is still in process, and as such the entity has no business operations.
On August 22, 2019, the members of Dahla, LLC (“Dahla”), a New Jersey limited liability company, entered into the Operating Agreement for Dahla. The members were listed as Jigarkumar Patel, CEO of the Company, and Dashiv Holdings, LLC with 49% and 51% membership interests, respectively. The Company bore the financial burden of the startup costs and treated the 49% membership interest held by Mr. Patel, acting on behalf of the Company, as an equity method investment. Note that Dahla is not considered a business as the entity’s license application is still in process, and as such the entity has no business operations.
On January 1, 2019, the Company issued 2,975,000 shares of common stock to Jigarkumar Patel, CEO and majority shareholder of the Company, for his 17% membership interest in PA Natural Medicine, LLC (“PA”), a Pennsylvania limited liability company. PA manages dispensaries throughout the state of Pennsylvania. The non-marketable equity investment has been presented at the carrying value at the time transfer occurred on January 1, 2019. The basis was approximately $39.
On May 15, 2020, the Company issued 2,548,000 shares of common stock and approximately $1,213 for an additional 26% membership interest in PA, at which point the investment was accounted for as an equity method investment. There are no restrictions on the assets of PA.
The following table presents current and noncurrent assets, current and noncurrent liabilities, and revenues and net income (loss) of the Company’s equity method investments at and for the year ended December 31, 2020:
The following table presents current and noncurrent assets, current and noncurrent liabilities, and revenues and net income (loss) of the Company’s equity method investments at and for the year ended December 31, 2019:
Assets under construction represent construction in progress related to both cultivation and dispensary facilities and are not depreciated.
The Company recorded depreciation expense of $1,669 for the year ended December 31, 2020 ($511 included in cost of goods sold and $1,158 included in depreciation, in the consolidated statements of operations) and $1,050 for the year ended December 31, 2019 ($nil included in cost of goods sold and $1,050 included in depreciation, in the consolidated statements of operations). The Company recorded $100 in depreciation in the consolidated statements of operations for the year ended December 31, 2019 for depreciation expense related to common control entities prior to the transfer date, which is excluded from accumulated depreciation.
| NOTE 9. | INTANGIBLE ASSETS AND GOODWILL |
Intangible assets, including goodwill as of December 31, 2020, consisted of the following:
| Gross carrying amount | | Weighted average useful lives (years) | | | December 31, 2018 | | | Acquisitions | | | Additions
| | | December 31, 2019 | |
| Indefinite life intangible assets: | | | | | | | | | | | | | | | |
| Licenses and permits | | N/A | | | $ | 9,642 | | | $ | 7,000 | | | $ | - | | | $ | 16,642 | |
| Total intangible assets | | | | | | | | | | | 7,000 | | | | | | | | | |
Goodwill
| | N/A | | | | | | | | 2,343 | | | | | | | | 25,513 | |
| Total intangible assets and goodwill | | | | | | | | | | $ | 9,343
| | | | | | | $ | 44,155
| |
Intangible assets, including goodwill as of December 31, 2019 consisted of the following:
| Gross carrying amount | | Weighted average useful lives (years) | | | December 31, 2018 | | | Acquisitions | | | Additions
| | | December 31, 2019 | |
| Indefinite life intangible assets: | | | | | | | | | | | | | | | |
| Licenses and permits | | N/A | | | $ | - | | | $ | 9,642 | | | $ | - | | | $ | 9,642 | |
| Total intangible assets | | | | | | | | | | | 9,642 | | | | | | | | 9,642 | |
Goodwill
| | N/A | | | | | | | | 25,170 | | | | | | | | 25,170 | |
| Total intangible assets and goodwill | | | | | | | | | | $ | 34,812 | | | | | | | $ | 34,812 | |
The Company recorded no amortization of intangible assets during the years ended December 31, 2020, or December 31, 2019, as the assets had an indefinite life.
There were no impairments identified during annual goodwill impairment testing in 2020 or 2019.
There were no intangible assets impairments identified during the year ended December 31, 2020, or December 31, 2019.
The Company adopted ASC 842, Leases, on January 1, 2019. The Company holds leases related to office spaces and retail dispensary facilities. The following is lease activity for the years ended December 31, 2020, and 2019:
Right-of-use assets
| | | Operating leases | | | Finance leases | |
| Balance, January 1, 2019 (Adoption of ASC 842) | | $ | 26 | | | $ | - | |
| Acquisitions | | | 2,371 | | | | 3,914 | |
| Additions | | | 702 | | | | - | |
| Disposals | | | - | | | | - | |
| Depreciation | | | (171 | ) | | | (62 | ) |
| Balance, December 31, 2019 | | $ | 2,928 | | | $ | 3,852 | |
| Acquisitions | | | 391 | | | | - | |
| Additions | | | 227 | | | | 7,514 | |
| Disposals | | | - | | | | (7,751 | ) |
| Depreciation | | | (323 | ) | | | (253 | ) |
| Balance, December 31, 2020 | | $ | 3,223 | | | $ | 3,362 | |
During the years ended December 31, 2020, and 2019, the Company recorded $576 and $233 of amortization on right-of-use assets included in general and administrative expenses within the consolidated statement of operations, respectively.
Lease liabilities
| | | Operating leases | | | Finance leases | |
| Balance, January 1, 2019 (Adoption of ASC 842) | | $ | (26 | ) | | $ | - | |
| Acquisitions | | | (2,426 | ) | | | (3,845 | ) |
| Additions | | | (694 | ) | | | - | |
| Disposals | | | - | | | | - | |
| Interest | | | (279 | ) | | | (189 | ) |
| Principal payments | | | 405 | | | | 137 | |
| Balance, December 31, 2019 | | $ | (3,020 | ) | | $ | (3,897 | ) |
| Less current portion | | | 252 | | | | 467 | |
| Long term lease liabilities, December 31, 2019 | | $ | (2,768 | ) | | $ | (3,430 | ) |
| Balance, January 1, 2020 | | $ | (3,020 | ) | | $ | (3,897 | ) |
| Acquisitions | | | (432 | ) | | | - | |
| Additions | | | (226 | ) | | | (7,364 | ) |
| Disposals | | | - | | | | 7,800 | |
| Interest | | | (323 | ) | | | (930 | ) |
| Principal payments | | | 598 | | | | 961 | |
| Balance, December 31, 2020 | | $ | (3,403 | ) | | $ | (3,430 | ) |
| Less current portion | | | 632 | | | | 32 | |
| Long term lease liabilities, December 31, 2020 | | $ | (2,771 | ) | | $ | (3,398 | ) |
The total cash outflow for leases for the year ended December 31, 2020, and 2019 was $1,559 and $527, respectively.
As of December 31, 2019, and 2020, the weighted average lease term remaining was 6.9 and 6.4 years, respectively. The following table provides amounts at December 31, 2020 for future minimum lease payments under non-cancelable operating leases having an initial or remaining term of more than one year:
| | | Operating leases | | | Finance leases | |
| 2021 | | $ | 873 | | | $ | 280 | |
| 2022 | | | 509 | | | | 3,460 | |
| 2023 | | | 534 | | | | - | |
| 2024 | | | 450 | | | | - | |
| 2025 | | | 308 | | | | - | |
| Thereafter | | | 3,785 | | | | - | |
| Total minimum lease payments | | $ | 6,459 | | | $ | 3,740 | |
| Effect of discounting | | | (3,056 | ) | | | (310 | ) |
| Present value of minimum lease payments | | $ | 3,403 | | | $ | 3,430 | |
| Current portion lease obligations | | | (632 | ) | | | (32 | ) |
| Long term lease obligations | | $ | 2,771 | | | $ | 3,398 | |
Notes payable consisted of the following balances due to third parties as of December 31, 2019:
| | December 31, 2019 | |
Secured promissory notes dated July to October 2019, in the cumulative principal amount of $3,950. Monthly interest payments of 7-10% per annum. Principal balance due at maturity. | | $ | 3,448 | |
Settlement agreement dated September 2018, in the principal amount of $1,410 with a maturity of January 2022. Fixed monthly payments of $35. Principal balance due at maturity. | | | 875 | |
Mortgage loan dated October 2017, in the principal amount of $1,050 with a maturity of November 2032. Monthly interest payments of 4.625% per annum. Principal balance due at maturity. | | | 944 | |
Loan agreements dated March 2016 to August 2019, in the cumulative principal amount of $1,896. Monthly interest payments of 7-12% per annum. Principal balance due at maturity. | | | 1,867 | |
Unsecured promissory notes dated January 2016 to May 2019, in the cumulative principal amount of $5,865. Monthly interest payments of 0-12% per annum. Principal balance due at maturity. | | | 1,634 | |
| Total notes payable | | | 8,768 | |
| Less unamortized debt discounts and issuance costs | | | - | |
| Net amount | | | 8,768 | |
| Less: current portion of notes payable | | | (7,731 | ) |
| Notes payable, net of current portion | | $ | 1,037 | |
Note that all notes payable outstanding as of December 31, 2019, were repaid in full during the year ended December 31, 2020.
Note that the Company had no outstanding notes payable due to third parties as of December 31, 2020.
Additionally, the Company had notes payable due to related parties as noted below. The noteholders are considered related parties due to (1) beneficial ownership in Devi common stock or (2) common ownership by Jigarkumar Patel, Devi CEO. Notes payable to related parties consisted of the following as of December 31, 2019:
| | | December 31, 2019 | |
| Loan agreement dated August 2019, in the principal amount of $95 with a maturity of May 2020. Monthly interest payments of 18% per annum. Principal balance due at maturity. | | $ | 95 | |
| Unsecured promissory notes dated January to September 2019, in the cumulative principal amount of $10,699. Monthly interest payments of 0-18% per annum. Principal balance due at maturity. (a) | | | 10,964 | |
| Advance payment by Drewry received in December 2019. Refer to paragraph below. (b) | | | 1,000 | |
| Total related party notes payable | | | 12,059 | |
| Less unamortized debt discounts and issuance costs | | | - | |
| Net amount | | | 12,059 | |
| Less: current portion of related party notes payable | | | (12,059 | ) |
| Related party notes payable, net of current portion | | $ | - | |
Note that all related party notes payable outstanding as of December 31, 2019, were repaid in full during the year ended December 31, 2020.
| (a) | From July 9 to September 19, 2019, the Company entered into several unsecured promissory notes with Jigarkumar Patel (“Jigar”) in the cumulative principal amount of $2,215, with all notes bearing 18% per annum and due within 12 months of issuance. On January 23, 2020, the Company executed a Convertible Promissory Note (“Jigarkumar Convertible Note”) with Jigar, assuming the outstanding balance of the aforementioned unsecured promissory notes. The Jigarkumar Convertible Note bears interest of 4% per month with a maturity date of March 31, 2020. Then on May 15, 2020, Jigarkumar converted the outstanding balance of the Jigarkumar Convertible Note to 3,435,667 shares of Devi common stock, satisfying the outstanding balance of $3,000 in full. |
| (b) | On December 26, 2019, the Company received an advance payment from Drewry Investments, LLC (“Drewry”) in the amount of $1,000. On January 23, 2020, the Company executed a Convertible Promissory Note (“Drewry Convertible Note”) with Drewry, assuming the outstanding balance of the advance payment and drawing an additional $2,200 for a total principal balance of $3,200, bearing interest of 4% per month with a maturity date of March 31, 2020. The Company then paid the outstanding balance of the Drewry Convertible Note in cash with the proceeds of the AFC Term Loan noted below. |
Notes payable to related parties consisted of the following as of December 31, 2020:
| | | December 31, 2020 | |
Credit Agreement, consisting of several delayed draw Term Loan Notes dated May to December 2020, in the cumulative principal amount of up to $42,500 with a maturity of May 2024. Interest accues on a monthly basis at a rate of 17% per annum (13% cash interest and 4% paid-in-kind). Lump sum payment of principal balance and any accrued, unpaid interest due at maturity. | | $ | 41,822 | |
| Total related party PIK loan | | | 41,822 | |
| Less unamortized debt discounts and issuance costs | | | (14,430 | ) |
| Net amount | | | 27,392 | |
| Less: current portion of related party PIK loan | | | (1,091 | ) |
| Related party PIK loan, net of current portion | | $ | 26,301 | |
On May 15, 2020, the Company as guarantor entered into a syndicated Credit Agreement with Advanced Flower Capital Management, LLC (“AFC”). Note that AFC is a related party as an affiliate of AFC is a beneficial owner of the Company’s common stock and such affiliate is entitled to appoint members of the Company’s Board of Directors. The Credit Agreement provides for a $42.5 million delayed draw term loan facility (“AFC Term Loan”). On May 15, 2020, the Company drew $26.2 million against the AFC Term Loan facility (the “May 2020 Draw”). The Company used the initial proceeds under the AFC Term Loan facility to pay off existing secured and unsecured promissory notes, existing mortgage loans, and finance the acquisition of equity interests in the Company’s subsidiaries held by third parties, all of which were outstanding as of December 31, 2019.
The AFC Term Loans are secured by (i) a first priority security interest in the equity interests of certain of the Company’s direct and indirect subsidiaries that guaranteed the AFC Term Loans (the “Guarantors”), (ii) a first priority security interest in the trademarks registered with the Arizona Secretary of State and Maryland Secretary of State, held by the Company’s direct subsidiary, and (iii) a first priority security interest in all of the Guarantors’ present and future real property assets. In the event of a change of control or other event of default, all obligations inclusive of any and all accrued and unpaid interest and fees shall automatically become and be immediately due and payable in full. The AFC Term Loans include covenants that, among other things, limit the Company’s ability to pay dividends, conduct certain asset or equity transactions, incur indebtedness, grant liens and dispose of material assets. The Company must meet the following covenants on a quarterly basis: (1) Minimum Adjusted EBITDA, (2) Minimum Free Cash Flow, (3) Max Total Leverage to Adjusted EBITDA Ratio, (4) Minimum Fixed Charge Coverage Ratio, and (5) Minimum Cash Balance. The Company is in compliance with all covenants.
Additionally, related to the May 2020 Draw, the Lenders received 11,414,686 warrants (compensation warrants), exercisable to purchase one share of common shares at an exercisable price of $0.01. In addition, the Lenders received 11,647,639 warrants (Lender warrants), exercisable to purchase one share of common shares at an exercisable price of $0.75 per share. The warrants were fair valued using the Black-Scholes option-pricing model, see note 14 for discussion on assumptions used in the model to value the warrants, and resulted in a debt discount of $15.4 million. Using the effective interest method, the carrying amount of the notes is the difference between the principal amount and the initial carrying value of the lender warrants. The net amount of the warrant component and issue costs are accreted using the effective interest method over the term of the note, such that the carrying amount of the financial liability will equal the principal balance at maturity. The Company incurred cash fees of $3.7 million allocated between warrant liabilities and debt incurred for $1.4 million and $2.3 million, respectively. Subsequent to the allocation to the warrant liabilities, $1.4 million was expensed and included in interest expense on the Consolidated Statement of Operations. In addition, $1.9 million was expensed and included within interest expense on the consolidated statement of operations to amortize the debt discounts and issuance costs.
On October 23, 2020, the Company drew an additional $4.2 million on the AFC Term Loan facility (the “October 2020 Draw”). In conjunction with the October 2020 Draw, the Company issued 0.7 million stock warrants with an exercise price of $0.01 per share and 700,000 stock warrants with an exercise price of $0.75 per share, to purchase the Company’s Common Stock, which expires 5 years from the issuance date. These warrants were issued to buyers of the Company’s debt and equity. The warrants were fair valued using the Black-Scholes option-pricing model and resulted in a debt discount of $0.7 million. Using the effective interest method, the carrying amount of the notes is the difference between the principal amount and the initial carrying value of the warrants. The net amount of the equity component and issue costs are accreted using the effective interest method over the term of the note, such that the carrying amount of the financial liability will equal the principal balance at maturity. The Company incurred cash fees of $0.2 million. The stock warrants qualify for liability classification in accordance with ASC 815, Derivatives and Hedging.
The Company made three additional draws on the AFC Term Loan facility in July, November, and December 2020 in the cumulative principal amount of $10.6 million, bringing the total principal amount drawn on the AFC Term Loan to $41.0 million as of December 31, 2020. No warrants or common stock were issued in conjunction with these additional draws.
Stated maturities of the above notes payable as of December 31, 2020 are as follows:
| | Annual Maturities as of December 31, 2020 | |
| 2021 | | $ | 1,091 | |
| 2022 | | | - | |
| 2023 | | | - | |
| 2024 | | | 40,731 | |
| 2025 | | | - | |
| Thereafter | | | - | |
| Total | | $ | 41,822 | |
*Included within notes payable is $14.4 million of unamortized debt cost.
The income tax provision recorded differs from the income tax obtained by applying the statutory income tax rate for the year ended December 31, 2020 of 25.91% (December 31, 2019 – 25.91%) to the income for the year and is reconciled as follows:
| | | December 31, 2020 | | | December 31, 2019 | |
| Income (loss) before taxes | | $ | (3,028 | ) | | $ | 800 | |
| | | | | | | | | |
| Income tax expense (recovery) based on statutory rate | | | (784 | ) | | | 207 | |
| | | | | | | | | |
| Non-deductible expenses | | | 7,875 | | | | 6,707 | |
| Other | | | 212 | | | | (471 | ) |
| Increase in valuation allowance | | | 3,895 | | | | 1,231 | |
| Income tax expense | | $ | 11,198 | | | $ | 7,674 | |
The Company’s income tax expense for the years ending December 31, 2020, and 2019 is entirely related to current tax expense. The Company has recorded an allowance equal to the total amount of the deferred tax asset generated from its net operating loss carryforwards due to the uncertainty of being able to utilize such net operating loss carryforwards in future periods.
Section 280E of the Internal Revenue Code prohibits businesses engaged in the trafficking of Schedule I or Schedule II controlled substances from deducting normal business expenses from gross income (revenue less cost of goods sold). Section 280E was originally intended to penalize criminal market operators, but because cannabis remains a Schedule I controlled substance for Federal purposes, the IRS has subsequently applied Section 280E to state-legal cannabis businesses. Cannabis businesses operating in states that align their tax codes with the IRC are also unable to deduct normal business expenses from their state income tax returns. The non-deductible expenses shown in the effective rate reconciliation above is comprised primarily of the impact of applying IRC Section 280E to the Company’s businesses that are involved in selling cannabis, along with other typical non-deductible expenses such as lobbying expenses.
The Company evaluates deferred tax assets to determine the likelihood of these assets being realized in future periods. After considering the likelihood, a valuation allowance has been recorded to offset the entire net deferred tax asset related to federal and state net operating loss carryforwards, as it is uncertain whether they will ultimately be utilized. During the year ended December 31, 2020, the valuation allowance increased by approximately $3,895 (December 31, 2019 – decrease by $1,231). The valuation allowance has been applied based on the Company’s historical results from operations. If events or circumstances change, the valuation allowance may be adjusted at that time resulting in an income tax benefit.
The Company has available tax losses that may be carried forward to apply against future years’ income for income tax purposes in certain jurisdictions. The Company has accumulated tax losses that expire as follows:
Explration Year
| | Federal
| | | State and local
| | | Total
| |
2024
| | $ | - | | | $ | 5,025 | | | $ | 5,025 | |
2025
| | | -
| | | | 14,822
| | | | 14,822 | |
Indefinite
| | | 17,766
| | | | -
| | | | 17,766 | |
Total
| | $ | 17,766 | | | | 19,847
| | | $ | 37,613 | |
The statute of limitations on tax returns for the Internal Revenue Service and Arizona Department of Revenue are 3 and 4 years respectively. Net operating losses remains open for examination beyond these statute of limitations for both the Internal Revenue Service and Arizona Department of Revenue.
Utilization of net operating loss carryforwards may be subject to limitations in the event of a change in ownership as defined under U.S. IRC Section 382, and similar state provisions. An “ownership change” is generally defined as a cumulative change in the ownership interest of significant stockholders over a three-year period of more than 50 percentage points. A formal Section 382 study has not been prepared, so the exact effects of the ownership change are not known at this time.
In March 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was enacted. The Act, among other provisions, reinstates the ability of corporations to carry net operating losses back to the five preceding tax years, has increased the excess interest limitation on modified taxable income from 30 percent to 50 percent. The Company has made a reasonable estimate of the effects on existing deferred tax balances and has concluded that the Act has not had a significant on the deferred tax balances.
| NOTE 13. | SHARE-BASED COMPENSATION |
Restricted Stock Units
The Company issue to our directors restricted stock units (“RSUs”), which consist of time-based awards. RSUs provide the recipients with the right to shares of common stock following a specified vesting period. Time-based awards vest quarterly.
On June 3, 2020, the Company granted 60,000 restricted stock units. These restricted stock units vest in four equal quarterly installments through 2021.
| | Number of
Units
| | | Weighted
Average
Grant Date
Fair Value
| |
RSU s unvested at December 31, 2019
| | | -
| | | $ | - | |
Granted
| | | 60,000
| | | | 0.67
| |
Vested
| | | (30,000 | ) | | | 0.67
| |
Cancelled
| | | -
| | | | -
| |
| RSU s unvested at December 31, 2020 | | | 30,000
| | | $ | 0.67 | |
During the year ended December 31, 2020, the Company recorded approximately $23 of share-based compensation expense for restricted stock units granted and vested during the period.
| NOTE 14. | STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTEREST |
Description of the Company’s Securities
At formation, the Company authorized 1,000,000 shares of common stock, with a par value of $0.10 per share and each share entitling the holder to one vote at every meeting of the stockholders. On September 19, 2019, the Company filed a Certificate of Amendment of Certificate of Incorporation, whereby the Company effected a 1,000-to-1 forward stock split and amended the total authorized shares of common stock to 180,000,000 shares with a par value of $0.0001 per share. The Company subsequently filed a Certificate of Amendment of Certificate of Incorporation on April 29, 2020, to increase the number of shares authorized from 180,000,000 to 250,000,000 with a par value of $0.0001 per share. Then on December 14, 2020, the Company filed an Amended & Restated Certificate of Incorporation increasing the number of shares authorized from 250,000,000 to 350,000,000 with a par value of $0.0001.
No preferred stock or other class of common stock has been authorized.
Warrants
On June 19, 2019, the Company entered into a Common Stock Purchase Agreement with issued warrants to Drewry Investments, LLC (“Drewry”). Drewry purchased 9.8 million common stock at a price of $1.00 per share. As part of this common stock purchase, the Company granted Drewry an option to purchase additional 50 million shares at an exercisable price of $1.00 per share, after the stock split. The warrants are exercisable if Drewry raised additional $50 million within 1 year from the grant date. The Company did not record any share-based compensation expense for stock warrants granted in 2019. The stocks warrant qualifies for equity classification in accordance with ASC 815, Derivatives and Hedging.
In addition to the liability warrants discussed in Note 11, on May 10, 2020, the Company issued stock warrants (“compensation warrants”) to a shareholder for services rendered. The warrant option to purchase 1,088,733 at an exercise price of $0.01 per share, which expires 10 years from the issuance date. The stock warrant qualifies for equity classification in accordance with ASC 815, Derivatives and Hedging.
On May 10, 2020, the Company issued 300,000 stock warrants (“compensation warrants”) for services. The warrant option to purchase stock warrants at $0.01 per share, which expires 10 years from the issuance date. The warrants are exercisable once the performance criteria of selling a dispensary in Maryland to Devi. The stock warrant qualifies for equity classification in accordance with ASC 815, Derivatives and Hedging. Subsequent to year-end, the warrants were cancelled. There was no impact to the financial statements as the performance criteria was not met.
On May 15, 2020, the Company issued 1,600,000 stock warrants (“compensation warrants”) for services, related to executing the financing transaction with AFC. The warrant option to purchase stock warrants at $0.01 per share, which expires 10 years from the issuance date. The stock warrant qualifies for equity classification in accordance with ASC 815, Derivatives and Hedging.
The Company recorded $0.7 million share-based compensation expense for compensation warrants issued during the year ended December 31, 2020. The fair value of the stock warrants classified as equity granted was determined using the Black-Scholes option-pricing model with the following assumptions at the time of grant:
| | | 2020 | | | 2019 | |
| Risk-Free Annual Interest Rate | | | 0.26 | % | | | N/A | |
| Expected Annual Dividend Yield | | | 0 | % | | | N/A | |
| Expected Stock Price Volatility | | | 85 | % | | | N/A | |
| Expected term | | | 10.0 | | | | N/A | |
There were no compensation warrants issued during the year ended December 31, 2019.
A summary of the status of the stock warrants outstanding, on an as-converted basis for shares of common stock, is as follows:
| | | Number of Stock Warrants | | | Weighted-average Exercise Price | |
| Balance as of January 1, 2019 | | | - | | | $ | - | |
| Issued | | | 50,000,000 | | | | 1.00 | |
| Balance as of December 31, 2019 | | | 50,000,000 | | | | 1.00 | |
| Issued | | | 26,051,058 | | | | 0.34 | |
| Forfeited | | | (50,000,000 | ) | | | 1.00 | |
| Balance as of December 31, 2020 | | | 26,051,058 | | | $ | 0.34 | |
The fair value of the stock warrants classified as liability (Note 14) was $11.5 million and $nil as of December 31, 2020, and 2019, respectively. The fair value of the stock warrants classified as liability granted was determined using the Black-Scholes option-pricing model with the following assumptions at the time of grant:
| | | 2020 | | | 2019 | |
| Risk-Free Annual Interest Rate | | | 0.44 | % | | | N/A | |
| Expected Annual Dividend Yield | | | 0 | % | | | N/A | |
| Expected Stock Price Volatility | | | 85 | % | | | N/A | |
| Expected term | | | 5.0 | | | | 1.0 | |
Volatility was estimated by using the average historical volatility of comparable companies from a representative peer group of publicly traded cannabis companies. The expected life in years represents the period of time that stock warrants issued are expected to be outstanding. The risk-free rate is based on US Treasury strip rate with a remaining term approximately equal to the expected life of the warrants.
During the years ended December 31, 2020, and 2019, the weighted-average fair value of the stock warrants granted was $0.67 per warrant. As of December 31, 2020, and 2019, stock warrants outstanding have a weighted-average remaining contractual life of 0.67 years.
Shares Issued
During the years ended December 31, 2020, and 2019, the Company issued the following shares, net of share issuance costs, as a result of business combinations and other equity-settled transactions:
| | Shares issued in the year ended | | |
| | | December 31, 2019 | | | December 31, 2020 | | Footnote |
| Initial Funding of Devi by Drewry Investments, LLC | | | 14,150,000 | | | | - | | FN 14 |
| Acquisition of AMMA Investment Group, LLC | | | 12,515,400 | | | | 14,300,000 | | FN 4 |
| Acquisition of Amado Management, LLC | | | 5,997,200 | | | | 17,752,000 | | FN 4 |
| Secondary Funding of Devi by J Brothers Investments, LLC | | | 1,000,000 | | | | - | | FN 14 |
| Acquisition of minority interest in Taro, LLC | | | 1,066,167 | | | | - | | FN 7 |
| Acquisition of minority interest in PA Natural Medicine, LLC | | | 2,975,000 | | | | 2,548,000 | | FN 7 |
| Acquisition of Blue Mountain Holdings, LLC | | | 6,165,640 | | | | - | | FN 4 |
| Acquisition of JKJ Management Laurel, LLC | | | 6,500,000 | | | | - | | FN 4 |
| Acquisition of Devi CT Management, LLC | | | 12,177,933 | | | | - | | FN 4 |
| Acquisition of Globe Street Management, LLC | | | 22,666,667 | | | | - | | FN 4 |
| Acquisition of Maryland Health Management, LLC | | | 20,478,427 | | | | 1,365,000 | | FN 4 |
| Acquisition of Tedra Health Management | | | 4,000,000 | | | | - | | FN 4 |
| Acquisition of Farmalogics Health and Wellness, LLC minority interest | | | - | | | | 35,000 | | FN 4 |
| Drewry Cash Contributions | | | 14,800,000 | | | | 3,456,000 | | FN 14 |
| J Brothers Cash Contributions | | | 3,100,010 | | | | - | | FN 14 |
| Satisfaction of notes payable | | | - | | | | 8,500,000 | | FN 14 |
| Satisfaction of convertible notes payable | | | - | | | | 3,435,667 | | FN 11 |
| Cancellation of Drewry warrants | | | - | | | | 15,290,000 | | FN 14 |
| Acquisition of Arizona Natural Pain Solutions, LLC | | | - | | | | 1,984,126 | | FN 4 |
| Total shares of common stock issued | | | 127,592,444 | | | | 68,665,793 | | |
For ease of comparability, the following equity transactions have been presented net of the impact of the 1,000-to-1 forward stock split, which took place on September 19, 2019.
Initial Funding of Devi by Drewry Investments, LLC
Between January 1 and January 30, 2019, the Company issued 10,107,000 shares of common stock to Drewry Investments, LLC (“Drewry”) in exchange for $5,000 as part of the initial funding of the Company pursuant to the Contribution Agreement dated January 1, 2019, and subsequently amended on February 12, 2019, and June 19, 2019 (the “Contribution Agreement”). On March 4, 2019, the Company issued an additional 4,043,000 shares to Drewry in exchange for $2,000, satisfying Drewry’s responsibility for the initial funding of the Company. This resulted in a cumulative 14,150,000 shares issued to Drewry as part of the initial funding, reflecting a price of $0.49 per share.
Secondary Funding of Devi by J Brothers Investments, LLC
Pursuant to the Contribution Agreement, on January 30, 2019, the Company issued 1,000,000 shares of common stock to J Brothers Investments, LLC (“JBrothers”) in exchange for cash and asset contributions made to entities intended to be acquired by the Company totaling $1,000 in value, reflecting a price of $1.00 per share.
Drewry Cash Contributions
On June 19, 2019, the Company entered into a Common Stock Purchase Agreement with Drewry (the “Drewry 2019 Agreement”) whereby the Company would issue up to 10,000,000 shares of common stock at a price of $1.000 per share. Between June 3 and July 11, 2019, Drewry contributed $9,800 in cash in exchange for 9,800,000 shares of common stock pursuant to the terms of the Drewry 2019 Agreement.
On September 26, 2019, the Company entered into the First Amendment to the Drewry Agreement (the “Drewry Amendment”) whereby the Company agreed to issue up to 5,000,000 additional shares of common stock at a price of $1.00 per share. Between October 16 and November 5, 2019, Drewry contributed $4,995 in exchange for 5,000,000 shares of common stock pursuant to the terms of Drewry Amendment.
On May 15, 2020, the Company entered into a Common Stock Purchase Agreement with Drewry (the “Drewry 2020 Agreement”) whereby the Company would issue 3,456,000 shares of common stock in exchange for $3,000 in cash, reflecting a price of $0.87 per share.
JBrothers Cash Contributions
On October 17, 2019, the Company entered into a Common Stock Purchase Agreement with JBrothers (the “JBrothers Agreement”) whereby the Company would issue 3,100,010 shares of common stock in exchange for $3,100 in cash, reflecting a price of $1.00 per share.
Satisfaction of Notes Payable
On March 10, 2020, the Company entered into an agreement with Weldon Development, LLC (“Weldon”) to satisfy the balance of the unsecured promissory note issued to Weldon in conjunction with the purchase of Weldon’s minority interest in AMMA Investment Group, LLC. Immediately prior to the closing of this agreement, the outstanding balance of the unsecured promissory note was $4,500. Pursuant to the terms of the agreement, the Company issued 6,000,000 shares of common stock to satisfy the $4,500 outstanding balance of the note, reflecting a price of $0.75 per share.
On May 7, 2020, the Company entered into a Loan Payoff Letter with, a related party, Marvele, LLC (“Marvele”) to satisfy the balance of the unsecured promissory note issued to Marvele in conjunction with purchase of Marvele’s minority interest in Amado Management, LLC. Per the Loan Payoff Letter, the Company issued 2,500,000 shares of common stock to satisfy the $1,500 outstanding balance of the note, reflecting a price of $0.60 per share and the remaining balance of the note was paid in cash.
Cancellation of Drewry Warrants
On May 15, 2020, the Company and Drewry entered into a Warrant Cancellation Agreement, providing for the cancellation of the 50,000,000 liability warrants made in favor of Drewry in exchange for the issuance of 15,290,000 additional shares. The shares were valued at $0.67 per share, and the Company recorded stock-based compensation expense of $10,245 related to the issuance.
Noncontrolling Interests
The net change in the noncontrolling interests is as follows:
| | | | Amado Management, LLC |
|
|
| AMMA
Investment Group, LLc
|
|
|
| Sixth Street Enterprises, Inc. |
|
|
| Tedra Health, LLC |
|
|
| Blue Mountain Care, LLC
|
|
|
| Blu Pharms, LLC |
|
|
| Maryland Health Management,
LLC
|
|
|
| Durjaya, LLC |
|
|
| Farmalogics
Health &
Wellness, LLC |
|
|
| Pure Releaf N
Union, LLC |
|
|
| Tide
Management, LLC
|
|
|
| Total
|
|
| Balance, December 31, 2018 | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Additions to non-controlling interest | | | 14,775 | | | | 858 | | | | 3,769 | | | | 54
| | | | 320
| | | | | | | | 252
| | | | (6 | ) | | | 614
| | | | 235
| | | | -
| | | | 21,934
| |
| Purchase of non-controlling interest | | | - | | | | (74 | ) | | | - | | | | 472 | | | | - | | | | - | | | | -
| | | | -
| | | | -
| | | | -
| | | | -
| | | | 398
| |
| Net income attributable to non-controlling interest | | | (4,458 | ) | | | (4,259 | ) | | | 20,530 | | | | (526 | ) | | | - | | | | -
| | | | (102 | ) | | | -
| | | | -
| | | | -
| | | | -
| | | | 11,185
| |
| Balance, December 31, 2019 | | $ | 10,317 | | | $ | (3,475 | ) | | $ | 24,299 | | | $ | - | | | $ | 320 | | | $ | 1,063 | | | | 150
| | | $ | (6 | ) | | $ | 614 | | | $ | 235 | | | $ | - | | | $ | 33,517 | |
| Additions to non-controlling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | -
| | | | -
| | | | -
| | | | -
| | | | 5,350
| | | | 5,350
| |
| Purchase of non-controlling interest | | | (9,374 | ) | | | 5,476 | | | | (36,155 | ) | | | - | | | | - | | | | - | | | | (106 | ) | | | -
| | | | (301 | ) | | | -
| | | | -
| | | | (40,460 | ) |
| Net income attributable to non-controlling interest | | | (943 | ) | | | (2,001 | ) | | | 11,856 | | | | - | | | | - | | | | - | | | | (44 | ) | | | -
| | | | -
| | | | -
| | | | 179
| | | | 9,047
| |
| Balance, December 31, 2020 | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 320 | | | $ | 1,063 | | | $ | - | | | $ | (6 | ) | | $ | 313 | | | $ | 235 | | | $
| 5,529
| | | $ | 7,454 | |
| NOTE 15. | FAIR VALUE AND RISK MANAGEMENT |
The accounting framework for determining fair value includes a hierarchy for ranking the quality and reliability of the information used to measure fair value, which enables the reader of the financial statements to assess the inputs used to develop those measurements. The fair value hierarchy consists of three tiers:
| • | Level 1 – defined as quoted market prices in active markets for identical assets or liabilities |
| • | Level 2 – defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all significant assumptions are observable in the market or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities and |
| • | Level 3 – defined as unobservable inputs that are not corroborated by market data. |
The Company utilizes the market approach to measure fair value for its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The Company measures the put right and warrant liability on a recurring basis using Level 3 inputs as defined under ASC 820, Fair Value Measurement and Disclosures. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period.
During the year ended December 31, 2020, and December 31, 2019, the Company issued 26.1 million and 50.0 million stock warrants, respectively. Certain stock warrants are accounted for as a warrant liability (23,062,325 liability warrants and 50,000,000 liability warrants as of December 31, 2020, and 2019, respectively). The estimated fair value of the liability is recorded using significant unobservable measures and other fair value inputs and is therefore classified as a Level 3 financial instrument. Increases or decreases in the fair value of the Company’s liability associated with the warrant liability are reflected as “change in the fair value of the put right and warrant liability” in the consolidated statements of operations for the respective period.
The warrant liability is fair valued using a Black-Scholes model and methodologies and significant grant-date assumptions are disclosed in Note 12. There was no change in the fair value from the initial valuation date.
The Company granted a one-time option (put right) to the sellers of ANPS as part of the Membership Interest purchase agreement. The put right gives the holder the right to sell some or all of the stock consideration received as part of the acquisition on May 31, 2024 (“exercise date”) for $1.26 per share adjusted at a rate of 12% per annum, until the exercise date. The Company recorded $1,171 as the fair value of the put right as a liability at the acquisition date. The fair value was determined using the Black-Scholes model and assumptions included below, with the residual value of the consideration recorded to the common stock issued. There was no material change in the fair value of the put right as of December 31, 2020, since the acquisition date. The fair value of the put right could differ from these estimates if any assumption below were to change; with the corresponding impact to the fair value of equity issued.
| | | 2020 | | | 2019 | |
| Risk-Free Annual Interest Rate | | | 0.44 | % | | | N/A | |
| Exercise price | | $ | 1.26 | | | | N/A | |
| Share price | | $ | 0.67 | | | | N/A | |
| Expected Stock Price Volatility | | | 80 | % | | | N/A | |
| Expected term | | | 4.0 | | | | N/A | |
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2020:
| | | Level 1
| | | Level 2 | | | Level 3 | | | Total | |
| Financial Liability | | | | | | | | | | | | |
| Put right | | $ | - | | | $ | - | | | $ | 1,171 | | | $ | 1,171 | |
| Warrant liability | | | -
| | | | -
| | | | 11,494 | | | | 11,494 | |
| Financial Liability Total | | $ | - | | | $ | - | | | $ | 12,665 | | | $ | 12,665 | |
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis at December 31, 2019:
| | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Financial Liability | |
| | | | | | | | | | |
| Put right | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Warrant liability | | | -
| | | | -
| | | | -
| | | | - | |
| Financial Liability Total | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| NOTE 16. | COMMITMENTS AND CONTINGENCIES |
Regulatory Environment
The Company’s operations are subject to a variety of local and state regulation. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits or licenses that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulation as of December 31, 2020, marijuana regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.
Claims & Legal Proceedings
From time to time, the Company may be involved in legal proceedings, including litigation or regulatory proceedings relating to claims arising out of operations in the normal course of business. In accordance with the current accounting standards for loss contingencies under Accounting Standard Codification Topic 450, we establish reserves for litigation-related matters that arise from the ordinary course of our business activities when it is probable that a loss associated with a claim or proceeding has been incurred and the amount of the loss can be reasonably estimated. Litigation claims and proceedings of all types are subject to many uncertain factors that generally cannot be predicted with assurance. By their nature, the amount of the contingency and the timing of a contingent event and any resulting accounting recognition are subject to our judgment of such events and our estimates of the amounts. Below we provide a description of potentially material legal proceedings and claims.
Litigation Assessment
The Company has evaluated its claims and the foregoing matters to assess the likelihood of any unfavorable outcome and to estimate, if possible, the amount of potential loss as it relates to the litigation discussed above. Based on this assessment and estimate, which includes an understanding of the Company’s intention to vigorously prosecute its claims, the Company believes that any defenses of any of the counterparties lack merit, and the likelihood of any recoveries by any of the counterparties against the Company appears remote. This assessment and estimate are based on the information available to management as of the date of these financial statements and involves a significant amount of management judgment, including the inherent difficulty associated with assessing litigation matters in their early stages. As a result, the actual outcome or loss may differ materially from those envisioned by the current assessment and estimate. Our failure to successfully prosecute or settle these claims could have a material adverse effect on our financial condition, revenue and profitability and could cause the market value of our subordinate voting shares to decline. The Company monitors and evaluates prior settled claims to ensure the Company is in compliance with any and all requirements.
Commitments
On March 4, 2020, the Company engaged Elite Construction, LLC (“Elite”) to perform engineering and construction services related to the build-out of a cultivation and dispensary site in Battle Creek, Michigan. Pursuant to the terms of the bid made by Elite, the Company was obligated to pay $3,836 for work performed under Phase 1 of construction with a remaining obligation to pay $671 as of December 31, 2020, which was subsequently paid in 2021. Certain amounts related to this contract have been recorded to construction in progress.
Loan Commitments
The AFC Term Loans are secured by (i) a first priority security interest in the equity interests of certain of the Company’s direct and indirect subsidiaries that guaranteed the AFC Term Loans (the “Guarantors”), (ii) a first priority security interest in the trademarks registered with the Arizona Secretary of State and Maryland Secretary of State, held by the Company’s direct subsidiary, and (iii) a first priority security interest in all of the Guarantors’ present and future real property assets. In the event of a change of control or other event of default, all obligations inclusive of any and all accrued and unpaid interest and fees shall automatically become and be immediately due and payable in full. The AFC Term Loans include restrictions that, among other things, limit the Company’s ability to pay dividends, conduct certain asset or equity transactions, incur indebtedness, grant liens and dispose of material assets. The Company must meet the following covenants on a quarterly basis: (1) Minimum Adjusted EBITDA, (2) Minimum Free Cash Flow, (3) Max Total Leverage to Adjusted EBITDA Ratio, (4) Minimum Fixed Charge Coverage Ratio, and (5) Minimum Cash Balance. The Company is in compliance with all covenants.
| NOTE 17. | DISCONTINUED OPERATIONS |
Tedra Health LLC
On March 8, 2019, AMMA Investment Group, LLC (“AMMA”) entered into a Management Services Agreement (MSA) with Tedra Health, LLC (“Tedra Health”). Tedra Health is a Connecticut limited liability company which operates a medical cannabis dispensary. AMMA determined that Tedra Health was a VIE of AMMA Investment Group, LLC as the cannabis management service fees were not commensurate of services provided. The Company re-evaluated the VIE on March 8, 2019 and concluded the primary beneficiary of Tedra Health had not changed. Pursuant to ASC 250-10 and ASC 805-50-45 and the MSA effective March 8, 2019, the results of operations of Tedra Health were included and reported in the Company’s consolidated results at the beginning of the period (or January 1, 2019). The Company recognized net assets acquired of $54 and noncontrolling interest of $54 on the transfer date of March 8, 2019.
During the year ended December 31, 2020, the Company decided to discontinue operating activities related to Tedra Health, LLC, (“Tedra”) which owns and operates a medical marijuana dispensary in the state of Connecticut. On October 2, 2020, Tedra entered into an Asset Purchase Agreement with FFD West, LLC (“FFD”) to sell and transfer all of its rights, title, and interest in designated purchased assets to FFD in exchange for $4,200 in cash, $400 in escrow and a $500 promissory note. This transaction included all contracts held by Tedra, medical marijuana license, operating lease, inventory, and property, plant & equipment. The gain on discontinued operations was approximately $3,800.
Discontinued operations are presented separately from continuing operations in the consolidated statements of operations and the consolidated statement of cash flows.
The following table represents the financial results associated with discontinued operations as reflected in the Company’s consolidated statements of operations:
| | For the Year Ended | |
| | | 2020 | | | 2019 | |
| Revenue, net of discounts | | $ | 2,291 | | | $ | 561 | |
| Cost of goods sold | | | (1,670 | ) | | | (386 | ) |
| Gross profit | | | 621 | | | | 175 | |
| Operating expenses | | | | | | | | |
| General and administrative | | | 782 | | | | 853 | |
| Selling and marketing | | | 26 | | | | 35 | |
| Depreciation and amortization | | | 78 | | | | 48 | |
| Total operating expenses | | | 886 | | | | 936 | |
| Operating income/(loss) | | | (265 | ) | | | (761 | ) |
| Other (expense) income | | | | | | | | |
| Interest expense | | | - | | | | (3 | ) |
| Income/(loss) before taxes and non-controlling interest | | | (265 | ) | | | (764 | ) |
| Income taxes | | | (109 | ) | | | (37 | ) |
| Net income/(loss) before non-controlling interest | | | (374 | ) | | | (801 | ) |
| Net income (loss) attributed to non-controlling interest | | | - | | | | 523 | |
| Net income/(loss) attributed to Devi Holdings, Inc. | | $ | (374 | ) | | $ | (278 | ) |
The following table is a summary of the assets and liabilities of discontinued operations:
| | For the period ended December 31 | |
| | | 2020 | | | 2019 | |
| Cash and cash equivalents | | $ | 168 | | | $ | 65 | |
| Accounts receivable, net | | | - | | | | 2 | |
| Prepaid expenses | | | 11 | | | | 14 | |
| Inventory, net | | | 244 | | | | 96 | |
| Property, plant and equipment, net | | | 507 | | | | 576 | |
| Operating lease right-of-use asset, net | | | 266 | | | | 334 | |
| Total assets held for sale | | | 1,196 | | | | 1,087 | |
| | | | | | | | | |
| Accounts payable | | | (197 | ) | | | (40 | ) |
| Accrued expenses and other liabilities | | | (176 | ) | | | (76 | ) |
| Operating lease liability, net of current portion | | | (267 | ) | | | (336 | ) |
| Total liabilities associated with assets held for sale | | $ | (640 | ) | | $ | (452 | ) |
The following table is a summary of the property, plant, and equipment of discontinued operations:
| | | December 31, 2020 | | | December 31, 2019 | |
| Machinery and equipment | | $ | 107 | | | $ | 103 | |
| Computer equipment and software | | | 41 | | | | 41 | |
| Leasehold improvements | | | 475 | | | | 470 | |
| Furniture and fixtures | | | 10 | | | | 10 | |
| Total property, plant and equipment, gross | | | 633 | | | | 624 | |
| Less: accumulated depreciation | | | (126 | ) | | | (48 | ) |
| Property, plant and equipment, net | | $ | 507 | | | $ | 576 | |
| NOTE 18. | SUBSEQUENT EVENTS |
Drewry Sale Agreement
On June 9, 2021, the Company entered into an agreement (the “Drewry Sale Agreement”) with Drewry Investments LLC (“Drewry”), David Dozzo, Luciano Gabriano, Michael Steele, and Avonlea Ventures Inc. (collectively, the “Drewry Parties”) to purchase the outstanding shares of Devi Common Stock held by the Drewry Parties and the 13.997% membership interest in Tide Management, LLC held by Drewry. As of June 9, 2021, the Drewry Parties owned 47,896,000 shares and had the right to acquire 3,455,842 additional shares of Devi common stock pursuant to warrants, for a total of 51,351,842 shares of Devi common stock. Additionally, as compensation for prior consulting related services provided to the Company by Drewry, the Company agreed to issue an additional 2,000,000 shares of Devi common stock, increasing the total shares held by Drewry to 53,351,842.
Per the Drewry Sale Agreement, the Company agreed to pay the Drewry Parties a total of $80,028 in exchange for the shares and $1,500 in exchange for the Drewry Parties’ 13.997% membership interest in Tide Management, LLC. Note that prior to the closing of the Drewry Sale Agreement, the Drewry Parties exercised, on a cashless basis, all of its existing warrants to acquire shares of Devi common stock pursuant to the exercise process set forth in the Warrants. The Closing Date of the Agreement was determined to be no later than July 31, 2021.
Capital Raise
On July 30, 2021, the Company completed a Common Stock Purchase Agreement with a group of institutional and individual investors, pursuant to which Devi sold an aggregate of 29,872,607 shares at a price of $1.57 per share for gross proceeds of $46.9 million. On August 4, 2021, several individuals entered into the same Common Stock Purchase Agreement as Additional Purchasers, pursuant to which Devi sold an additional 2,575,088 shares at the same price of $1.57 per share for gross proceeds of $4.0 million. The total gross proceeds following the closing of this Agreement were $50.9 million, of which 5% of the gross proceeds were payable to the placement agent (“Seaport Global Securities LLC”).
On October 14, 2021, the Company completed a Common Stock Purchase Agreement with a group of related party investors, pursuant to which Devi sold an aggregate 16,725,908 shares at a price of $1.50 per share for gross proceeds of $25.0 million. There were no fees or costs associated with this capital raise.
The Company also completed a Common Stock Purchase Agreement with individual investor, pursuant to which Devi sold an aggregate 318,471 shares at a price of $1.57 per share for gross proceeds of $0.5 million, of which 5% of the gross proceeds were payable to the placement agent (“Seaport Global Securities LLC”). The total gross proceeds following the closing of both agreements were $25.5 million. In connection with the Common Stock Purchase Agreement, the Company issued 4.3 million stock warrants for services, related to executing the financing transaction with AFC. The warrant provided the holder the right to purchase the Company’s stock at $1.80 per share, and which expires on July 30, 2024. The Company is in the process of evaluating the classification of these warrants.
Drewry Assignment of Loan Interests
On June 9, 2021, the Company entered into an Assignment Agreement (the “Assignment Agreement”) with Drewry Investments LLC (“Assignor”) whereby Drewry agreed to irrevocably sell and assign all of their rights and interests as a Lender under the Credit Agreement to AFC Management, LLC.
Amended and Restated Credit Agreement
On July 30, 2021, the Company entered into an Amended and Restated Credit Agreement (“Amended Credit Agreement”) with AFC Management, LLC, A BDC Warehouse LLC, AFC Gamma, Inc. AFC Management LLC (collectively “AFC”) to borrow an additional $30.0 million, increasing the existing non-revolving term loan to $72.5 million. Terms and conditions to the Credit Agreement (see Note 11 Notes Payable) remained substantially unchanged with interest payments due monthly at an interest rate of 13% per annum. Tranche 2 Term Loans drawn under the Amended Credit Agreement will have paid-in-kind interest (“PIK”) of 2%.
Bridge Credit Agreement
On July 30, 2021, Devi Holdings, Inc. (“Borrower”) entered into a Credit Agreement (the “Bridge Credit Agreement”) with Flower Loan Holdco, LLC and J Brothers Investments LLC, a related party. The Company entered into term loan notes with Flower Loan Holdco, LLC and J Brothers Investments LLC (collectively the “Bridge Loans”) in the amounts of $32.4 million less an original issue discount of $759 and $2.0 million less a discount of $40, respectively. The interest rate for the Bridge Loans is 20.00% per annum and will increase on March 31, 2022, to a rate per annum equal to 30.00%. The maturity date of these term loans is August 7, 2024. The proceeds from the Bridge Loans were used for the Drewry Sale Agreement as described above.
Additionally, Jigarkumar Patel granted, assigned, and pledged to secure the obligations under the term loans through all right, title and interest in Aumega Health and Wellness, LLC (“Aumega”), which holds a 17% membership interest in PA Natural Medicine, LLC (“PA”). This membership interest in PA held by Aumega represents a portion of the Company’s 43% noncontrolling membership interest in PA. The Aumega guaranty constitutes a continuing and irrevocable guaranty and shall remain in full force and effect until the term loans have been paid in full.
On October 15, 2021, the Company repaid the bridge loan in full with the proceeds from the capital raise mentioned above.
Promissory Note issued for real estate purchase
On May 27, 2021, the Company issued a promissory note in the principal amount of $700 to HRG Battle Creek, LLC, a Michigan limited liability company, related to the Company’s purchase of real estate in Emmett Township, Michigan. The note shall be paid back through monthly interest-only payments beginning the first day of the first full month 30 days after the closing date of the transaction with lump-sum principal payments made every 12 months on the anniversary of the closing date. The first interest-only payment will be due July 1, 2021, and the maturity date of the note will be June 30, 2024. The note is secured by the real property acquired by the Company from HRG Battle Creek, LLC.
Acquisitions
On September 13, 2021, Natures NM Management LLC, wholly owned subsidiary of Devi Holdings, Inc., purchased all of the interest in PurLife Management Group, LLC (“PurLife”), which provides management services to PurLife, Inc., a New Mexico nonprofit corporation, and MJ Express-O, Inc., a New Mexico nonprofit corporation, which is a vertically integrated cannabis company for $10 million cash, $14.2 million promissory note and approximately 1,600,000 shares of Devi Holdings, Inc. In addition, 0.4 million warrants were issued at an exercise price of $1.80 per share, which expires on September 13, 2024. Management is evaluating the fair value and the classification of the warrants. The acquisition of PurLife gives the Company an opportunity to enter the New Mexico cannabis market. Management is evaluating the transaction cost and, fair value of consideration transferred, and assets and liabilities assumed, because the information was not available at the time the financial statements were issued.
On September 20, 2021, Devi Holdings, Inc. purchased all of the membership interest in MW Biosystems, LLC, an Arizona limited liability company as well as control of the board of directors of Cannabis Research Group, Inc., an Arizona nonprofit corporation, (collectively, “CRG”) for $19 million. The acquisition of CRG expands the Company’s current dispensary locations in Arizona. Management is evaluating the transaction cost and, fair value of the consideration transferred, and assets and liabilities assumed, because the information was not available at the time the financial statements were issued.
On October 27, 2021, AMMA Investment Group, LLC, subsidiary of Devi Holdings, Inc., purchased certain assets and liabilities in Tolleson Supply Company, LLC, an Arizona limited liability company, (“Tolleson”), which cultivates cannabis products, for $0.4 million cash, $0.6 note payable and 2,053,333 shares of Devi Holdings, Inc. The acquisition of Tolleson gives the Company an opportunity to expand the cultivation production in the state of Arizona. Management is evaluating the transaction cost and, fair value of consideration transferred, and assets and liabilities assumed, because the information was not available at the time the financial statements were issued.
Cannabis License Update
In July 2021, the Company was notified by the state of Georgia that Nature’s GA, LLC, joint venture, won a license to sell cannabis in the state.
In October 2021, the Company was notified by the state of Illinois that Teisa, LLC, joint venture, did not win a license to sell cannabis in the state of Illinois. Subsequently, the Company wrote off the entire investment in Teisa LLC, which was $490.
PA Natural Medicine LLC interest sale
On October 1, 2021 (the “Closing Date”), the Company, as part of a group of sellers, sold its equity investment of 43% in PA Natural Medicine LLC (“PA”) to CSAC Acquisition PA II Corp. (the “Buyer”) which is a subsidiary of AYR Wellness, Inc. (“the Parent”). The Buyer acquired all of the issued and outstanding membership interests of PA in exchange for aggregate cash consideration of $35.2 million (which includes closing cash net of working capital, transaction expenses, and reserves), purchase promissory notes of $25 million, stock consideration of $20 million in Parent subordinate shares, and a right to earn-out consideration. The pro-rata share of cash consideration paid at closing received by the Company was $15.2 million. The proceeds were used to payoff the Bridge loan, which included the assignment of the promissory note receivable from the buyer, at a discount, to Flower Loan Holdco, LLC. The purchase promissory notes have interest payable quarterly at a rate of 8% per annum, with aggregate principal payments of $500 payable quarterly and the remaining principal balance payable on the third anniversary of issuance.
One-half of all shares acquired by the Buyer will be subject to a six-month lockup period after the Closing Date and the remaining half of shares acquired will be subject to a 12-month lockup period. However, Aumega, a subsidiary of the Company that owns the Company’s 43% investment, will not be required to enter into a lockup agreement. Aumega shares will only be subject to a four-month statutory holding period under Canadian securities laws.
For calendar year 2021 (the “measurement period”), the Company is eligible for its pro-rata share of earn-out consideration, the total of which will not exceed $40 million. Consideration for earn-out consideration, if any, will be paid in a combination of cash, promissory notes, and stock. Earn-out promissory notes will have interest payable quarterly at a rate of 8% per annum, with principal payments of $500 payable quarterly and the remaining principal balance payable on the third anniversary of issuance.
Amado Land Purchase
On July 16, 2021, the Company entered into a Purchase and Sale Agreement (the “Mulligan Agreement”) with Mulligan Holdings, LLC, an Arizona limited liability company, to purchase real estate located in Amado, Arizona for total consideration of $4,550. Pursuant to the terms of the Mulligan Agreement, the purchase price shall be held in escrow pending the satisfactory results of feasibility studies and inspections of the property within 45 days of the closing of the agreement. On August 23, 2021, the Company entered into the First Amendment to the Mulligan Agreement extending the period for completing the feasibility studies and inspections to September 10, 2021, and the deadline for close of escrow to September 15, 2021. The transaction closed on September 7, 2021.
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