ACREAGE HOLDINGS, INC.
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to assist in the understanding and assessing the
trends and significant changes in the Company's results of operations and
financial condition. Historical results may not be indicative of future
performance. This discussion includes forward-looking statements that reflect
the Company's plans, estimates and beliefs. Such statements involve risks and
uncertainties. The Company's actual results may differ materially from those
contemplated by these forward-looking statements as a result of various factors,
including those set forth in "Risk Factors" in Item 1A of the Annual Report on
Form 10-K for the year ended December 31, 2020 (the "2020 Form 10-K"), and
"Cautionary Statement Regarding Forward-Looking Statements" set forth below.
This MD&A should be read in conjunction with the Company's unaudited condensed
consolidated financial statements for the three month period ended September 30,
2021 and related notes appearing elsewhere in this Quarterly Report on Form 10-Q
(this "Quarterly Report" or "Form 10-Q") and the 2020 Form 10-K. Financial
information presented in this MD&A is presented in thousands of U.S. dollars,
unless otherwise indicated.
Cautionary Statement Regarding Forward Looking-Statements
This Quarterly Report of the Company contains statements that include
forward-looking information and are forward-looking statements within the
meaning of applicable Canadian and United States securities legislation
("forward-looking statements"), including the Private Securities Litigation
Reform Act of 1995, that involve risks and uncertainties. All statements, other
than statements of historical fact, included herein are forward-looking
statements, including, for greater certainty, the on-going implications of the
novel coronavirus ("COVID-19") and statements regarding the proposed transaction
with Canopy Growth Corporation ("Canopy Growth"), including the anticipated
benefits and likelihood of completion thereof.
Generally, forward-looking statements may be identified by the use of
forward-looking terminology such as "plans", "expects" or "does not expect",
"proposed", "is expected", "budgets", "scheduled", "estimates", "forecasts",
"intends", "anticipates" or "does not anticipate", or "believes", or variations
of such words and phrases, or by the use of words or phrases which state that
certain actions, events or results may, could, would, or might occur or be
achieved. There can be no assurance that such forward-looking statements will
prove to be accurate, and actual results and future events could differ
materially from those anticipated in such forward-looking statements.
Forward-looking statements reflect Acreage's current beliefs and are based on
information currently available to Acreage and on assumptions Acreage believes
are reasonable. Forward-looking statements is subject to known and unknown
risks, uncertainties and other factors that may cause the actual results, level
of activity, performance or achievements of Acreage to be materially different
from those expressed or implied by such forward-looking statements. Such risks
and other factors may include, but are not limited to:
•the future implications to the business, financial results and performance of
the Company arising, directly or indirectly, from COVID-19;
•the anticipated benefits of the Amended Arrangement;
•the occurrence or waiver of the Triggering Event (as described in Note 13 of
the unaudited condensed consolidated financial statements);
•the ability of Acreage to satisfy the conditions to closing of the Acquisition;
•the ability of Acreage to meets its performance targets and financial
thresholds agreed upon with Canopy Growth as part of the Amended Arrangement,
including those that are conditions to closing the Acquisition;
•the likelihood of the Triggering Event being satisfied or waived by the outside
date;
•the likelihood of Canopy Growth completing the acquisition of the Fixed Shares
and/or Floating Shares;
•risks related to the ability to financing Acreage's business and fund its
obligations;
•other expectations and assumptions concerning the transactions contemplated
between Canopy Growth and Acreage;
•the available funds of Acreage and the anticipated use of such funds;
•the availability of financing opportunities for Acreage and the risks
associated with the completion thereof;
•regulatory and licensing risks;
•changes in general economic, business and political conditions, including
changes in the financial and stock markets;
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•risks related to infectious diseases, including the impacts of the novel
coronavirus;
•legal and regulatory risks inherent in the cannabis industry;
•risks associated with economic conditions, dependence on management and
currency risk;
•risks relating to U.S. regulatory landscape and enforcement related to
cannabis, including political risks;
•risks relating to anti-money laundering laws and regulation;
•other governmental and environmental regulation;
•public opinion and perception of the cannabis industry;
•risks related to contracts with third-party service providers;
•risks related to the enforceability of contracts and lack of access to U.S.
bankruptcy protections;
•reliance on the expertise and judgment of senior management of Acreage;
•risks related to proprietary intellectual property and potential infringement
by third parties;
•the concentrated voting control of Acreage's founder and the unpredictability
caused by Acreage's capital structure;
•risks relating to the management of growth;
•increasing competition in the industry;
•risks inherent in an agricultural business;
•risks relating to energy costs;
•risks associated to cannabis products manufactured for human consumption
including potential product recalls;
•reliance on key inputs, suppliers and skilled labor;
•cybersecurity risks;
•ability and constraints on marketing products;
•fraudulent activity by employees, contractors and consultants;
•tax and insurance related risks;
•risks related to the economy generally;
•risk of litigation;
•conflicts of interest;
•risks relating to certain remedies being limited and the difficulty of
enforcement judgments and effecting service outside of Canada ;
•risks related to future acquisitions or dispositions;
•sales by existing shareholders; and
•limited research and data relating to cannabis.
A description of additional assumptions used to develop such forward-looking
statements and a description of additional risk factors that may cause actual
results to differ materially from forward-looking statements can be found in
Part I, Item 1A of the Company's Annual Report on Form 10-K, under the heading
"Risk Factors", dated March 25, 2021 , as filed with the Securities and Exchange
Commission . Although Acreage has attempted to identify important factors that
could cause actual results to differ materially from those contained in
forward-looking statements, there may be other factors that cause results not to
be as anticipated, estimated or intended. Readers are cautioned that the
foregoing list of factors is not exhaustive. Readers are further cautioned not
to place undue reliance on forward-looking statements as there can be no
assurance that the plans, intentions or
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expectations upon which they are placed will occur. Forward-looking statements
contained in this Form 10-Q are expressly qualified by this cautionary
statement. The forward-looking statements contained in this Form 10-Q represent
the expectations of Acreage as of the date of this Form 10-Q and, accordingly,
are subject to change after such date. However, Acreage expressly disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as
expressly required by applicable securities law.
Management's discussion and analysis of financial condition and results of
operations is intended to help provide an understanding of the Company's
financial condition, changes in financial condition and results of operations.
This discussion is organized as follows:
•Overview-This section provides a general description of the Company's
businesses, its strategic objectives, as well as developments that occurred
during the three and nine months ended September 30, 2021 and 2020 that the
Company believes are important in understanding its results of operations and
financial condition or to disclose known trends.
•Results of Operations-This section provides an analysis of the Company's
results of operations for the three and nine months ended September 30, 2021 and
2020. This analysis is presented on a consolidated basis. In addition, a brief
description is provided of significant transactions and events that impact the
comparability of the results being analyzed.
•Liquidity and Capital Resources-This section provides an analysis of the
Company's cash flows for the nine months ended September 30, 2021 and 2020, as
well as a discussion on the Company's outstanding debt and commitments that
existed as of September 30, 2021 . Included in the discussion of outstanding debt
is a discussion of the amount of financial capacity available to fund the
Company's future commitments and obligations, as well as a discussion of other
financing arrangements.
Overview
Acreage, a vertically integrated, multi-state operator of cannabis licenses and
assets in the U.S , was continued into the Province of British Columbia under the
Business Corporations Act (British Columbia ). Acreage Fixed Shares and Floating
Shares (as such terms are defined at Note 13 of the unaudited condensed
consolidated financial statements) are each listed on the Canadian Securities
Exchange under the symbols "ACRG.A.U" and "ACRG.B.U", respectively, and are
quoted on the OTCQX® Best Market by OTC Markets Group under the symbols "ACRHF"
and "ACRDF", respectively and on the Open Market of the Frankfurt Stock Exchange
under the symbols "0VZ1" and "0VZ2", respectively. Acreage operates through its
consolidated subsidiary High Street Capital Partners, LLC ("HSCP"), a Delaware
limited liability company. HSCP, which does business as "Acreage Holdings ", was
formed on April 29, 2014 . The Company became an indirect parent of HSCP on
November 14, 2018 in connection with a reverse takeover ("RTO") transaction. The
Company's operations include (i) cultivating cannabis plants, (ii) manufacturing
branded consumer products, (iii) distributing cannabis flower and manufactured
products, and (iv) retailing high-quality, effective and dosable cannabis
products to consumers. The Company appeals to medical and adult-use customers
through brand strategies intended to build trust and loyalty.
As of September 30, 2021 , Acreage owned and operated a total of 22 dispensaries
- five dispensaries in Oregon (three in Portland , one in Eugene and one in
Springfield ), four in New York (Buffalo , Farmingdale , Middletown and Queens ),
three in New Jersey (Atlantic City , Egg Harbor and Williamstown ), three in
Connecticut (Bethel , South Windsor and Uncasville ), two in Massachusetts
(Worcester and Shrewsbury ), two in Illinois (Chicago and Rolling Meadows ), and
three in Maine (Gardiner , Portland and South Portland ). As of September 30,
2021 , Acreage owned and operated a total of 6 cultivation and processing
facilities in Oakland, California , Sinking Spring, Pennsylvania , Sterling,
Massachusetts , Syracuse, New York , Freeport, Illinois , and Egg Harbor, New
Jersey . Acreage also collected management and consulting services revenues,
substantially all in Maine and New Hampshire .
Strategic Priorities
The Company believes its refocused strategy is the key to continued improvements
in its financial results and shareholder value. The Company remains focused on
three key strategic objectives - driving profitability, strengthening the
balance sheet, and accelerating growth in its core markets.
Driving Profitability: The Company's focus on improving operational and
financial results has resulted in generally improving profitability. Management
continues to diligently control costs, improve operational efficiencies, and
accelerate organic growth in its core markets to continue to report improved
profitability going forward.
Strengthening the Balance Sheet: Strengthening the balance sheet is key to both
providing the Company with the necessary capital to achieve its operational
plans and building shareholder confidence. The Company has worked to ensure that
sufficient
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capital has been available when needed. Going forward, the Company will monitor
the capital markets and utilize opportunities to access both debt or equity when
it is necessary and advantageous to do so.
Accelerating Growth in Core Markets: Through prior acquisitions and capital
expenditures, management believes Acreage is well positioned for future success
in several key markets as regulations regarding the use of cannabis continue to
evolve. The Company will continue to focus its growth on its core markets where
it can take advantage of and expand on the presence already established.
Highlights from the three months ended September 30, 2021 :
•The Company achieved total consolidated revenue growth of 52% as compared with
the three months ended September 30, 2020 . On a sequential basis, the Company
achieved total consolidated revenue growth of 9% compared with the three months
ended June 30, 2021 .
•Adjusted EBITDA for the three months ended September 30, 2021 was $6.5 million
compared to an adjusted EBITDA loss of $6.9 million in the same period in 2020.
This marks the third consecutive quarter of positive adjusted EBITDA for the
company and validates management's refocused strategic plan.
•Hurricane Ida caused extensive damage to the Company's cultivation facility
located in Sewell, New Jersey , which was nearing the completion of its
construction. As a result, the Company wrote off the value of the capital assets
at the Sewell, New Jersey locations and incurred a one-time charge, net of
expected insurance proceeds of $2.3 million .
•The Company entered into a definitive agreement and management services
agreements to sell, upon regulatory approval, four retail dispensaries in Oregon
for total consideration of $6.5 million ,
•Subsequent to September 30, 2021 , the Company completed the acquisition of
Greenleaf Apothecaries, LLC , Greenleaf Therapeutics, LLC and Greenleaf Gardens,
LLC (together "Greenleaf), an operator of cultivation, processing and retail
facilities in Ohio ,
Additional highlights from the nine months ended September 30, 2021 :
•The Company achieved total consolidated revenue growth of 57% as compared with
the nine months ended September 30, 2020 .
•Adjusted EBITDA for the nine months ended September 30, 2021 was $16.2 million
compared to an adjusted EBITDA loss of $26.0 million in the same period in 2020.
•The Company opened its third New Jersey based The Botanist dispensary in
Williamstown, New Jersey .
•The Company completed the acquisition of 100% of CWG Botanicals, Inc. ("CWG"),
an adult-use cannabis cultivation and processing operations in the state of
California .
•The Company completed the sale of its operations in Florida for aggregate
proceeds of $60.0 million , which is consistent with its overall strategy to
focus on its core states.
•The Company agreed to sell its dispensary in Powell , Oregon and its cultivation
and processing facility in Medford, Oregon .
•The Company utilized the proceeds from the sale of Acreage Florida and its
restricted cash to strengthen its balance sheet. During the nine months ended
September 30, 2021 , the Company reduced its external debt by $46.3 million .
•The Company reached an agreement with Medterra CBD, LLC , one of the largest CBD
companies in the industry, that.will allow Acreage Holdings to tap into
Medterra's innovation pipeline, high-quality CBD, and significant e-commerce
platform for nationwide distribution of a suite of branded CBD products.
Operational and Regulation Overview
The Company believes its operations are in material compliance with all
applicable state and local laws, regulations and licensing requirements in the
states in which it operates. However, cannabis is illegal under U.S. federal
law. Substantially all of the Company's revenue is derived from U.S. cannabis
operations. For information about risks related to U.S. cannabis operations,
please refer to Item 1A of the Company's Annual Report on Form 10-K for the year
ended December 31, 2020 .
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Results of Operations for Three Months Ended September 30, 2021 and 2020
The following table presents selected financial data derived from the unaudited
condensed consolidated financial statements of the Company for the three and
nine months ended September 30, 2021 and 2020. The selected financial
information set out below may not be indicative of the Company's future
performance.
Summary Results of Operations Better/(Worse) Better/(Worse)
in thousands, except per Three Months Ended September 2021 vs. 2020 2021 vs. 2020
share amounts 30, Nine Months Ended September 30,
2021 2020 $ % 2021 2020 $ %
Revenues, net $ 48,151 $ 31,742 $ 16,409 52 % $ 130,762 $ 83,039 $ 47,723 57 %
Operating loss (6,496) (38,580) 32,084 83 % (11,444) (329,197) 317,753 97 %
Net loss attributable to
Acreage (12,297) (40,548) 28,251 70 % (22,657) (249,694) 227,037 91 %
Basic and diluted loss per
share attributable to Acreage $ (0.11) $ (0.39) $ 0.28 72 % $ (0.21) $ (2.54) $ 2.33 92 %
Revenues, Cost of goods sold and Gross margin
The Company derives its revenues from sales of cannabis and cannabis-infused
products through retail dispensary, wholesale and manufacturing and cultivation
businesses, as well as from management or consulting fees from entities for whom
the Company provides management or consulting services.
Gross profit is revenue less cost of goods sold. Cost of goods sold includes
costs directly attributable to inventory sold such as direct material, labor,
and overhead, including depreciation. Such costs are further affected by various
state regulations that limit the sourcing and procurement of cannabis and
cannabis-related products, which may create fluctuations in gross profit over
comparative periods as the regulatory environment changes.
Better/(Worse) Better/(Worse)
in thousands Three Months Ended September 30, 2021 vs. 2020 Nine Months Ended September 30, 2021 vs. 2020
2021 2020 $ % 2021 2020 $ %
Retail revenue, net $ 30,794 $ 23,914 $ 6,880 29 % $ 85,038 $ 61,362 $ 23,676 39 %
Wholesale revenue, net 17,077 7,798 9,279 119 % 42,634 21,513 21,121 98 %
Other revenue, net 280 30 250 833 % 3,090 164 2,926 n/m
Total revenues, net $ 48,151 $ 31,742 $ 16,409 52 % $ 130,762 $ 83,039 $ 47,723 57 %
Cost of goods sold, retail (16,279) (14,134) (2,145) (15) % (43,412) (37,004) (6,408) (17) %
Cost of goods sold, wholesale (8,069) (4,133) (3,936) (95) % (19,049) (11,395) (7,654) (67) %
Total cost of goods sold $ (24,348) $ (18,267) $ (6,081) (33) % $ (62,461) $ (48,399) $ (14,062) (29) %
Gross profit $ 23,803 $ 13,475 $ 10,328 77 % $ 68,301 $ 34,640 $ 33,661 97 %
Gross margin 49 % 43 % 6 % 52 % 42 % 10 %
Total revenues increased by $16,409 or 52% for the three months ended September
30, 2021 , as compared to the corresponding period of fiscal 2020. On a
comparative basis, total revenue increased by $5,961 due to the acquisitions of
(i) certain Maine operations and (ii) CWG in April 2021 and was offset by
decreases of $542 due to the divestitures/closures of (i) Maryland Medicinal
Research & Caring, LLC and Acreage North Dakota, LLC in May 2020 , (ii) Form
Factory in March 2020 and iii) Acreage Florida in April 2021 . Additionally,
revenue for the three months ended September 30, 2021 for the Company's
operations in Oregon , which are considered non-core and are being held for sale,
decreased by $1,035 as compared to the corresponding period in fiscal 2020.
Excluding these acquisitions and divestitures/closures and the impact of revenue
declines in the Company's Oregon operations, total revenue increased by $12,025
or 42% for the three months ended September 30, 2021 , as compared to the
corresponding period of fiscal 2020.
Retail revenue increased by $6,880 or 29% for the three months ended September
30, 2021 , as compared to the corresponding period of fiscal 2020. Excluding the
impact of acquisitions and divestitures/closures, retail revenue increased by
$3,746 for the three months ended September 30, 2021 , as compared to the
corresponding period of fiscal 2020. The remaining increase in
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retail revenue was primarily driven by increased demand and production across
various states, and new store openings and was partially offset by retail
revenue declines of $911 in non core states (Oregon ).
Wholesale revenue increased by 119% for the three months ended September 30,
2021 , as compared to the corresponding periods of fiscal 2020. The increased
wholesale revenue was primarily due to increased capacity, coupled with maturing
operations at the Company's Pennsylvania , Massachusetts , and Illinois
cultivation facilities. This resulted in higher yields and product mix in each
of the respective markets. Additionally, wholesale revenue for the three months
ended September 30, 2021 included $2,189 from CWG which was acquired in April
2021 .
On a year-to-date basis, total revenues for the nine months ended September 30,
2021 , increased by $47,723 or 57% as compared to the corresponding period of
fiscal 2020. On a comparative basis, total revenues increased by $18,651 due to
the acquisitions of (i) CCF in June 2020 , (ii) certain Maine operations and
(iii) CWG in May 2021 and was offset by decreases of $1,629 due to the
divestitures/closures of (i) Maryland Medicinal Research & Caring, LLC and
Acreage North Dakota, LLC in May 2020 , (ii) Form Factory in March 2020 and (iii)
Acreage Florida in April 2021 . Additionally, total revenues for the nine months
ended September 30, 2021 for the Company's operations in Oregon , which are
considered non-core and are being held for sale, decreased by $2,575 as compared
to the corresponding period in fiscal 2020. Excluding these acquisitions and
divestitures/closures and the impact of total revenue declines in the Company's
Oregon operations, total revenue increased by $33,275 or 46% for the nine months
ended September 30, 2021 , as compared to the corresponding period of fiscal
2020. Finally, total revenue for the nine months ended September 30, 2021
included $2,500 of management fees in New Hampshire , a portion of which related
to prior fiscal periods.
While total revenues increased 52%, total costs of goods sold only increased 33%
for the three months ended September 30, 2021 , as compared with the
corresponding period of fiscal 2020.
Retail cost of goods sold increased 15% for the three months ended September 30,
2021 , as compared to the corresponding period of fiscal 2020, and below the 29%
increase in retail revenue. The lower rate of growth for retail cost of goods
sold was due to the increased vertical integration of the Company's operations.
A greater portion of the product sold at the Company's retail dispensaries is
sourced internally from the Company's cultivation and processing operations.
Cost of goods sold for this internally produced product does not contain the
wholesale margin that would be paid if the Company had to source that same
product from external vendors.
Wholesale cost of goods sold increased 95% for the three months ended September
30, 2021 , as compared to the corresponding period of fiscal 2020, and below the
119% increase in wholesale revenue. While wholesale cost of goods sold increased
due to the volume increase associated with the wholesale revenue growth, the
rate of growth was lower as a result of production efficiencies being achieved.
In addition, wholesale cost of goods sold for the comparative period were driven
by the initial set up costs and consequential expansion impact of various
cultivation facilities that was not as significant in the current period.
On a year-to-date basis, while total revenues increased 57%, total costs of
goods sold only increased 29% for the nine months ended September 30, 2021 , as
compared with the corresponding period of fiscal 2020. The reasons for the
increases in costs of goods sold and for the lower rate of growth of costs of
goods sold compared to the revenue growth, for the nine months ended September
30, 2021 , are consistent with the reasons for the three months ended September
30, 2021 .
Gross margin for the three months ended September 30, 2021 was 49.4%, compared
to 42.5% for the three months ended September 30, 2020 . Gross margin for the
nine months ended September 30, 2021 was 52.2%, compared to 41.7% for the nine
months ended September 30, 2020 . The increase in gross margin was driven by the
factors discussed above.
Revenue by geography
While the Company operates under one operating segment, the production and sale
of cannabis products, the below revenue breakout by geography is included as
management believes it provides relevant and useful information to investors.
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Revenue by region Better/(Worse) Better/(Worse)
Three Months Ended September 2021 vs. 2020 2021 vs. 2020
in thousands 30, Nine Months Ended September 30,
2021 2020 $ % 2021 2020 $ %
New England $ 19,892 $ 12,598 $ 7,294 58 % $ 56,070 $ 36,520 $ 19,550 54 %
Mid-Atlantic 14,695 11,217 3,478 31 % 43,474 25,622 17,852 70 %
Midwest 10,012 4,810 5,202 108 % 22,333 12,050 10,283 85 %
West 3,552 2,700 852 32 % 8,264 8,082 182 2 %
South - 417 (417) n/m 621 776 (155) (20)
Total revenues, net $ 48,151 $ 31,742 $ 16,409 52 % $ 130,762 $ 83,039 $ 47,723 57 %
n/m - Not Meaningful
Total operating expenses
Total operating expenses consist primarily of compensation expense at the Company's corporate offices as well as operating subsidiaries, impairment losses, professional fees, which includes, but is not limited to, legal and accounting services, depreciation and other general and administrative expenses. Operating expenses
Better/(Worse) Better/(Worse)
Three Months Ended September 2021 vs. 2020 2021 vs. 2020
in thousands 30, Nine Months Ended September 30,
2021 2020 $ % 2021 2020 $ %
General and administrative
6,353 43 % $ 23,067 $ 40,237 $ 17,170 43 %
Compensation expense 10,699 8,306 (2,393) (29) % 32,236 30,740 (1,496) (5) %
Equity-based compensation
expense 4,168 10,445 6,277 60 % 17,191 65,369 48,178 74 %
Marketing 583 46 (537) n/m 992 1,514 522 34 %
Impairments, net 2,339 - (2,339) n/m 3,157 187,775 184,618 98
Loss on notes receivable - - - n/m 1,726 8,161 6,435 79
Write down (recovery) of
assets held-for-sale - 2,893 2,893 n/m (8,616) 11,003 19,619 n/m
Legal settlements, net - 14,150 14,150 n/m 322 14,150 13,828 98 %
Depreciation and
amortization 4,044 1,396 (2,648) (190) % 9,670 4,888 (4,782) (98) %
Total operating expenses $ 30,299 $ 52,055 $ 21,756 42 % $ 79,745 $ 363,837 $ 284,092 78 %
n/m - Not Meaningful
Total operating expenses for the three months ended September 30, 2021 were
$30,299 , a decrease of $21,756 or 42% from the corresponding period of fiscal
2020. The primary drivers of the decrease in operating expenses were as follows:
•General and administrative expenses decreased $6,353 during the three months
ended September 30, 2021 , as compared to the corresponding period of fiscal
2020, primarily due to a reduction of legal fees and rental and lease expenses
incurred.
•Compensation expense increased $(2,393) during the three months ended September
30, 2021 , as compared to the corresponding period of fiscal 2020, primarily due
additional staff required to manage the Company's expanded operations, including
the acquisitions of certain Maine operations since the comparable period and CWG
in May 2021 . Additionally, compensation expense in the comparable period of 2020
was reduced as a result of reorganization efforts, including a suspension of
operations at Form Factory and temporary staff reductions undertaken in response
to the COVID-19 pandemic.
•Equity-based compensation expense decreased $6,277 during the three months
ended September 30, 2021 , as compared to the corresponding period of fiscal
2020, primarily due to benefits associated with the reorganization efforts
undertaken in the previous period, resulting in the acceleration of restricted
share vesting for certain employees and previously issued awards becoming fully
vested and cancelled in the prior periods.
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•Impairments, net for the three months ended September 30, 2021 increased $2,339
due to the write-off of capital assets at the Sewell, New Jersey locations
resulting from damage by Hurricane Ida. The loss was recognized net of expected
insurance proceeds.
•During the three months ended September 30, 2020 , the Company determined
certain businesses and assets met the held-for-sale criteria. In accordance with
ASC 360-10, Property, Plant and Equipment, the assessed disposal groups for such
assets held-for-sale were written down to fair value less costs to sell,
resulting in the recognition of write down charges. No such write-down was
required for the three months ended September 30, 2021 .
•During the three months ended September 30, 2020 , the Company recorded a charge
of $14,150 due to the recognition of litigation accruals for various matters. No
such provision was required for the three months ended September 30, 2021 .
•Depreciation and amortization expenses increased $(2,648) during the three
months ended September 30, 2021 , compared to the corresponding period of fiscal
2020, primarily due to an acceleration of the amortization of certain intangible
assets as a result of a reduction in the expected useful lives of such assets.
Total operating expenses for the nine months ended September 30, 2021 were
$79,745 , a decrease of $284,092 or 78% from the corresponding period of fiscal
2020. The primary drivers of the decrease in operating expenses were as follows:
•General and administrative expenses decreased $17,170 during the six months
ended September 30, 2021 , as compared to the corresponding period of fiscal
2020, primarily due to a reduction of legal fees and rental and lease expenses
incurred.
•Compensation expense increased slightly by $(1,496) for the nine months ended
September 30, 2021 , as compared to the corresponding period of fiscal 2020 Staff
increases due to additional staff required to manage the Company's expanded
operations were somewhat offset by reorganization efforts undertaken in previous
periods.
•Equity-based compensation expense decreased $48,178 during the nine months
ended September 30, 2021 , as compared to the corresponding period of fiscal
2020, primarily due to benefits associated with the reorganization efforts
undertaken in the previous period, resulting in the acceleration of restricted
share vesting for certain employees and previously issued awards becoming fully
vested and cancelled in the prior periods.
•Impairments, net for the nine months ended September 30, 2021 included a $2,339
write-off of the capital assets at the Sewell, New Jersey locations resulting
from damage by Hurricane Ida. The loss was recognized net of expected insurance
proceeds. Impairment expenses, net of $187,775 for the nine months ended
September 30, 2020 included impairment charges related to interim intangible and
goodwill impairment testing undertaken in the prior period due to the triggering
event caused by the COVID-19 pandemic, as further discussed in Note 4 in the
unaudited condensed consolidated financial statements.
•The loss on notes receivable of $1,726 for the nine months ended September 30,
2021 is due to the determination that the payment for certain notes receivables
was doubtful based on the most recent information available to the Company. The
loss on notes receivable for the comparable period in 2020 of $8,161 was due to
the write-off of a notes receivable that the Company determined was no longer
collectible.
•During the nine months ended September 30, 2020 , the Company determined certain
businesses and assets met the held-for-sale criteria. In accordance with ASC
360-10, Property, Plant and Equipment, the assessed disposal groups for such
assets held-for-sale were written down to fair value less costs to sell,
resulting in the recognition of write down charges of $11,003 . No such
write-down was required for the nine months ended September 30, 2021 . During the
nine months ended September 30, 2021 , the Company determined that the fair value
less costs to sell of its Acreage Florida disposal group increased $8,616 in
excess of its value previously written down value. Accordingly, the Company
recognized a recovery of assets held-for-sale related to its Acreage Florida
disposal group related to the previously recognized write-downs. Refer to Notes
3 and 17 in the unaudited condensed consolidated financial statements for
further discussion.
•During the nine months ended September 30, 2020 , the Company recorded a charge
of $14,150 due to the recognition of litigation accruals for various matters. No
such provision was required for the nine months ended September 30, 2021 .
•Depreciation and amortization expenses increased during the nine months ended
September 30, 2021 , compared to the corresponding period of fiscal 2020,
primarily due to an acceleration of the amortization of certain intangible
assets as a result of a reduction in the expected useful lives of such assets.
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Total other (loss) income
Other (loss) income Better/(Worse) Better/(Worse)
Three Months Ended September 2021 vs. 2020 Nine Months Ended September 2021 vs. 2020
in thousands 30, 30,
2021 2020 $ % 2021 2020 $ %
(Loss) income from
investments, net $ 489 $ (433) $ 922 n/m $ (777) $ (195) $ (582) (298) %
Interest income from loans
receivable 1,067 1,606 (539) (34) % 4,125 5,083 (958) (19) %
Interest expense (3,620) (6,147) 2,527 41 % (14,072) (11,106) (2,966) (27)
Other income (loss), net 81 (656) 737 n/m 7,825 (853) 8,678 n/m
Total other income (loss)
3,647 65 %$ (2,899) $ (7,071) $ 4,172 59 n/m - Not Meaningful Total other loss for the three months endedSeptember 30, 2021 was$(1,983) , an decrease of$3,647 from the corresponding period of fiscal 2020. The primary drivers of the increase in other loss were as follows: •Income from investments, net of$489 for the three months endedSeptember 30, 2021 was primarily due to gains in the fair market value of investments in equity of entities where the Company does not have significant influence or control. •Interest income from loans receivable of$1,067 for the three months endedSeptember 30, 2021 has declined$(539) from the corresponding period of fiscal 2020 due to a reduction in the value of loans receivable outstanding. •Interest expense, net of$(3,620) decreased$2,527 during the three months endedSeptember 30, 2021 , compared to the corresponding period of fiscal 2020, due to the Company's decreased level of net debt coupled with reduced rates of interest on the Company's debt obligations. Total other income (loss) for the nine months endedSeptember 30, 2021 was$(2,899) , a decrease of$4,172 from the other income (loss) recognized in the corresponding period of fiscal 2020. The primary drivers of the decrease in other income (loss) for the nine months endedSeptember 30, 2021 were as follows: •Loss from investments, net of$(777) for the nine months endedSeptember 30, 2021 was primarily due to declines in the fair market value of investments in equity of entities where the Company does not have significant influence or control. •Interest income from loans receivable of$4,125 for the nine months endedSeptember 30, 2021 has declined$(958) from the corresponding period of fiscal 2020 due to a reduction in the value of loans receivable outstanding. •Interest expense, net of$(14,072) increased$(2,966) during the nine months endedSeptember 30, 2021 , compared to the corresponding period of fiscal 2020, due to the Company's increased debt financing transactions primarily undertaken subsequent toJune 30, 2020 and somewhat offset with reduced rates of interest on the Company's debt obligations for the nine months endedSeptember 30, 2021 . •Other income (loss), net for the nine months endedSeptember 30, 2021 of$7,825 included a gain on the sale of Acreage Florida of$11,682 , partially offset by i) a loss on the subsequent sale of notes receivable received as consideration from the buyer of Acreage Florida of approximately$2,000 , and ii)iii) a loss of$1,644 on the disposal of capital assets. 48 --------------------------------------------------------------------------------
Net loss
Net loss Better/(Worse) Better/(Worse)
in thousands Three Months Ended September 30, 2021 vs. 2020 Nine Months Ended September 30, 2021 vs. 2020
2021 2020 $ % 2021 2020 $ %
Net loss $ (14,058) $ (48,036) $ 33,978 71 % $ (26,004) $ (314,635) $ 288,631 92 %
Less: net loss attributable to
non-controlling interests (1,761) (7,488) 5,727 76 % (3,347) (64,941) 61,594 95 %
Net loss attributable to
Acreage Holdings, Inc. $ (12,297) $ (40,548) $ 28,251 70 % $ (22,657) $ (249,694) $ 227,037 91 %
The decreases in net loss are driven by the factors discussed above.
Non-GAAP Information
This statement includes Adjusted EBITDA, which is a non-GAAP performance measure
that we use to supplement our results presented in accordance with U.S. GAAP.
The Company uses Adjusted EBITDA to evaluate its actual operating performance
and for planning and forecasting future periods. The Company believes that the
adjusted results presented provide relevant and useful information for investors
because they clarify the Company's actual operating performance, make it easier
to compare our results with those of other companies and allow investors to
review performance in the same way as our management. Since these measures are
not calculated in accordance with U.S. GAAP, they should not be considered in
isolation of, or as a substitute for, net loss or our other reported results of
operations as reported under U.S. GAAP as indicators of our performance, and
they may not be comparable to similarly named measures from other companies.
The Company defines Adjusted EBITDA as net income before interest, income taxes
and, depreciation and amortization and excluding the following: (i) income from
investments, net (the majority of the Company's investment income relates to
remeasurement to fair value of previously-held interests in connection with our
roll-up of affiliates, and the Company expects income from investments to be a
non-recurring item as its legacy investment holdings diminish), (ii)
equity-based compensation expense, (iii) non-cash impairment losses, (iv)
transaction costs and (v) other non-recurring expenses (other expenses and
income not expected to recur).
49
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Adjusted EBITDA Better/(Worse) Better/(Worse)
in thousands Three Months Ended September 30, 2021 vs. 2020 Nine Months Ended September 30, 2021 vs. 2020
2021 2020 $ % 2021 2020 $ %
Net loss (U.S. GAAP) $ (14,058) $ (48,036) $ (26,004) $ (314,635)
Income tax expense (benefit) 5,579 3,826 11,661 (21,633)
Interest (income) expense, net 2,553 4,541 9,947 6,023
Depreciation and amortization 4,590 1,396 11,384 4,888
EBITDA (non-GAAP) $ (1,336) $ (38,273) $ 36,937 97 % $ 6,988 $ (325,357) $ 332,345 n/m
Adjusting items:
(Income) loss from
investments, net (489) 433 777 195
Impairments, net - - 818 187,775
Loss on Sewell facility 2,339 - 2,339 -
Loss on notes receivable - - 1,726 8,161
Write down (recovery) of
assets held-for-sale - 2,893 (8,616) 11,003
Equity-based compensation
expense 4,168 10,445 17,191 65,370
Legal settlements, net - 14,150 322 14,150
Gain on business divestiture (109) - (11,791) -
Transaction costs - 3,114 - 3,114
Other non-recurring expenses 1,924 355 6,425 9,605
Adjusted EBITDA (non-GAAP) $ 6,497 $ (6,883) $ 13,380 n/m $ 16,179 $ (25,984) $ 42,163 n/m
n/m - Not Meaningful
The increases in adjusted EBITDA are driven by the factors discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Sources and uses of cash
The Company's primary uses of capital include operating expenses, capital
expenditures and the servicing of outstanding debt. The Company's primary
sources of capital include funds generated by cannabis sales as well as
financing activities. Through September 30, 2021 , the Company had primarily used
private financing as a source of liquidity for short-term working capital needs
and general corporate purposes.
In March 2021 , the Company extended the maturity date related to $21,000 of the
$22,000 aggregate amount of the loan transaction to June 30, 2021 , as described
in Note 10 to the unaudited condensed consolidated financial statements.
In June 2021 , the Company repaid the 3.55% credit facility of $21,000 and the
3.55% credit facility collateral (related party) of $22,000 . Certain of the cash
proceeds from the sale of Acreage Florida, including the proceeds from the sale
of the notes receivable received from the buyer of Acreage Florida as
consideration, and the Company's restricted cash were utilized to repay these
debt obligations.
As of September 30, 2021 , the Company had cash of $27,868 (not including
approximately $1,098 of restricted cash and approximately $518 of cash held for
sale and included in current assets held for sale). The Company's ability to
fund its operations, capital expenditures, acquisitions, and other obligations
depends on its future operating performance and ability to obtain financing,
which are subject to prevailing economic conditions, as well as financial,
business and other factors, some of which are beyond the Company's control.
The Company expects that its cash on hand and cash flows from operations, along
with its ability to obtain private and/or public financing, will be adequate to
support the capital needs of the existing operations as well as expansion plans
for the next 12 months. While the Company's liquidity risk has increased since
its RTO transaction as a result of the Company's rapid growth and continued
expansion, which resulted in negative operating cash flow for the year ended
December 31, 2020 , the Company believes it has alleviated the risk. Please refer
to the disclosures under "Basis of presentation and going concern" in Note 2 to
the unaudited condensed consolidated financial statements.
Cash flows
Cash and cash equivalents, restricted cash, and cash held for sale were $29,484
as of September 30, 2021 , an increase of $38,975 from September 30, 2020 . The
following table summarizes the change in cash, cash equivalents, restricted
cash, and cash held for sale for the nine months ended September 30, 2021 and
2020.
Cash flows Better/(Worse)
in thousands Nine Months Ended September 30, 2021 vs. 2020
2021 2020 $ %
Net cash used in operating activities
$ 25,896 59 % Net cash provided by (used in) investing activities 34,152 (63,681) 97,833 n/m Net cash (used in) provided by financing activities (40,995) 149,748 (190,743) n/m Net (decrease) increase in cash, cash equivalents, restricted cash, and cash held for sale$ (25,155) $ 41,859 $ (67,014) n/m n/m - Not Meaningful Net cash used in operating activities For the nine months endedSeptember 30, 2021 , the Company used$18,312 of net cash in operating activities. This represented a reduction of$25,896 when compared to the corresponding period of fiscal 2020. Excluding non-cash items such as impairments, equity based compensation, write-offs, gains and losses on disposals and depreciation and amortization in the net operating income (loss), this improved operating income was a result of revenue increases exceeding increases in costs of goods sold and a decrease in non-cash expenditures. Additionally, for both the nine months endedSeptember 30, 2021 and 2020, cash used in operating activity included cash used to fund increases in working capital due to the expanded operations. 51 -------------------------------------------------------------------------------- Net cash (used in) provided by investing activities For the nine months endedSeptember 30, 2021 , the Company provided$34,152 of net cash through investing activities. This represented an improvement of$97,833 when compared to the corresponding period of fiscal 2020. Cash provided by investing activities for the nine months endedSeptember 30, 2021 , was primarily driven by$27,535 spent on capital expenditures to build out the Company's owned operations but this was more than offset by (i)$9,307 collected from entities, net of advances, and (ii)$50,407 net proceeds from the sale of assets.. Cash used in investing activities during the nine months endedSeptember 30, 2020 , was primarily driven by (i)$7,904 spent on capital expenditures to build out the Company's owned operations, (ii)$13,958 advanced to entities, net of collections, and (iii)$9,983 on business acquisitions. Net cash (used in) provided by financing activities For the nine months endedSeptember 30, 2021 , the Company used$40,995 of net cash in financing activities. This represented a decrease of$115,928 when compared to the corresponding period of fiscal 2020. Cash used in financing activities during the nine months endedSeptember 30, 2021 was primarily driven by the repayment of debt of$46,321 , partially offset by$6,301 related to financing proceeds. Cash provided by financing activities during the nine months endedSeptember 30, 2020 was primarily driven by (i)$134,000 raised through debt financing, (ii)$27,887 through equity transactions, (iii)$22,000 collateral received from prior financing arrangements and (iv) offset by$30,822 repayment of debt. Capital Resources Capital structure and debt The Company's debt outstanding as ofSeptember 30, 2021 was as follows: Debt balances September 30, 2021 Seller's notes $ 2,581 Financing liability (related party)
15,253
Finance lease liabilities 5,228
7.5% Loan due 2023 (related party) 32,328
6.1% Secured debenture due 2030 (related party) 45,936
Hempco Foros promissory note -
Senior secured term loan facility 23,482
Construction financing loan 11,255
Canwell promissory note 6,500
Total debt $ 142,563
Less: current portion of debt 16,377
Total long-term debt $ 126,186
Commitments and contingencies Refer to Note 13 of the unaudited condensed consolidated financial statements.
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