Unaudited Condensed Interim Consolidated Financial Statements
As of and for the Three and Six Months Ended
June 30, 2021 and 2020
(Expressed in Thousands United States Dollars Unless Otherwise Stated)
Page(s) | |
Condensed Interim Consolidated Financial Statements | |
Condensed Interim Consolidated Statements of Financial Position (Unaudited) | 1 |
Condensed Interim Consolidated Statements of Profits or Losses and Other Comprehensive Income (Unaudited) | 2 |
Condensed Interim Consolidated Statements of Changes in Equity (Unaudited) | 3 |
Condensed Interim Consolidated Statements of Cash Flows (Unaudited) | 4 |
Notes to Condensed Interim Consolidated Financial Statements | 5-37 |
Curaleaf Holdings, Inc.
Condensed Interim Consolidated Statements of Financial Position
Unaudited
(in thousands)
June 30, | December 31, | |||||||||||
Note | 2021 | 2020 | ||||||||||
Assets | Unaudited | Audited | ||||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | $ | 333,791 | $ | 73,542 | ||||||||
Accounts receivable, net | 3 | 49,672 | 28,830 | |||||||||
Inventories, net | 5 | 304,648 | 197,991 | |||||||||
Biological assets | 6, 20 | 64,263 | 46,210 | |||||||||
Assets held for sale | 7 | 31,877 | 58,504 | |||||||||
Prepaid expenses and other current assets | 21,282 | 10,140 | ||||||||||
Current portion of notes receivable | 8 | - | 2,645 | |||||||||
Total current assets | 805,533 | 417,862 | ||||||||||
Deferred tax asset | 6,266 | 5,528 | ||||||||||
Notes receivable | 8 | 2,602 | 2,000 | |||||||||
Property, plant and equipment, net | 9 | 306,573 | 242,855 | |||||||||
Right-of-use assets, net | 18 | 285,549 | 267,168 | |||||||||
Intangible assets, net | 10 | 1,116,716 | 797,401 | |||||||||
Goodwill | 10 | 583,250 | 470,144 | |||||||||
Investments | 4 | 23,493 | 16,264 | |||||||||
Prepaid acquisition consideration | 4 | - | 132,234 | |||||||||
Other assets | 24,711 | 35,135 | ||||||||||
Total assets | $ | 3,154,693 | $ | 2,386,591 | ||||||||
Liabilities and shareholders' equity | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 42,957 | $ | 47,043 | ||||||||
Accrued expenses | 59,672 | 57,475 | ||||||||||
Income tax payable | 63,384 | 79,649 | ||||||||||
Current portion of lease liability | 18 | 18,312 | 15,710 | |||||||||
Current portion of notes payable | 11 | 1,706 | 6,500 | |||||||||
Current contingent consideration liability | 4, 18 | 9,155 | - | |||||||||
Liabilities held for sale | 7 | 7,077 | 7,181 | |||||||||
Other current liabilities | 20 | 13,083 | 6,568 | |||||||||
Total current liabilities | 215,346 | 220,126 | ||||||||||
Deferred tax liability | 340,358 | 226,465 | ||||||||||
Notes payable | 11 | 336,452 | 285,001 | |||||||||
Lease liability | 18 | 293,190 | 270,495 | |||||||||
Non-controlling interest redemption liability | 20 | 129,066 | 2,694 | |||||||||
Contingent consideration liability | 4, 20 | 29,106 | 1,898 | |||||||||
Other long term liability | 4,098 | 3,698 | ||||||||||
Total liabilities | 1,347,616 | 1,010,377 | ||||||||||
Shareholders' equity: | ||||||||||||
Share capital | 2,267,167 | 1,754,412 | ||||||||||
Treasury shares | (5,208 | ) | (5,208 | ) | ||||||||
Reserves | (239,265 | ) | (177,744 | ) | ||||||||
Accumulated other comprehensive income | 2,180 | - | ||||||||||
Accumulated deficit | (219,098 | ) | (194,645 | ) | ||||||||
Total Curaleaf Holdings, Inc. shareholders' equity | 12 | 1,805,776 | 1,376,815 | |||||||||
Redeemable non-controlling interest contingency | 20 | (129,066 | ) | (2,694 | ) | |||||||
Non-controlling interest | 21 | 130,367 | 2,093 | |||||||||
Total shareholders' equity | 1,807,077 | 1,376,214 | ||||||||||
Total liabilities and shareholders' equity | $ | 3,154,693 | $ | 2,386,591 |
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.
1
Curaleaf Holdings, Inc.
Condensed Interim Consolidated Statements of Profits or Losses and Other Comprehensive Income
Unaudited
(in thousands, except for share and per share amounts)
Three months ended | Six months ended | |||||||||||||||||||
June 30, | June 30, | |||||||||||||||||||
Note | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Retail and wholesale revenues | $ | 311,494 | $ | 99,579 | $ | 571,377 | $ | 176,635 | ||||||||||||
Management fee income | 711 | 17,901 | 1,148 | 37,342 | ||||||||||||||||
Total revenues | 312,205 | 117,480 | 572,525 | 213,977 | ||||||||||||||||
Cost of goods sold | 156,967 | 56,844 | 288,820 | 100,856 | ||||||||||||||||
Gross profit before impact of biological assets | 155,238 | 60,636 | 283,705 | 113,121 | ||||||||||||||||
Realized fair value amounts included in inventory sold | (81,803 | ) | (22,423 | ) | (150,717 | ) | (43,613 | ) | ||||||||||||
Unrealized fair value gain on growth of biological assets | 6 | 111,060 | 43,014 | 192,321 | 79,761 | |||||||||||||||
Gross profit | 184,495 | 81,227 | 325,309 | 149,269 | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||
Selling, general and administrative | 14 | 87,959 | 40,466 | 168,052 | 86,324 | |||||||||||||||
Share-based compensation | 13 | 18,370 | 4,833 | 23,277 | 9,334 | |||||||||||||||
Depreciation and amortization | 9, 10, 18 | 26,280 | 14,237 | 48,392 | 26,924 | |||||||||||||||
Total operating expenses | 132,609 | 59,536 | 239,721 | 122,582 | ||||||||||||||||
Income from operations | 51,886 | 21,691 | 85,588 | 26,687 | ||||||||||||||||
Other income (expense): | ||||||||||||||||||||
Interest income | 278 | 3,573 | 366 | 6,419 | ||||||||||||||||
Interest expense | 11 | (12,269 | ) | (11,357 | ) | (24,420 | ) | (21,849 | ) | |||||||||||
Interest expense related to lease liabilities | 18 | (9,339 | ) | (2,132 | ) | (17,899 | ) | (4,290 | ) | |||||||||||
Other income | 7, 11, 15 | 2,304 | (77 | ) | 2,719 | 2,529 | ||||||||||||||
Total other expense | (19,026 | ) | (9,993 | ) | (39,234 | ) | (17,191 | ) | ||||||||||||
Income (loss) before provision for income taxes | 32,860 | 11,698 | 46,354 | 9,496 | ||||||||||||||||
Income tax expense | (42,624 | ) | (13,534 | ) | (73,332 | ) | (26,783 | ) | ||||||||||||
Net loss | (9,764 | ) | (1,836 | ) | (26,978 | ) | (17,287 | ) | ||||||||||||
Less: Net income (loss) attributable to non-controlling interest | 21 | (2,524 | ) | 193 | (2,524 | ) | (170 | ) | ||||||||||||
Net loss attributable to Curaleaf Holdings, Inc. | $ | (7,240 | ) | $ | (2,029 | ) | $ | (24,454 | ) | $ | (17,117 | ) | ||||||||
Loss per share attributable to Curaleaf Holdings, Inc. - basic and diluted | 16 | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.04 | ) | $ | (0.03 | ) | |||||||
Weighted average common shares outstanding - basic and diluted | 16 | 701,668,932 | 533,192,806 | 691,909,375 | 520,446,921 | |||||||||||||||
Net loss | $ | (9,764 | ) | $ | (1,836 | ) | $ | (26,978 | ) | $ | (17,287 | ) | ||||||||
Foreign currency translation differences | 2,180 | - | 2,180 | - | ||||||||||||||||
Total comprehensive loss | $ | (7,584 | ) | $ | (1,836 | ) | $ | (24,798 | ) | $ | (17,287 | ) |
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.
2
Curaleaf Holdings, Inc.
Condensed Interim Consolidated Statements of Changes in Equity
Unaudited
(in thousands, except for share amounts)
Share Capital (Note 12) | Treasury | Share-Based | Other | Accumulated Other |
Total Curaleaf Holdings, Inc. |
Redeemable Non - Controlling Interest | Non-Controlling |
Redeemable Non-Controlling | Total | |||||||||||||||||||||||||||||||||||||||||||||||
# of Shares | Shares | Reserves | Reserves | Total | Comprehensive | Accumulated | Shareholders' | Contingency | Interest | Interest | Shareholders' | |||||||||||||||||||||||||||||||||||||||||||||
SVS | MVS | Amount | (Note 12) | (Note 13) | (Note 4) | Reserves | Income | Deficit | Equity | (Note 4) | (Note 4) | (Note 4) | Equity | |||||||||||||||||||||||||||||||||||||||||||
Balances as of December 31, 2019 | 366,114,366 | 103,970,705 | $ | 693,699 | $ | (5,208 | ) | $ | 20,517 | $ | (167,336 | ) | $ | (146,819 | ) | $ | - | $ | (132,910 | ) | $ | 408,762 | $ | (2,694 | ) | $ | 2,156 | $ | (4,778 | ) | $ | 403,446 | ||||||||||||||||||||||||
Issuance of shares in connection with acquisitions | 55,790,122 | - | 268,799 | - | - | - | - | - | - | 268,799 | - | - | - | 268,799 | ||||||||||||||||||||||||||||||||||||||||||
Minority buyouts | 3,788,920 | - | 25,752 | - | - | (16,490 | ) | (16,490 | ) | - | - | 9,262 | - | - | 1,710 | 10,972 | ||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 4,221,843 | - | 3,891 | - | (3,012 | ) | - | (3,012 | ) | - | - | 879 | - | - | - | 879 | ||||||||||||||||||||||||||||||||||||||||
Share-based compensation | - | - | - | - | 9,334 | - | 9,334 | - | - | 9,334 | - | - | - | 9,334 | ||||||||||||||||||||||||||||||||||||||||||
Non cash bonus | - | - | - | - | 1,518 | - | 1,518 | - | - | 1,518 | - | - | - | 1,518 | ||||||||||||||||||||||||||||||||||||||||||
Conversion of MVS to SVS | 10,000,000 | (10,000,000 | ) | - | - | - | - | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||
Net income (loss) | - | - | - | - | - | - | - | - | (17,117 | ) | (17,117 | ) | - | (640 | ) | 470 | (17,287 | ) | ||||||||||||||||||||||||||||||||||||||
Balances as of June 30, 2020 | 439,915,251 | 93,970,705 | $ | 992,141 | $ | (5,208 | ) | $ | 28,357 | $ | (183,826 | ) | $ | (155,469 | ) | $ | - | $ | (150,027 | ) | $ | 681,437 | $ | (2,694 | ) | $ | 1,516 | $ | (2,598 | ) | $ | 677,661 | ||||||||||||||||||||||||
Balances as of December 31, 2020 | 569,831,140 | 93,970,705 | $ | 1,754,412 | $ | (5,208 | ) | $ | 34,530 | $ | (212,274 | ) | $ | (177,744 | ) | $ | - | $ | (194,645 | ) | $ | 1,376,815 | $ | (2,694 | ) | $ | 2,093 | $ | - | $ | 1,376,214 | |||||||||||||||||||||||||
Issuance of shares in connection with public offering | 18,975,000 | - | 261,597 | - | - | (22,286 | ) | (22,286 | ) | - | - | 239,311 | - | - | - | 239,311 | ||||||||||||||||||||||||||||||||||||||||
Issuance of shares in connection with acquisitions | 16,426,167 | - | 242,366 | - | - | (56,387 | ) | (56,387 | ) | - | - | 185,980 | - | - | - | 185,980 | ||||||||||||||||||||||||||||||||||||||||
Initial NCI - Curaleaf International | - | - | - | - | - | - | - | - | - | - | (126,372 | ) | 130,798 | - | 4,426 | |||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 4,057,514 | - | 8,792 | - | (6,125 | ) | - | (6,125 | ) | - | - | 2,667 | - | - | - | 2,667 | ||||||||||||||||||||||||||||||||||||||||
Share-based compensation | - | - | - | - | 23,277 | - | 23,277 | - | - | 23,277 | - | - | - | 23,277 | ||||||||||||||||||||||||||||||||||||||||||
Foreign currency exchange variance | - | - | - | - | - | - | - | 2,180 | - | 2,180 | - | - | - | 2,180 | ||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | (24,454 | ) | (24,454 | ) | - | (2,524 | ) | - | (26,978 | ) | ||||||||||||||||||||||||||||||||||||||
Balances as of June 30, 2021 | 609,289,821 | 93,970,705 | $ | 2,267,167 | $ | (5,208 | ) | $ | 51,682 | $ | (290,947 | ) | $ | (239,265 | ) | $ | 2,180 | $ | (219,098 | ) | $ | 1,805,776 | $ | (129,066 | ) | $ | 130,367 | $ | - | $ | 1,807,077 |
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.
3
Curaleaf Holdings, Inc.
Condensed Interim Consolidated Statements of Cash Flows
Unaudited
(in thousands)
Six months ended | ||||||||||||
June 30, | ||||||||||||
Note | 2021 | 2020 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (26,978 | ) | $ | (17,287 | ) | ||||||
Adjustments to reconcile loss to net cash provided (used) in operating activities: | ||||||||||||
Depreciation and amortization | 65,037 | 34,983 | ||||||||||
Share-based compensation | 23,277 | 10,852 | ||||||||||
Non-cash interest expense | 19,477 | 5,633 | ||||||||||
Unrealized gain on changes in fair value of biological assets | (192,349 | ) | (79,761 | ) | ||||||||
Realized fair value amounts included in inventory sold | 18 | 150,717 | 43,613 | |||||||||
(Gain)/loss on sale of property, plant and equipment | (740 | ) | - | |||||||||
Deferred taxes | 8,250 | 6,503 | ||||||||||
Changes in operating assets and liabilities | ||||||||||||
Accounts receivable | (12,046 | ) | 8,522 | |||||||||
Biological assets | 29,294 | 26,852 | ||||||||||
Inventories | (100,800 | ) | (46,197 | ) | ||||||||
Prepaid expenses and other current assets | (13,240 | ) | 1,299 | |||||||||
Other assets | (1,137 | ) | (1,442 | ) | ||||||||
Accounts payable | (4,516 | ) | 4,614 | |||||||||
Income taxes payable | (15,377 | ) | 21,803 | |||||||||
Accrued expenses | (7,996 | ) | 1,827 | |||||||||
Net cash provided by (used in) operating activities | (79,127 | ) | 21,814 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchases of property, plant and equipment, net | (73,342 | ) | (51,511 | ) | ||||||||
Proceeds from sale of entity | 8 | 24,884 | - | |||||||||
Payments made on completion on acquisitions | - | (51,188 | ) | |||||||||
Cash acquired from acquisitions | 12,891 | - | ||||||||||
Amounts advanced for notes receivable, net of payments received | 2,038 | (14,100 | ) | |||||||||
Net cash used in investing activities | (33,529 | ) | (116,799 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||
Cash received from financing agreement | 11 | 54,599 | 185,723 | |||||||||
Proceeds from sale leaseback | 19,947 | - | ||||||||||
Debt issuance costs | (681 | ) | - | |||||||||
Lease liability payments | 18 | (25,130 | ) | (11,164 | ) | |||||||
Proceeds from minority interest investment in Curaleaf International | 86,957 | - | ||||||||||
Principal payments on notes payable | (6,093 | ) | - | |||||||||
Exercise of stock options | 2,667 | 879 | ||||||||||
Issuance of common shares, net of issuance costs | 240,569 | - | ||||||||||
Net cash provided by financing activities | 372,835 | 175,438 | ||||||||||
Net change in cash | 260,179 | 80,453 | ||||||||||
Cash at beginning of period | 73,542 | 42,310 | ||||||||||
Effect of exchange rate on cash | 70 | - | ||||||||||
Cash at end of period | 333,791 | 122,763 | ||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid for interest | 1,269 | 18,092 | ||||||||||
Cash paid for income tax | 82,593 | - | ||||||||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||||||
Issuance of shares in connection with minority buyouts | - | 10,972 | ||||||||||
Issuance of shares in connection with acquisitions | 185,979 | 268,799 | ||||||||||
Non-cash acquisition consideration | 45,211 | - | ||||||||||
Contingent consideration incurred in connection with acquisitions | 9,155 | 68,012 | ||||||||||
Forgiveness of note receivable in connection with acquisition | - | 751 | ||||||||||
Loss on sale of entities | (582 | ) | - | |||||||||
Equity issuance | 1,262 | - |
The accompanying notes are an integral part of these unaudited condensed interim consolidated financial statements.
4
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Note 1 - Operations of the company
Curaleaf Holdings, Inc. (the 'Company', 'Curaleaf', or the 'Group'), formerly known as Lead Ventures, Inc. ('LVI'), was incorporated under the laws of British Columbia, Canada on November 13, 2014. Curaleaf operates as a life science company developing full scale cannabis operations, with core competencies in cultivation, manufacturing, dispensing, and medical cannabis research.
On October 25, 2018, the Company completed a reverse takeover transaction, and completed a related private placement which closed one day prior on October 24, 2018 (collectively, the 'Business Combination'). Following the transactions, the Company's subordinate voting shares ('SVS') were listed on the Canadian Securities Exchange ('CSE') under the symbol 'CURA' and quoted on the OTCQX ® Best Market under the symbol 'CURLF'.
On April 7, 2021, the Company established an overseas subsidiary named Curaleaf International Holdings Limited ('Curaleaf International') together with a strategic investor who provided initial capital of $130,798 for 31.5% equity stake in Curaleaf International (the 'Curaleaf International Transaction'). Curaleaf International was used for the acquisition of EMMAC Life Sciences Limited ('EMMAC'), the largest vertically integrated independent cannabis company in Europe. This infusion of outside capital into Curaleaf International significantly accelerates Curaleaf's expansion plans in Europe by fully funding Curaleaf's cash outlay for the EMMAC Transaction (as defined below) and providing the capital required to support Curaleaf International's near-term European rollout. With its foreseeable expansion budget fully funded, Curaleaf's new international business can focus on executing its further European expansion.
Curaleaf and the strategic investor have entered into a shareholders' agreement regarding the governance of Curaleaf International pursuant to which Curaleaf has control over operational issues as well as raising capital and the ability to exit the business. In addition, the strategic investor's stake is subject to put/call rights which permit either party to cause the stake to be bought out by Curaleaf for Curaleaf equity starting the earlier of change of control or in 2025.
The head office of the Company is located at 301 Edgewater Place #405, Wakefield, MA 01880. The Company's registered and records office address is located at Suite 1700-666 Burrard Street, Vancouver, British Columbia, Canada.
For the purposes of these unaudited condensed interim consolidated financial statements (the 'Interim Financial Statements'), the terms 'Company' and 'Curaleaf' mean Curaleaf Holdings, Inc. and, unless the context otherwise requires, includes its subsidiaries. Any references to the cultivation, processing, manufacturing, extraction, retail operations, dispensing or distribution of cannabis, logistics, or similar terms specifically relate only to the Company's state-licensed subsidiary entities. Operations of the licensed subsidiary entities are dependent on each entity's license type, and the applicable state law and associated regulations.
Note 2 - Basis of presentation
The Interim Financial Statements have been prepared in compliance with International Accounting Standard 34 - Interim Financial Reporting. The Company followed the same accounting policies and methods of application as those disclosed in the annual audited consolidated financial statements of the Company as at and for the years ended December 31, 2020 and 2019 (the 'Annual Financial Statements'), which are available under the Company's profile on the System for Electronic Document Analysis and Retrieval ('SEDAR') at www.sedar.com. These Interim Financial Statements should be read in conjunction with the Annual Financial Statements, which were prepared in accordance with International Financial Reporting Standards ('IFRS'), as issued by the International Accounting Standards Board ('IASB').
These Interim Financial Statements were approved by the Board of Directors of the Company and authorized for issue by the Board of Directors on August 6, 2021.
5
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Functional currency
The Company and its United States ('U.S.') subsidiaries' functional currency, as determined by management, is the U.S. dollar ('USD'). These Interim Financial Statements are presented in thousands USD unless otherwise stated. The Company's international subsidiary's functional currency, as determined by management, are the Great Britain Pound ('GBP'), the Euro, and the Swiss Franc ('CHF'). The international financial statements are converted from GBP, Euro, and CHF to USD using the period's average rate for profit and loss amounts and the period end rate for balance sheet items. Conversion adjustments are recognized with accumulated other comprehensive income, which is a component of equity.
Changes in presentation
Where necessary, corresponding figures have been adjusted to conform to the presentation of the current year amounts.
The International Accounting Standard 1 - Presentation of Financial Statements, requires an entity to present a statement of financial position at the beginning of the earliest comparative period ('opening statement of financial position'), when the Company applies an accounting policy retrospectively or makes a retrospective restatement or when it reclassifies items in its financial statements.
The requirement to present the additional opening statement of financial position, when the Company has made a restatement or reclassification, extends to the information in the related notes. The Company has determined it more relevant to disclose Know-How separately from Service agreements within intangible assets (Note 10). The Company has recorded a retrospective measurement period adjustment to goodwill and prepaid acquisition consideration (Notes 4 and 10). However, the Company considered materiality and concluded that it is sufficient to present such information only in those notes that have been impacted by a reclassification, as other notes of the financial statements have not been impacted by the reclassification. The omission of the notes to the additional opening statement of financial position is therefore, in the Company's view, not material.
Basis of consolidation
Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity and is exposed to the variable returns from its activities. The financial statements of subsidiaries are included in the Interim Financial Statements from the date control commences until the date control ceases.
Non-controlling interests ('NCI') are measured initially at their proportionate share of the acquiree's identifiable net assets at the date of acquisition. Changes in the Company's interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions.
When the Company loses control over a subsidiary, it derecognizes the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognized in the statement of profits or losses. Any interest retained in the former subsidiary is measured at fair value when control is lost.
These Interim Financial Statements include the accounts of the Company and its direct subsidiaries, indirect subsidiaries that are not wholly owned, and other entities consolidated on a basis other than of ownership:
6
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
June 30, | December 31, | |||||||||||
Operations | 2021 | 2020 | ||||||||||
Business name | Location | ownership % | ownership % | |||||||||
CLF AZ, Inc. | AZ | 100 | % | 100 | % | |||||||
CLF NY, Inc. | NY | 100 | % | 100 | % | |||||||
Curaleaf CA, Inc. | CA | 100 | % | 100 | % | |||||||
Curaleaf KY, Inc. | KY | 100 | % | 100 | % | |||||||
Curaleaf Massachusetts, Inc. | MA | 100 | % | 100 | % | |||||||
Curaleaf MD, LLC | MD | 100 | % | 100 | % | |||||||
Curaleaf OGT, Inc. | OH | 100 | % | 100 | % | |||||||
Curaleaf PA, LLC | PA | 100 | % | 100 | % | |||||||
Curaleaf, Inc. | MA | 100 | % | 100 | % | |||||||
Focused Investment Partners, LLC | MA | 100 | % | 100 | % | |||||||
CLF Maine, Inc. | ME | 100 | % | 100 | % | |||||||
PalliaTech CT, Inc. | CT | 100 | % | 100 | % | |||||||
CLF Oregon, LLC (formerly PalliaTech OR, LLC) | OR | 100 | % | 100 | % | |||||||
PalliaTech Florida, Inc. | FL | 100 | % | 100 | % | |||||||
Curaleaf Florida, LLC | FL | 100 | % | 100 | % | |||||||
CLF MD Processing, LLC | MD | 100 | % | 100 | % | |||||||
PT Nevada, Inc. | NV | 100 | % | 100 | % | |||||||
CLF Sapphire Holdings, Inc. | OR | 100 | % | 100 | % | |||||||
Curaleaf NJ II, Inc. | NJ | 100 | % | 100 | % | |||||||
Focused Employer, Inc. | MA | 100 | % | 100 | % | |||||||
GR Companies, Inc. | IL | 100 | % | 100 | % | |||||||
Curaleaf International Holdings, Limited | Guernsey, UK | 68.5 | % | 0 | % | |||||||
HMS Health LLC | MD | - | - | |||||||||
HMS Processing LLC | MD | - | - | |||||||||
HMS Sales LLC | MD | - | - | |||||||||
MI Health LLC | MD | - | - | |||||||||
Town Center Wellness, LLC | MD | - | - | |||||||||
Grassroots OpCo AR, LLC | AR | - | - | |||||||||
WCCC, LLC | IL | - | - | |||||||||
Compass Dispensary Holdings, LLC | IL | - | - | |||||||||
Greenhouse Group, LLC | IL | - | - | |||||||||
GR Vending MI, LLC | MI | - | - | |||||||||
GR Companies OK, LLC | OK | - | - | |||||||||
Remedy Compassion Center, Inc | ME | - | - | |||||||||
Primary Organic Therapy, Inc. (d/b/a Maine Organic Therapy) | ME | - | - |
All intercompany balances and transactions were eliminated on consolidation.
7
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Significant accounting judgments, estimates and assumptions
The preparation of the Company's Interim Financial Statements in accordance with IFRS requires management to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Except as described below, the significant judgments, estimates, and assumptions made by management in preparing the Interim Financial Statements for the three and six months ended June 30, 2021 and 2020 were the same as those that applied to the Annual Financial Statements.
Biological assets
Biological assets are dependent upon estimates of future economic benefits as a result of past events to determine the fair value through an exercise of significant judgment by the Company. In estimating the fair value of an asset or a liability, the Company uses observable market data to the extent it is available. The Company uses the average selling price per gram in the market in which the biological assets are produced to determine fair value. The Company reevaluates market prices on a quarterly basis in order to ensure biological assets are measured at the most relevant fair value.
Business combinations
In a business combination, all identifiable assets, liabilities, and contingent liabilities acquired are recorded at their fair values. The Company accounts for business combinations using the acquisition method when the acquired set of activities and assets meets the definition of a business and control is transferred to the Company. In determining whether a particular set of activities and assets is a business, the Company assesses whether the set of assets and activities acquired includes, at a minimum, an input and substantive process and whether the acquired set has the ability to produce outputs.
One of the most significant estimates relates to the determination of the fair value of these assets and liabilities of the acquiree. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognized in the statement of profits or losses immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in the unaudited interim condensed consolidated statement of profits or losses. Contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with IFRS 9 - Financial Instruments with the corresponding gain or loss being recognized in the unaudited interim condensed consolidated statement of profits or losses. For any intangible asset identified, depending on the type of intangible asset and the complexity of determining its fair value, an independent valuation expert or management may develop the fair value using appropriate valuation techniques, which are generally based on a forecast of the total expected future net cash flows. The evaluations are linked closely to the assumptions made by management regarding the future performance of the assets concerned and any changes in the discount rate applied. Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods, not to exceed one year from the acquisition date.
The Company utilizes the guidance prescribed by Amendments to IFRS 3 - Definition of a Business (the 'IFRS 3 Amendment'). The IFRS 3 Amendment changes the definition of a business and allows entities to use a concentration test to determine if transactions should be accounted for as a business combination or an asset acquisition. Under the optional concentration test, where substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business and the transaction would be accounted for as an asset acquisition. Management performs a concentration test where appropriate and if the concentration of assets is 85% or above, the transaction is generally accounted for as an asset acquisition.
8
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Share-based payment arrangements
The Company uses the Black-Scholes valuation model to determine the fair value of options granted to employees and directors under share-based payment arrangements, where appropriate. In instances where stock options have performance or market conditions, the Company utilizes the Monte Carlo valuation model to simulate the various outcomes that affect the value of the option. In estimating fair value, management is required to make certain assumptions and estimates such as the expected life of units, volatility of the Company's future share price, risk free rates, future dividend yields, and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.
Assets held for sale
The Company classifies assets held for sale in accordance with IFRS 5 - Non-Current Assets Held for Sale and Discontinued Operations ('IFRS 5'). When the Company makes the decision to sell an asset or to stop some part of its business, the Company assesses if such assets should be classified as an asset held for sale. To classify as an asset held for sale, the asset or disposal group must meet all of the following conditions: i) the asset is available for immediate sale in its present condition, ii) management is committed to a plan to sell, iii) an active program to locate a buyer and complete the plan has been initiated, iv) the asset is being actively marketed for sale at a sales price that is reasonable in relation to its fair value, v) the sale is highly probable within one year from the date of classification, and vi) actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn. An asset held for sale is measured at the lower of its carrying amount or fair value less cost to sell ('FVLCTS') unless the asset held for sale meets the exceptions as denoted by IFRS 5. FVLCTS is the amount obtainable from the sale of the asset in an arm's length transaction, less the costs of disposal. Once classified as held for sale, any depreciation and amortization cease to be recorded (see Note 7).
Goodwill
Goodwill represents the excess of the purchase price paid for the acquisition of an entity over the fair value of the net tangible and intangible assets acquired. Goodwill is allocated to the cash generating unit ('CGU' or 'CGUs') which are expected to benefit from the synergies of the combination. In determining its CGUs, the Company has completed an internal analysis to identify the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Given the nature of the Company's business, management generally identifies CGUs based on both regions and acquired business entities. The Company has determined that the goodwill recognized in connection with all acquisitions to date belong to the cannabis operations segment.
Goodwill is not subject to amortization and is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired in accordance with IAS 36. Impairment is determined by assessing if the carrying value of a CGU, including the allocated goodwill, exceeds its recoverable amount determined as the greater of the estimated fair value less costs to sell and the value in use. The Company performs the analysis on a CGU level using a discounted cash flow method. Impairment losses recognized in respect of a CGU are first allocated to the carrying value of goodwill and any excess is allocated to the carrying amount of assets in the CGU. Any goodwill impairment loss is recognized in the consolidated statement of profits or losses in the period in which the impairment is identified. Impairment losses on goodwill are not subsequently reversed.
9
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
COVID-19 Estimation Uncertainty
The novel coronavirus commonly referred to as 'COVID-19' was identified in December 2019 in Wuhan, China. On January 30, 2020, the World Health Organization declared the outbreak a global health emergency, and on March 11, 2020, the spread of COVID-19 was declared a pandemic by the World Health Organization. On March 13, 2020, the spread of COVID-19 was declared a national emergency by former President Donald Trump. The outbreak has spread throughout the globe, causing companies and various international jurisdictions to impose restrictions such as quarantines, business closures, and travel restrictions.
The duration of the business disruptions and related financial impact cannot reasonably be estimated at this time. In addition, it is possible that estimates in the Company's financial statements will change in the near term as a result of COVID-19, and the effect of any such changes could be material, which could result in, among other things, impairment of long-lived assets, intangibles assets, and goodwill. The Company is closely monitoring the impact of the pandemic on all aspects of its business. See the heading 'Risk Factors - Risks Related to the COVID-19 Pandemic' of the Company's annual information form for the year ended December 31, 2020 filed on April 28, 2021, which is available on the Company's profile on SEDAR for more information.
New, amended, and future IFRS pronouncements
The Company has implemented all applicable IFRS standards recently issued by the IASB. Pronouncements that are not applicable or where it has been determined do not have a significant impact to the Company have been excluded herein.
The following is a brief summary of the new standards issued but not yet effective:
Amendments to IAS 1: Classification of Liabilities as Current or Non-Current
In January 2020, the IASB issued Amendments to IAS 1: Classification of Liabilities as Current or Non-Current ('Amendments to IAS 1'). The Amendments to IAS 1 aim to promote consistency in applying the requirements by helping companies determine whether, in the statement of financial position, debt and other liabilities with an uncertain settlement date should be classified as current (due or potentially due to be settled within one year) or non-current. The Amendments to IAS 1 include clarifying the classification requirements for debt a company might settle by converting it into equity. The Amendments to IAS 1 are effective for annual reporting periods beginning on or after January 1, 2023 (extended from January 1, 2022), with earlier application permitted.
Amendments to IAS 37: Onerous Contracts - Cost of Fulfilling a Contract
In May 2020, the IASB issued Amendments to IAS 37: Onerous Contracts - Cost of Fulfilling a Contract amending the standard regarding costs a company should include as the cost of fulfilling a contract when assessing whether a contract is onerous. The amendment is effective for annual reporting periods beginning on or after January 1, 2022.
10
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Note 3 - Accounts receivable
Accounts receivable consist of the following:
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Trade accounts receivable, net | $ | 46,915 | $ | 30,919 | ||||
Other receivables | 2,757 | 2,447 | ||||||
Transferred to assets held for sale | - | (4,536 | ) | |||||
Total trade and other receivables | $ | 49,672 | $ | 28,830 |
As of June 30, 2021, the Company had reserved $3,904 compared to $5,530 as of December 31, 2020 for potential credit losses.
Note 4 - Acquisitions
A summary of acquisitions completed during the six months ended June 30, 2021 and the year ended December 31, 2020 is provided below:
Three and Six months ended June 30, 2021 | ||||||||
Purchase price allocation | EMMAC (2) (USD) | Grassroots Maryland (2) | ||||||
Assets acquired: | ||||||||
Cash | $ | 1,490 | $ | 11,976 | ||||
Accounts receivable, net | 19,318 | 6,219 | ||||||
Prepaid expenses and other current assets | - | 452 | ||||||
Inventory | 3,826 | 4,550 | ||||||
Biological assets | 3,993 | 1,164 | ||||||
Property, plant and equipment, net | 7,549 | 19,448 | ||||||
Right-of-use assets | 4,360 | 726 | ||||||
Other assets | 1,141 | - | ||||||
Intangible assets : | ||||||||
Licenses | 227,174 | 112,460 | ||||||
Trade name | 12,377 | - | ||||||
Non-compete agreements | 3,294 | - | ||||||
Intellectual Property | 65 | - | ||||||
Goodwill | 92,716 | 33,847 | ||||||
Deferred tax liabilities | (72,138 | ) | (33,235 | ) | ||||
Liabilities assumed | (37,613 | ) | (11,808 | ) | ||||
Consideration transferred | $ | 267,552 | $ | 145,799 |
11
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
2020 Acquisitions | ||||||||||||||||||||||||||||||||
Purchase price allocation | Cura (2) | Remedy (2) | Arrow (1) | MEOT (2) | Curaleaf NJ (2) | Blue Kudu (1) | Grassroots (2) | ATG (2) | ||||||||||||||||||||||||
Assets acquired: | ||||||||||||||||||||||||||||||||
Cash | $ | 12,755 | $ | 172 | $ | 711 | $ | 395 | $ | 3,667 | $ | 276 | $ | 28,690 | $ | 7,253 | ||||||||||||||||
Accounts receivable, net | 11,027 | 15 | - | 129 | 1,995 | 350 | 5,511 | - | ||||||||||||||||||||||||
Prepaid expenses and other current assets | 2,232 | 3 | - | 15 | 405 | - | 5,835 | 787 | ||||||||||||||||||||||||
Inventory | 22,074 | 227 | 508 | 1,418 | 4,962 | 123 | 12,101 | 3,455 | ||||||||||||||||||||||||
Biological assets | - | 79 | - | 705 | 2,340 | - | 4,571 | 379 | ||||||||||||||||||||||||
Property, plant and equipment, net | 7,465 | 319 | 1,854 | 1,081 | 6,187 | 56 | 37,128 | 4,397 | ||||||||||||||||||||||||
Right-of-use assets | 9,047 | 108 | 2,058 | 1,812 | 41,518 | 812 | 103,055 | 1,555 | ||||||||||||||||||||||||
Other assets | 832 | - | - | 1,034 | 46 | - | 91 | - | ||||||||||||||||||||||||
Intangible assets : | ||||||||||||||||||||||||||||||||
Licenses | 135,060 | - | 38,435 | - | 57,580 | 3,845 | 300,140 | 24,690 | ||||||||||||||||||||||||
Trade name | 28,340 | 160 | - | 170 | 8,260 | - | 12,130 | 120 | ||||||||||||||||||||||||
Service agreements | - | 1,430 | - | 5,830 | - | - | 3,080 | - | ||||||||||||||||||||||||
Know-how | 59,030 | - | - | - | - | - | - | - | ||||||||||||||||||||||||
Non-compete agreements | 4,950 | - | - | - | - | - | 19,290 | - | ||||||||||||||||||||||||
Goodwill | 113,252 | 909 | - | 561 | 22,863 | - | 243,458 | 19,072 | ||||||||||||||||||||||||
Deferred tax liabilities | (58,971 | ) | (480 | ) | - | (1,680 | ) | (20,525 | ) | - | (102,329 | ) | (9,397 | ) | ||||||||||||||||||
Liabilities assumed | (22,652 | ) | (573 | ) | (5,885 | ) | (3,426 | ) | (46,065 | ) | (1,469 | ) | (159,368 | ) | (9,811 | ) | ||||||||||||||||
Consideration transferred | $ | 324,441 | $ | 2,369 | $ | 37,681 | $ | 8,044 | $ | 83,233 | $ | 3,993 | $ | 513,383 | $ | 42,500 |
(1) | Acquisition accounted for as an asset acquisition with the application of the IFRS 3 Amendment. |
(2) | Acquisition accounted for as a business combination under IFRS 3. |
Certain fair values may be estimated at the acquisition date pending confirmation or completion of the valuation process. Where provisional values are used in accounting for a business combination, they may be adjusted retrospectively in subsequent periods, not to exceed one year from the acquisition date.
Goodwill arising from acquisitions consists largely of the synergies and economies of scale expected from combining the operations of the businesses. These synergies include the elimination of redundant facilities and functions and the use of the Company's existing commercial infrastructure to expand sales.
2021 acquisitions
EMMAC Life Sciences Limited, a corporation existing under the laws of England and Wales ('EMMAC')
On April 7, 2021, Curaleaf International completed the acquisition of EMMAC (the 'EMMAC Transaction'), the largest vertically integrated independent cannabis company in Europe, for base consideration of (i) approximately $45,211 in cash, (ii) the issuance of 15,714,390 SVS to benefit the former holders of ordinary shares of EMMAC with a fair value, based on a third party valuation that takes into account transfer restrictions and the time value of money, of approximately $178,578 and (iii) 706,105 SVS to be held in escrow in accordance with the terms of the EMMAC Share Purchase Agreement with a fair value of approximately $7,401. The portion of the consideration paid through the issuance of SVS was subject to a statutory four-month hold period as well as a lock-up agreement with each recipient restricting trading of the SVS received, with an initial release of 5% of SVS from such restrictions at closing, and subsequent release of 5% of SVS from such restrictions at the end of each calendar quarter following the closing of the EMMAC Transaction. Additional consideration is to be paid based upon the successful achievement of certain performance milestones including being permitted by a governmental entity in Europe to sell, produce, market, or distribute cannabis for recreational purposes on a temporary, trial, experimental, interim, study, or pilot basis, achieving revenue targets in 2022 in the UK and Germany markets, and dry flower production at the Terra Verde cultivation facilities of at least 10 tons during 2022. The total contingent consideration related to EMMAC had a fair value of $27,207. The Company also assumed a contingent consideration liability related to the EMMAC acquisition of Terra Verde in 2020, which had a fair value of $9,154. After working capital adjustments at closing, the total consideration paid for EMMAC was $267,551. The Company incurred and expensed transaction costs of approximately $2,615 related to the EMMAC Transaction.
12
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
The Company calculated, on a pro forma basis, the combined results of the acquired entity as if the EMMAC Transaction had occurred as of January 1, 2021. These unaudited pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition occurred as of January 1, 2021 or of the future consolidated operating results. For the EMMAC Transaction, total unaudited pro-forma revenue and net loss for the six months ended June 30, 2021 was $577,390 and $33,202, respectively.
Revenue and net loss from EMMAC included in the consolidated statement of profits and losses for the six months ended June 30, 2021 was $5,308 and $8,007, respectively.
Maryland Compassionate Care and Wellness, LLC ('MCCW')
Through its acquisition of Grassroots (as defined below), the Company acquired an option to purchase MCCW from its sole owner, KDW Maryland Holding Corporation ('KDW'), subject to regulatory approval, which was received on May 1, 2021. MCCW is the holder of cultivation, processing, and dispensary licenses in Maryland. MCCW is the sole owner of each of GR Vending MD Management, LLC and GR Vending MD, LLC. Mr. Mitchell Kahn, a member of the Company's board of directors, is a minority stockholder, the sole director and an officer of KDW; see further detail in Note 19 - Related party transactions. Total consideration paid for MCCW was an allocation of $145,799 of the total Grassroots consideration from prepaid acquisition consideration. See further detail under the heading '2020 Acquisitions - GR Companies, Inc. a Delaware company ('Grassroots') below. The Company did not incur any additional expenses in relation to this acquisition.
2020 acquisitions
For more detail regarding completed 2020 acquisitions, please see the 2020 Audited Annual Financial Statements, filed under the Company's profile on SEDAR on March 11, 2021.
GR Companies, Inc., a Delaware company ('Grassroots')
In July 2019, the Company entered into an Agreement and Plan of Merger to acquire Grassroots (the 'Grassroots Acquisition'). In June 2020, Curaleaf entered into an Amended and Restated Agreement and Plan of Merger (the 'Grassroots Merger Agreement') which amended and restated the original definitive agreement and amended certain terms of the Grassroots Acquisition. The Company acquired Grassroots to continue its path forward in playing a leading role in the growth of the U.S. cannabis market.
Closing of the Grassroots Acquisition occurred in July 2020. At closing, the Company issued (i) 103,455,816 SVS to the benefit of the former holders of common stock of Grassroots which had a fair value of approximately $564,541, and (ii) 12,851,005 SVS to be held in escrow in accordance with the terms of the Grassroots Merger Agreement which had a fair value of approximately $71,389. In addition, the Company paid an amount of $51,187 in connection with the closing of the Grassroots Acquisition, which included reimbursements of permitted capital expenditures and acquisitions that occurred between signing and closing, transaction related expenses, and replenishment of working capital. Curaleaf also agreed to issue 2,119,864 SVS to partially offset the dilution to the holders of common stock of Grassroots caused by the conversion of certain debentures of Grassroots into equity of Grassroots immediately prior to the closing of the Grassroots Acquisition. At closing, the parties resolved that certain Grassroots assets in Illinois, Ohio, and a dispensary in Maryland, were designated for sale to comply with local limitations on license ownership- see further detail related to the reorganization of the Maryland and Illinois entities and the sale of the Ohio assets subsequent to Q2 in Note 7- Assets and liabilities held for sale. Due to the limitations on license ownership, the Company recognized $132,234 for prepayment of acquisition consideration in July 2020. In May 2021, the Company received regulatory approval to own and operate MCCW, and has accordingly recorded a retrospective measurement period adjustment of $13,565 to Goodwill, resulting in a Goodwill fair value of $243,458 as of the date of acquisition. The transaction price remains subject to post-closing adjustments and the parties are still in the process of finalizing the computation of those post-closing adjustments, which are expected to finalize by the third quarter of 2021. The Company incurred transaction costs of approximately $7,623. Subsequent to Q2 2021, the Company completed the reorganization of the Maryland and Illinois entities and the sale of the Ohio assets. See further details in Note 7 - Assets and liabilities held for sale.
13
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Pending acquisitions
The following acquisition was completed subsequent to June 30, 2021. In accordance with IFRS 10 - Consolidated Financial Statements, prior to acquisition, the Company had concluded that it does control the operations of the acquiree, and has therefore consolidated the results of the entity in the Interim Financial Statements. Due to the timing of the transaction closing, sufficient information was not available to complete the Purchase Price accounting at the time of filing.
Ohio Grown Therapies, LLC, an Ohio limited liability company ('OGT')
In May 2019, the Company entered into an agreement granting it an option to acquire OGT for $20,000 in order to expand the Company's cultivation and processing capacity in Ohio. Regulatory approval to complete the transaction was received in July 2021. In accordance with the purchase agreement, the Company paid $5,000 cash in May 2019, $7,500 in cash in July 2020, and the final $7,500 in cash in July 2021 at closing. The Company incurred transaction costs to date of approximately $91.
The following acquisition had been signed but was not yet completed as of June 30, 2021. The Company has concluded that it does not control the operations of the acquiree in accordance with IFRS 10 - Consolidated Financial Statements, and accordingly, the results of the following entity are not included in the Interim Financial Statements:
Los Sueños Farms, LLC and its related entities
In May 2021, the Company signed definitive documents to acquire Los Sueños Farms, LLC and its related entities ('Los Sueños') which will significantly expand the Company's Colorado presence, vertically integrating in the state with large scale outdoor cannabis cultivation and two retail dispensaries. The proposed transaction includes three Pueblo, Colorado outdoor cannabis grow facilities covering 66 acres of cultivation capacity (once fully expanded), an 1,800-plant indoor grow, equipment, licensed operating entities, and two retail cannabis dispensary locations, called 'The Spot 420' (in Trinidad and Pueblo West) serving medical as well as adult use customers. Total base consideration for the proposed acquisition of Los Sueños will be approximately $67,000 payable in cash, plus a potential earnout of up to $4,000, to be paid in 2023 based on operating cash-flow based targets for 2022. The transaction is expected to close in late 2021.
14
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Note 5 - Inventories
Inventories consist of the following:
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Raw materials | ||||||||
Harvested cannabis | $ | 29,728 | $ | 5,036 | ||||
Harvested trim | 18,760 | 8,450 | ||||||
Total raw materials | 48,488 | 13,486 | ||||||
Work-in-process | ||||||||
Processing | 75,165 | 67,955 | ||||||
Finished goods | ||||||||
Consumables | 15,586 | 10,403 | ||||||
Flower | 16,775 | 14,231 | ||||||
Extracts | 59,197 | 31,269 | ||||||
Total finished goods | 91,558 | 55,903 | ||||||
Fair value adjustment to inventory related to biological assets | 92,084 | 63,828 | ||||||
Transferred to assets held for sale | (2,647 | ) | (3,181 | ) | ||||
$ | 304,648 | $ | 197,991 |
During the six months ended June 30, 2021, the Company recognized cost of goods sold of $439,537 of which $288,820 was included in costs before the impact of biological assets adjustments in the amount of $150,717, a non-cash expense relating to the realized change in fair value of inventory sold.
Note 6 - Biological assets
The following table is a reconciliation of the carrying amount of the biological assets:
Balance at December 31, 2020 | $ | 46,210 | ||
Assets obtained in the acquisition of EMMAC | 3,993 | |||
Grassroots Maryland adjustment | 1,164 | |||
Unrealized fair value gain on growth of biological assets | 192,725 | |||
Increase in biological assets due to capitalized costs | 60,618 | |||
Transferred to inventories upon harvest | (240,781 | ) | ||
Transferred to assets held for sale | 334 | |||
Balance at June 30, 2021 | $ | 64,263 | ||
Balance at December 31, 2019 | $ | 19,197 | ||
Unrealized fair value gain on growth of biological assets | 79,761 | |||
Increase in biological assets due to capitalized costs | 38,884 | |||
Transferred to inventories upon harvest | (109,349 | ) | ||
Transferred to assets held for sale | (1,468 | ) | ||
Balance at June 30, 2020 | $ | 27,025 |
Biological assets consist of actively growing cannabis plants to be harvested as agricultural produce.
15
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
The average grow cycle of plants up to the point of harvest is approximately twelve weeks. Plants in production are plants that are in the flowering stage and are valued at fair value less cost to complete and cost to sell, where fair value represents the Company's selling price per gram of dried cannabis. As of June 30, 2021, and December 31, 2020, it was expected that the Company's biological assets would yield 21,792,142 and 16,905,180 grams of cannabis when harvested, respectively. See Note 20 - Fair value measurements, for the inputs and sensitivity analysis for the fair value of the biological assets.
Note 7 - Assets and liabilities held for sale
Assets and liabilities held for sale consist of the following:
Assets held for sale | HMS Assets | Elevate, Takoma | GR Entities | Total | ||||||||||||
Balance at January 1, 2021 | $ | 30,397 | 2,274 | 25,833 | $ | 58,504 | ||||||||||
Transferred in/(out) | (30,397 | ) | (2,274 | ) | 6,044 | (26,627 | ) | |||||||||
Total assets held for sale at June 30, 2021 | $ | - | - | 31,877 | $ | 31,877 |
Liabilities associated with assets held for sale | HMS Assets | Elevate, Takoma | GR Entities | Total | ||||||||||||
Balance at January 1, 2021 | $ | 3,145 | 797 | 3,239 | $ | 7,181 | ||||||||||
Transferred in/(out) | (3,145 | ) | (797 | ) | 3,838 | (104 | ) | |||||||||
Total liabilities associated with assets held for sale at June 30, 2021 | $ | - | - | 7,077 | $ | 7,077 |
In November 2020, the Company announced the signing of a definitive agreement to sell its rights to the assets of HMS Health, LLC and the cultivation and processing assets of HMS Processing, LLC (collectively, the 'HMS Assets') in Maryland to TerrAscend for total consideration of $27,500. The HMS Assets sale includes the divestiture of operations of a 22,000 square foot co-located cultivation and processing facility in Frederick, MD. The transaction closed on May 4, 2021 after receipt of regulatory approval by the Maryland Medical Cannabis Commission. After working capital adjustments, the total consideration of $24,899 included $22,399 payable in cash upon closing as well as a $2,500 interest bearing note due and payable to the Company in April 2022.
In November 2020, the Company signed a definitive agreement to sell 100% of Town Center Wellness, LLC, (Elevate Takoma) a licensed dispensary business in Takoma Park, Maryland, to PharmaCann LLC for total consideration of $2,000, all payable in cash upon closing. The transaction closed on May 1, 2021 after receipt of regulatory approval by the Maryland Medical Cannabis Commission. After working capital adjustments, the total consideration was $3,613. These sales enable the Company to finalize the acquisition of the Maryland dispensary, cultivation and processing assets previously owned by Grassroots, which were previously restricted by the legal limits on license ownership in the state of Maryland.
The Company has certain rights to the proceeds from the sale of the OhiGrow, LLC and Ohio Green Grow, LLC (collectively, the 'Ohio Assets'), which have Ohio cultivation and processing licenses, respectively, and were previously affiliated with Grassroots. In April 2021, the owners of the Ohio Assets and the Company signed definitive agreements with Jushi OH, LLC pursuant to which the owners agreed to sell the Ohio Assets to Jushi OH and the Company agreed to assign certain debt of the Ohio Assets to Jushi OH. In July 2021, the transaction closed following receipt of regulatory approval by the Ohio Department of Commerce and the Company received $4,949 in proceeds.
16
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
The Company also has certain rights to the proceeds from the sale of three Illinois medical dispensary licenses and six adult use dispensary licenses owned by former affiliates of Grassroots (collectively, the 'Illinois Assets'). Currently, three medical dispensaries and two adult use dispensaries operate under these licenses. On April 1, 2021, the owners of these licenses signed definitive agreements to sell the Illinois Assets to Parallel (formerly Surterra Wellness, Inc.). The transaction is subject to regulatory approval. Under the terms of the transaction, the purchase price for the Illinois Assets consists of a $100,000 base price to be paid $60,000 in cash and $40,000 in Parallel stock, plus earnouts of up to an additional $55,000 payable through 2023. Pursuant to the Grassroots Merger Agreement, the proceeds net of expenses and taxes from the sale of the Illinois Assets shall be shared by the Company with the former owners of Grassroots as follows: (i) the first $25,000 of net proceeds shall be retained by the Company; (ii) the next $25,000 of net proceeds shall be remitted to the former Grassroots owners; and (iii) the Company shall keep 50% of the net proceeds above $50,000, and the other 50% shall be remitted to the Grassroots owners. The Company has received a $10,000 deposit from Parallel, which is refundable under limited circumstances and will be applied to the base purchase price for the Illinois Assets at closing. Additionally, the Company has been marketing certain rights and interests for certain real estate assets associated with the Grassroots Acquisition.
Note 8 - Notes receivable
Notes receivable consist of the following:
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Notes receivable - Misc. | $ | 362 | $ | - | ||||
Notes receivable HMS (Note 7) | 2,240 | - | ||||||
Notes receivable RJB Enterprises, LLC. | - | 1,645 | ||||||
Notes receivable Curaleaf Maryland, Inc. | - | 3,000 | ||||||
Total notes receivable | $ | 2,602 | $ | 4,645 | ||||
Current portion of notes receivable | $ | - | $ | 2,645 | ||||
Long term notes receivable | 2,602 | 2,000 | ||||||
Total notes receivable | $ | 2,602 | $ | 4,645 |
Note 9 - Property, plant and equipment
Property, plant and equipment and related accumulated depreciation consist of the following:
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Land | $ | 2,803 | $ | 6,871 | ||||
Building and improvements | 182,368 | 139,044 | ||||||
Furniture and fixtures | 88,108 | 70,486 | ||||||
Information technology | 3,593 | 3,025 | ||||||
Construction in progress | 85,446 | 73,728 | ||||||
Transferred to assets held for sale | (9,207 | ) | (6,326 | ) | ||||
Total property, plant and equipment | 353,111 | 286,828 | ||||||
Less: Accumulated depreciation | (46,538 | ) | (43,973 | ) | ||||
Property, plant and equipment, net | $ | 306,573 | $ | 242,855 |
Assets included in construction in progress represent projects related to both cultivation and dispensary facilities not yet completed or otherwise not ready for use.
Depreciation expense for the three and six months ended June 30, 2021 totaled $6,813 and $12,953, respectively, of which $4,355 and $8,523, respectively, is included in cost of goods sold.
17
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Note 10 - Goodwill and intangible assets
Identifiable intangible assets consist of the following:
2020 | 2021 | |||||||||||||||||||||||||
Balance | Balance | |||||||||||||||||||||||||
at | PPA | Intangible | Year-to-date | Currency | at | |||||||||||||||||||||
December 31, | Acquisitions | Adjustment | Reclass | amortization | exchange | June 30, | ||||||||||||||||||||
Licenses | $ | 662,492 | $ | 339,634 | $ | (197 | ) | $ | - | $ | (28,588 | ) | $ | 353 | $973,694 | |||||||||||
Trade names | 47,820 | 12,377 | - | - | (2,376 | ) | 13 | 57,834 | ||||||||||||||||||
Service agreements | 63,595 | - | - | (53,659 | ) | (326 | ) | - | 9,610 | |||||||||||||||||
Intellectual property and know-how | - | 65 | - | 53,659 | (2,938 | ) | 5 | 50,791 | ||||||||||||||||||
Non-compete agreements | 23,494 | 3,294 | - | - | (2,004 | ) | 3 | 24,787 | ||||||||||||||||||
Total intangible assets, net | $ | 797,401 | $ | 355,370 | $ | (197 | ) | $ | - | $ | (36,232 | ) | $ | 374 | $1,116,716 |
Amortization of intangible assets was $19,936 and $36,232 for the three and six months ended June 30, 2021, respectively. Purchase price adjustments relate to remeasurement period adjustments, which were retrospectively reflected in the acquisition tables in Note 4.
The Company determined that goodwill associated with all acquisitions is associated with the cannabis operations segment. There was no goodwill associated with the non-cannabis operations segment as of June 30, 2021 or December 31, 2020. The changes in the carrying amount of goodwill for the cannabis operations segment were as follows:
Total | ||||
Balance at December 31, 2020 | $ | 470,144 | ||
Purchase price adjustments | (13,605 | ) | ||
Acquisition of EMMAC (Note 4) | 126,504 | |||
Change in assets held for sale (Note 7) | 207 | |||
Balance at June 30, 2021 | $ | 583,250 |
Purchase price adjustments relate to remeasurement period adjustments, which were retrospectively reflected in the acquisition tables in Note 4. There were no indications of goodwill impairment for any CGUs for the three months ended June 30, 2021 or 2020.
18
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Note 11 - Notes payable
Notes payable consist of the following:
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
Term Loan Facility | ||||||||
Principal amount | $ | 300,000 | $ | 300,000 | ||||
Unamortized debt discount | (24,341 | ) | (25,126 | ) | ||||
Net carrying amount | $ | 275,659 | $ | 274,874 | ||||
Promissory Note - 2024 | ||||||||
Principal amount | $ | 10,000 | $ | 10,000 | ||||
Interest accrued/Unamortized debt discount | (300 | ) | (300 | ) | ||||
Net carrying amount | $ | 9,700 | $ | 9,700 | ||||
Credit Facility - 2024 | ||||||||
Principle Amount | $ | 50,000 | $ | - | ||||
Unamortized Debt Discount | (132 | ) | - | |||||
Net carrying amount | $ | 49,868 | $ | - | ||||
Seller note payable | $ | 1,706 | $ | 6,500 | ||||
Other notes payable | 1,225 | 427 | ||||||
Total other notes payable | $ | 2,931 | $ | 6,927 | ||||
Current portion of notes payable | $ | 1,706 | $ | 6,500 | ||||
Long term notes payable | 336,452 | 285,001 | ||||||
Total notes payable | $ | 338,158 | $ | 291,501 |
Term Loan Facility
In January 2020, the Company closed on a senior secured term loan facility ('Term Loan Facility') from a syndicate of lenders totaling $300,000. The notes bear interest at a rate of 13.0% per annum, payable quarterly in arrears with maturity in December 2023 and contain certain principal prepayment premiums.
In August 2018, the Company had issued $85,000 of senior secured debt under a financing agreement referred to as the Financing Agreement - 2021. The Company satisfied its obligations in full under the Financing Agreement - 2021 in connection with, and out of the proceeds of the Term Loan Facility.
The Term Loan Facility may be pre-paid but is subject to a prepayment premium dependent on the loan year. Any prepayment made between January 10, 2022 and January 9, 2023 will incur a prepayment premium of 6.50%. Any prepayment made between January 10, 2023 and October 14, 2023 will incur a prepayment premium of 3.25%. Any prepayment made on or after October 15, 2023 will not incur a prepayment premium.
Beginning with the fiscal quarter ended on December 31, 2020, the Term Loan Facility is subject to a mandatory amortization payment and a yield maintenance premium. The mandatory amortization payment is paid ratably to each lender based on the aggregate principal amount of all initial term loans times an applicable rate that is based on the leverage ratio.
19
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
For the three months ended June 30, 2021, the applicable percentage ranges from 0% to 3.00% depending on the leverage ratio. For all quarters in 2021, the applicable percentage ranges from 0% to 6.00% depending on the leverage ratio. For all quarters in 2022, the applicable percentage ranges from 0% to 8.00% depending on the leverage ratio. For all quarters in 2023 through September 30, 2023, the applicable percentage ranges from 0% to 9.00% depending on the leverage ratio.
The yield maintenance premium is paid based on all amounts repaid. The premium is determined by the amount of interest that would have otherwise been payable on the prepayment less the aggregate amount of interest that would have been earned if the prepayment were to be reinvested from the date of prepayment until January 10, 2022, at the yield maintenance premium rate. The yield maintenance premium rate is the rate per annum equal to the rate in effect 3 days before the repayment date for U.S. Treasury instruments that have a maximum term of 3 months or less times 0.50%.
The Company recognized interest expense under the Term Loan Facility of $11,507 and $22,867 for the three and six months ended June 30, 2021, respectively, including interest expense related to the amortization of the debt discount of $353 and $796, respectively.
Promissory Note - 2024
In October 2020, the Company entered into a promissory note with a principal sum of $10,000 with Baldwin Holdings, LLC (the 'Promissory Note - 2024') to replace the contingent liability incurred in connection with the Curaleaf, MA acquisition which was deemed completed in March 2020. The issue price of the Promissory Note - 2024 is equal to 97.00% of the principal amount of the Promissory Note - 2024 and the remaining $300 is treated as Original Issue Discount ('OID').
The Promissory Note - 2024 carries a fixed interest rate per quarter equal to 3.25%. Interest is payable in arrears on the last day of each fiscal quarter, commencing on December 31, 2020. The Maturity Date of the Promissory Note - 2024 is June 10, 2024.
The Promissory Note - 2024 contains other terms substantially similar to the Term Loan Facility, except that the Promissory Note - 2024 is secured by separate collateral consisting solely of the equity of, and guarantees given by, the Company's subsidiaries Curaleaf Hartford, Inc. and Curaleaf Stamford, Inc., which operate medical cannabis dispensaries in Hartford and Stamford, CT, respectively.
The Company recognized interest expense under the Promissory Note - 2024 of $329 and $654 for the three and six months ended June 30, 2021, respectively. There was no interest expense recognized for the three and six months ended June 30, 2020.
Credit Facility - 2024
In January 2021, the Company entered into a $50,000 secured credit facility (the 'Credit Agreement'), which matures on January 10, 2024, with a syndicate of lenders. The net proceeds from borrowings under the Credit Agreement are expected to be used to fund capital expenditures to support future growth initiatives, potential acquisitions, and for general corporate purposes. Borrowings under the Credit Agreement bear interest on any outstanding principal of 10.25% per annum. The facility was fully drawn at closing. The Credit Agreement serves as an expansion of the Company's existing Financing Agreement, described under 'General Development of the Business - Three Year History - 2019 - Senior Secured Term Loan Facility' in the Company's 2020 Annual Information Form filed with SEDAR on April 28, 2021. Except as described below, the terms of the Credit Agreement are substantially similar to the terms of the Financing Agreement and the two facilities are secured by the same collateral.
20
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
The Credit Agreement may be pre-paid but is subject to a prepayment premium dependent on the loan year. Any prepayment made between January 8, 2022 and January 7, 2023 will incur a prepayment premium of 5.125%. Any prepayment made between January 8, 2023 and January 7, 2024 will incur a prepayment premium of 2.50%.
The Credit Agreement is subject to a yield maintenance premium. The yield maintenance premium is paid based on amounts repaid. The premium is determined by the amount of interest that would have otherwise been payable on the prepayment less the aggregate amount of interest that would have been earned if the prepayment were to be reinvested from the date of prepayment until January 8, 2022, at the yield maintenance premium rate. The yield maintenance premium rate is the rate per annum equal to the rate in effect 3 days before the repayment date for U.S. Treasury instruments that have a maximum term of 3 months or less times 0.50%.
Seller note
The Company issued certain notes payable in conjunction with the Emerald acquisition in the amount of $8,000, the Glendale acquisition in the amount of $7,500, and the Phyto acquisition in the amount of $1,500. The Company paid $5,000 and the accrued interest related to the Emerald acquisition in January 2020 and the remaining $3,000 and accrued interest was paid in May 2020. The Company paid $2,500 and the accrued interest related to the Glendale acquisition in February 2020. The Company paid $2,100 and the accrued interest related to the Glendale acquisition in January 2021.
Future maturities
As of June 30, 2021, future principal payments due under Notes payable were as follows:
Period | Amount | |||
2021 (remaining six months) | $ | 1,706 | ||
2022 | - | |||
2023 | 300,000 | |||
2024 | 60,000 | |||
2025 | - | |||
2026 and thereafter | 1,225 | |||
$ | 362,931 |
Information about the Company's exposure to interest rate risks and liquidity risks is included in Note 20 - Fair value measurements.
Note 12 - Shareholders' equity
The authorized and issued share capital of the Company is as follows:
Authorized
As of June 30, 2021, the authorized share capital consists of an unlimited number of multiple voting shares ('MVS') without par value and an unlimited number of SVS without par value.
21
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Issued
Holders of the MVS are entitled to 15 votes per share and are entitled to notice of and to attend any meeting of the shareholders, except a meeting of which only holders of another particular class or series of shares will have the right to vote. As of June 30, 2021 and December 31, 2020, the MVS represented approximately 13.4% and 14.2%, respectively, of the total issued and outstanding shares and 69.8% and 71.2%, respectively, of the voting power attached to such outstanding shares. The MVS are convertible into SVS on a one-for-one basis at any time at the option of the holder or upon termination of the MVS structure. The articles of the Company currently provide that the MVS will automatically convert into SVS upon the earlier occurrence of the following events (i) on October 25, 2021, (ii) the transfer or disposition of the MVS by the Company's Executive Chairman, Boris Jordan, to one or more third parties which are not certain permitted holders as described in the Company's articles, and (iii) Mr. Jordan or his permitted holders no longer beneficially owning, directly or indirectly and in the aggregate, at least 5% of the issued and outstanding SVS and MVS on a non-diluted basis. At the annual and special meeting of the shareholders of the Company to be held on September 9, 2021, the shareholders of the Company will be asked to consider and, if deemed appropriate, approve, an amendment to the articles of the Company (the 'Proposed Amendment') in order to extend the automatic termination of the dual-class structure of the Company and to maintain such dual-class structure until the earlier to occur of (i) the transfer or disposition of the MVS by Mr. Boris Jordan to one or more third parties which are not permitted holders; (ii) Mr. Jordan or his permitted holders no longer beneficially owning, directly or indirectly and in the aggregate, at least 5% of the issued and outstanding SVS and MVS on a non-diluted basis; and (iii) the first business day following the first annual meeting of shareholders of the Company following the SVS being listed and posted for trading on a United States national securities exchange such as The Nasdaq Stock Market or The New York Stock Exchange. Refer to the management information circular dated July 30, 2021 and available on SEDAR under the Company's profile at www.sedar.com for more information on the Proposed Amendment.
As of June 30, 2021, the Company had 93,970,705 MVS issued and outstanding that were held indirectly by Boris Jordan.
On January 12, 2021, the Company closed an overnight marketed offering of 18,975,000 SVS at a price of C$16.70 per share in an underwritten public offering, for total gross proceeds of C$316,883, before deducting the underwriters' fees and estimated offering expense. The Company intends to use the net proceeds of $240,569 from the overnight marketed offering for working capital and general corporate purposes.
Holders of the SVS are entitled to one vote per share. As of June 30, 2021, the Company had 609,289,821 SVS issued and outstanding.
The Company had reserved 70,326,053 SVS and 66,380,185 SVS, as of June 30, 2021 and December 31, 2020, respectively, for the issuance of stock options and other share-based awards under the Company's 2018 Long Term Incentive Plan (see Note 13).
Treasury shares
There were no shares repurchased into treasury for the three and six months ended June 30, 2021 and 2020.
22
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Note 13 - Share-based payment arrangements
Stock option programs
The 2011 and 2015 Equity Incentive Plans provide for the grant of incentive stock options, non-statutory stock options, restricted stock awards, restricted stock units, stock appreciation rights, and other share-based awards. In connection with the Business Combination, all unexercised stock options of Curaleaf, Inc. issued and outstanding under the 2011 and 2015 Equity Incentive Plans were converted to the option to receive an equivalent substitute option under the 2018 Long Term Incentive Plan (the 'LTIP'). The LTIP provides for the grant of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards, dividend equivalents, and other share-based awards. The number of SVS reserved for issuance under the LTIP is calculated as 10% of the aggregate number of SVS and MVS outstanding on an 'as-converted' basis.
Stock option valuation
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes valuation model, where appropriate. In instances where stock options have performance or market conditions, the Company utilizes the Monte Carlo valuation model to simulate the various outcomes that affect the value of the option.
The weighted average inputs used in the measurement of the grant date fair values of the equity-settled share-based payment plans were as follows:
June 30, | |||||||||
2021 | 2020 | ||||||||
Fair value at grant date | $ | 10.14 | $ | 3.40 | |||||
Share price at grant date | $ | 14.73 | $ | 5.69 | |||||
Exercise price | $ | 15.77 | $ | 4.54 | |||||
Expected volatility | 76.6 | % | 90.8 | % | |||||
Expected life | 6.1 | years | 5.9 | years | |||||
Expected dividends | - | % | - | % | |||||
Risk-free interest rate (based on government bonds) | 1.02 | % | 0.50 | % |
The expected volatility is estimated based on the Company's historical volatility. Management believes this is the best estimate of the expected volatility over the expected life of its stock options. The expected life in years represents the period of time that options granted are expected to be outstanding. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.
During the three and six months ended June 30, 2021, the Company recorded share-based compensation in the amount of $18,370 and $23,277, respectively compared to $4,833 and $9,334 in the three and six months ended June 30, 2020.
23
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Reconciliation of outstanding stock options
The number and weighted-average exercise prices of share options under the LTIP were as follows:
Weighted | Weighted | |||||||||||||||
Number of | average | Number of | average | |||||||||||||
options | exercise price | options | exercise price | |||||||||||||
2021 | 2021 | 2020 | 2020 | |||||||||||||
Outstanding at January 1 | 25,936,658 | $ | 4.21 | 26,919,515 | $ | 1.78 | ||||||||||
Forfeited during the six month period | (40,389 | ) | 10.57 | (487,570 | ) | 7.13 | ||||||||||
Expired during the six month period | (42,712 | ) | 7.48 | |||||||||||||
Exercised during the six month period | (4,119,407 | ) | 0.73 | (3,970,996 | ) | 0.22 | ||||||||||
Granted during the six month period | 4,070,297 | 15.77 | 1,865,124 | 4.54 | ||||||||||||
Rollover grants in connection with acquisition | - | - | 4,820,663 | 9.98 | ||||||||||||
Outstanding at June 30 | 25,804,447 | $ | 6.65 | 29,146,736 | $ | 2.12 | ||||||||||
Options exercisable at June 30 | 15,274,210 | $ | 4.79 | 18,578,714 | $ | 0.58 |
Restricted stock units('RSUs')
The number of RSUs awarded under the LTIP were as follows:
Number of RSUs | ||||||||
2021 | 2020 | |||||||
Outstanding at January 1 | 2,452,338 | 2,170,064 | ||||||
Forfeited during the six month period | 15,460 | (180,526 | ) | |||||
Released during the six month period | (455,069 | ) | (250,847 | ) | ||||
Granted during the six month period | 1,294,325 | 1,507,414 | ||||||
Outstanding at June 30 | 3,307,054 | 3,246,105 | ||||||
RSUs vested at June 30 | - | 414,119 |
Note 14 - Selling, general and administrative expense
Selling, general and administrative expenses consist of the following:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Selling, general and administrative expenses: | ||||||||||||||||
Salaries and benefits | $ | 47,265 | $ | 22,131 | $ | 88,333 | $ | 40,900 | ||||||||
Sales and marketing | 10,140 | 5,010 | 20,629 | 8,618 | ||||||||||||
Rent and occupancy | 6,897 | 1,338 | 13,801 | 2,162 | ||||||||||||
Travel | 1,846 | 930 | 2,627 | 2,593 | ||||||||||||
Professional fees | 7,824 | 4,862 | 14,520 | 18,948 | ||||||||||||
Office supplies and services | 7,119 | 3,802 | 14,456 | 6,587 | ||||||||||||
Other | 6,868 | 2,393 | 13,686 | 6,516 | ||||||||||||
Total selling, general and administrative expense | $ | 87,959 | $ | 40,466 | $ | 168,052 | $ | 86,324 |
24
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Note 15 - Other income
Other income consists of the following:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Gain (loss) on disposal of assets | $ | 54 | $ | - | $ | 66 | $ | 345 | ||||||||
Gain (loss) on foreign currency exchange | (56 | ) | - | (56 | ) | 18 | ||||||||||
Gain (loss) on investment | 2,148 | (55 | ) | 2,148 | - | |||||||||||
Gain (loss) on non-substantial debt modification | 4 | - | 4 | - | ||||||||||||
Other income (expense) | 154 | (22 | ) | 557 | 2,166 | |||||||||||
Total other income, net | $ | 2,304 | $ | (77 | ) | $ | 2,719 | $ | 2,529 |
Note 16 - Earnings per share
Basic and diluted loss per share attributable to the Company was calculated as follows:
Three months ended | Six months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Numerator: | ||||||||||||||||
Net loss | $ | (9,764 | ) | $ | (1,836 | ) | $ | (26,978 | ) | $ | (17,287 | ) | ||||
Less: Net income (loss) attributable to redeemable non-controlling interest | (2,524 | ) | 193 | (2,524 | ) | (170 | ) | |||||||||
Net loss attributable to Curaleaf Holdings, Inc. - basic and diluted | $ | (7,240 | ) | $ | (2,029 | ) | $ | (24,454 | ) | $ | (17,117 | ) | ||||
Denominator: | ||||||||||||||||
Weighted average SVS outstanding - basic and diluted | 701,668,932 | 533,192,806 | 691,909,375 | 520,446,921 | ||||||||||||
Loss per share - basic and diluted | $ | (0.01 | ) | $ | (0.00 | ) | $ | (0.04 | ) | $ | (0.03 | ) |
The Company's potentially dilutive securities, which include options to purchase shares, have been excluded from the computation of diluted net loss per share as the effect would reduce the net loss per share. Therefore, the weighted average number of SVS outstanding used to calculate both basic and diluted net loss per share attributable to shareholders is the same. The Company excluded the following potential shares, presented based on amounts outstanding at each period end, from the computation of diluted loss per share attributable to the Company for the periods indicated because including them would have had an anti-dilutive effect:
Six months ended | ||||||||
June 30, | ||||||||
2021 | 2020 | |||||||
Options to purchase SVS | 25,804,447 | 29,146,736 |
25
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Note 17 - Segment reporting
The Company operates in two segments: the production and sale of cannabis via retail and wholesale channels ('Cannabis Operations'); and providing professional services including cultivation, processing, retail know-how and back-office administration, intellectual property licensing, real estate leasing services, and lending facilities to medical and adult-use cannabis licensees under management service agreements ('Non-Cannabis Operations').
Cannabis | Non-Cannabis | Total | ||||||||||
For the six months ended June 30, 2021: | ||||||||||||
Revenues | $ | 571,377 | $ | 1,148 | $ | 572,525 | ||||||
Gross profit | 324,161 | 1,148 | 325,309 | |||||||||
Income (loss) from operations | 129,743 | (44,155 | ) | 85,588 | ||||||||
Net income (loss) | $ | 101,867 | $ | (128,845 | ) | $ | (26,978 | ) |
Cannabis | Non-Cannabis | Total | ||||||||||
For the six months ended June 30, 2020: | ||||||||||||
Revenues | $ | 176,635 | $ | 37,342 | $ | 213,977 | ||||||
Gross profit | 111,927 | 37,342 | 149,269 | |||||||||
Income (loss) from operations | 31,373 | (4,686 | ) | 26,687 | ||||||||
Net income (loss) | $ | 23,721 | $ | (41,008 | ) | $ | (17,287 | ) |
Cannabis | Non-Cannabis | Held for sale | Total | |||||||||||||
As of June 30, 2021: | ||||||||||||||||
Total assets | $ | 2,370,091 | $ | 752,725 | $ | 31,877 | $ | 3,154,693 | ||||||||
Total liabilities | $ | 775,009 | $ | 565,530 | $ | 7,077 | $ | 1,347,616 |
Cannabis | Non-Cannabis | Held for sale | Total | |||||||||||||
As of December 31, 2020: | ||||||||||||||||
Total assets | $ | 2,114,424 | $ | 213,663 | $ | 58,504 | $ | 2,386,591 | ||||||||
Total liabilities | $ | 672,796 | $ | 330,400 | $ | 7,181 | $ | 1,010,377 |
Note 18 - Commitments and contingencies
Leases
The Company leases its facilities under operating leases that require the payment of real estate taxes and other operating costs in addition to normal rent.
26
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
At June 30, 2021, approximate future minimum payments due under non-cancellable operating leases were as follows:
Period | Scheduled payments | |||
2021 (remaining six months) | $ | 73,033 | ||
2022 | 52,223 | |||
2023 | 50,691 | |||
2024 | 49,132 | |||
2025 and thereafter | 422,965 | |||
Total undiscounted lease liability | 648,044 | |||
Impact of discount | (336,007 | ) | ||
Lease liability at June 30, 2021 | 312,037 | |||
Less current portion of lease liability | (18,312 | ) | ||
Less long-term lease liabilities transferred to liabilities associated with assets held for sale | (535 | ) | ||
Long-term portion of lease liability | $ | 293,190 |
Real estate leases typically extend for a period of 1-10 years. Some leases for office space include extension options exercisable up to one year before the end of the cancellable lease term. Typically, options to renew leases are for an additional period of 5 years after the end of the initial contract term and are at the option of the Company as the lessee. Lease payments are in substance fixed, and certain real estate leases include annual escalation clauses with reference to an index or contractual rate.
The Company leases machinery and equipment but does not purchase or guarantee the value of leased assets. The Company considers these assets to be of low value or short-term in nature and therefore no right-of use assets and lease liabilities are recognized for these leases. Expenses recognized relating to short-term leases and leases of low value during the three and six months ended June 30, 2021 and 2020 were immaterial.
The Company leases space for its offices, cultivation centers, and retail dispensaries. Key movements relating to the right-of-use lease asset balances are presented below:
Carrying amount, January 1, 2021 | $ | 267,168 | ||
ROU assets acquired (Note 4) | 4,219 | |||
Additions to leased assets | 27,727 | |||
Depreciation charges | (15,663 | ) | ||
Changes in assets held for sale | 2,098 | |||
Carrying amount, June 30, 2021 | $ | 285,549 |
The total interest expense on lease liabilities for the three and six months ended June 30, 2021 was $9,339 and $17,899, respectively.
The total depreciation expense on right-of-use assets for the three and six months ended June 30, 2021 was $8,282 and $15,999, respectively, of which $4,395 and $8,270,respectively, was included in cost of goods sold.
The total cash outflow for lease liability payments for the three and six months ended June 30, 2021 was $12,059 and $25,130, respectively.
27
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Indemnification agreements
In the ordinary course of business, the Company may provide indemnification of varying scope and terms to vendors, lessors, business partners, and other parties with respect to certain matters including, but not limited to, losses arising out of breach of agreements or from intellectual property infringement claims made by third parties. In addition, the Company has entered into indemnification agreements with members of its board of directors and senior management team that will require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers of the Company. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is, in many cases, unlimited. To date, the Company has not incurred any material costs as a result of such indemnification agreements. The Company does not believe that the outcome of any claims under indemnification arrangements will have a material effect on its financial position, results of operations or cash flows, and it has not accrued any liabilities related to such obligations in its Interim Financial Statements.
Legal
The Company is involved in claims or lawsuits that arise in the ordinary course of business. Accruals for claims or lawsuits are provided to the extent that losses are deemed both probable and estimable. Although the ultimate outcome of these claims or lawsuits cannot be ascertained, on the basis of present information and advice received from counsel, it is management's opinion that the disposition or ultimate determination of such claims or lawsuits will not have a material adverse effect on the Company.
Among other legal disputes, the Company is currently involved in the following proceedings:
Connecticut Arbitration. Pursuant to the Second Amended and Restated Operating Agreement of Doubling Road Holdings, LLC, the holders (the 'Holders') of a majority of the Series A-2 Units of Doubling Road Holdings had the right (the 'Put Right') to require that PalliaTech CT, LLC or any of its affiliates purchase all of the Series A-2 Units in exchange for shares of PalliaTech, Inc. (now Curaleaf, Inc.), the parent of PalliaTech CT, pursuant to a defined 'Buy-Out Exchange Ratio.' On October 25, 2018, the Holders, the Company, and others entered into a Stipulation of Settlement in order to resolve a dispute with respect to the applicable Buy-Out Exchange Ratio for the Put Right. The Stipulation of Settlement provided, among other things, that PalliaTech CT purchased the Holders' interests in exchange for (1) a payment of $40,142; (2) 4,755,548 SVS; and (3) the potential for additional equity in the Company depending on the results of a 'Settlement Second Appraisal.' Pursuant to the Settlement Second Appraisal, dated December 12, 2019, and the terms of the Stipulation of Settlement, the Holders received 2,016,859 additional SVS. On January 23, 2020, the Holders filed claims in arbitration including for fraudulent inducement and breach of contract, relating primarily to a lock-up agreement that the Holders signed in connection with the Stipulation of Settlement. A hearing has been scheduled for January 2022.
Florida Arbitration / Litigation. On December 10, 2018, Jayson Weisz and SRC Medical Partners, LLC initiated an arbitration against PalliaTech Florida LLC. On March 19, 2019, Weisz and SRC derivatively on behalf of PalliaTech Florida LLC filed a complaint against Defendants Curaleaf Florida LLC, PalliaTech Florida, Inc., Joseph Lusardi, and Boris Jordan in the Complex Business Litigation Section in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. Plaintiffs' derivative Complaint seeks the judicial dissolution of Curaleaf Florida LLC and asserts various causes of action against Defendants, including for breach of contract, civil conspiracy, breach of fiduciary duty, fraudulent transfer, and a declaratory judgment appointing Robins to the Board of Managers. On January 10, 2020, Weisz, JRF Group, and the Curaleaf entities entered into a Stipulation of Settlement pursuant to which all claims of Weisz and JRF Group against the Company and its affiliates were released without compensation and the Company purchased JRF Group's interest in PalliaTech Florida LLC for consideration of 1,772,062 SVS and $2,500 in cash. During February 2020, SRC, PalliaTech Florida LLC, PalliaTech Florida, Inc., and Lusardi participated in a final arbitration hearing. In June 2020, the arbitrator issued a final order regarding SRC's claims in the dispute. While no damages were awarded, the Company was ordered to buyout SRC's interest in PT Florida. Based on the order, the parties agreed that the Company would acquire SRC's interest in PT Florida for no cash and 2,375,000 SVS. In connection with this transaction, the Company agreed to pay SRC $1,750 cash to retire principal and interest on the half of the Secured Promissory Notes - 2029 held by SRC. The acquisition and retirement of the notes was completed in August 2020.
28
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Securities Class Action. On August 5, 2019, a purported class action was filed against the Company, Joseph Lusardi, Neil Davidson, and Jonathan Faucher ('Defendants') in the United States District Court for the Eastern District of New York on behalf of persons or entities who purchased or otherwise acquired publicly traded securities of the Company from November 21, 2018 to July 22, 2019. On January 6, 2020, an Amended Class Action Complaint was filed against Defendants. The Amended Class Action Complaint alleges that Defendants made materially false and/or misleading statements regarding the Company's CBD products based on a July 22, 2019 letter received from the U.S. Food and Drug Administration ('FDA Letter'). According to the Amended Class Action Complaint, the FDA Letter states that several of the CBD products sold on the Company's website were 'misbranded drugs' in violation of the Federal Food, Drug, and Cosmetic Act. The Amended Class Action Complaint asserts claims (1) against all Defendants for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and (2) against Lusardi, Davidson, and Faucher for alleged violations of Section 20(a) of the Securities Exchange Act of 1934. On March 6, 2020, Defendants filed a motion to dismiss arguing that the Amended Class Action Complaint failed to allege (1) any false or misleading statement or omission, (2) scienter, (3) any domestic transactions, or (4) control person liability. On February 15, 2021, the Company's motion to dismiss was granted with prejudice.
Taxes
The Company records tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances and information available at the reporting date. There is inherent uncertainty in quantifying income tax positions, especially considering the complex tax laws and regulations for federal, state and foreign jurisdictions in which the Company operates. The Company has recorded tax benefits for those tax positions where it is more likely than not that a tax benefit will result upon ultimate settlement with a tax authority that has all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will result, no tax benefit has been recognized in the Interim Financial Statements.
The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal, state and foreign jurisdictions, where applicable. The Company is currently under Internal Revenue Service ('IRS') examination for the tax years 2016, 2017, and 2018, and the Company's subsidiary, Alternative Therapies Group, Inc., is currently under IRS examination for the tax year 2018. As of June 30, 2021, the Company recorded $2,900 of unrecognized tax benefits and expects there is reasonable possibility that these unrecognized tax benefits will change within 12 months due to expirations of statute of limitations or audit settlements. As of June 30, 2021, the Company also accrued interest and penalties of $866 for its uncertain tax positions. The Company records interest and penalties related to income tax amounts as a component of income tax expense.
The IRS has proposed adjustments relating to the U.S. Parent Company's treatment of expenses under Section 280E, however, the Company is defending its tax reporting positions before the IRS. The outcome of this audit remains unclear at this point. The Company also intends to litigate any further such challenges because it currently believes all of its other tax positions can be sustained under an IRS examination. The ultimate resolution of tax matters could have a material effect on the Company's Interim Financial Statements. As the IRS interpretations on Section 280E continue to evolve, the impact of any such challenges cannot be reliably estimated. The Company's tax years are still open under statute from December 31, 2016, to the present.
29
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Note 19 - Related party transactions
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control. Related parties may be individuals or corporate entities. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties.
The EMMAC Transaction discussed in Note 4 - Acquisitions constituted a related party transaction within the meaning of Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions ('MI 61-101') as a result of Measure 8 Ventures, LP, an investment fund managed by Mr. Boris Jordan, the Executive Chairman and control person of the Company, having an interest in the EMMAC Transaction by way of a profit interest and a convertible debt instrument which converted into shares of EMMAC representing 8% of EMMAC equity at closing of the EMMAC Transaction. Mr. Jordan owns a minority interest in Measure 8 Ventures, LP. The Company relied upon the exemptions provided under Sections 5.5(b) of MI 61-101 - Issuer Not Listed on Specified Markets and 5.7(1)(a) of MI 61-101 - Fair Market Value Not More the 25% of Market Capitalization from the requirements that the Company obtain a formal valuation of the EMMAC Transaction and that the EMMAC Transaction receive the approval of the minority shareholders of the Company.
The terms of the EMMAC Transaction and Curaleaf International Transaction were negotiated by management and advisors under guidance of, and unanimously recommended for approval by, a committee composed of members of the Board of Directors free from any conflict of interest with respect to the EMMAC Transaction and Curaleaf International Transaction (the 'Special Committee'), all of which were independent members of the Board of Directors within the meaning of National Instrument 52-110 - Audit Committees. The Special Committee has received a fairness opinion from the independent investment bank Eight Capital, to the effect that, in its opinion, and based upon and subject to the assumptions, limitations and qualifications set forth therein, the consideration paid by the Company as part of the EMMAC Transaction is fair, from a financial point of view, to the Company. The fee paid to Eight Capital in connection with the delivery of its fairness opinion was not contingent on the successful implementation of the EMMAC Transaction.
The Company incurred the following transactions with related parties during the three and six months ended June 30, 2021 and 2020:
Three months ended | Period ended | Balances as of | ||||||||||||||||||||||
June 30, | June 30, | June 30, | December 31, | |||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
Transaction | Related party transactions | Related party transactions | Balance receivable (payable) | |||||||||||||||||||||
Processing fees (1) | $ | - | $ | 535 | $ | - | $ | 1,194 | $ | - | $ | - | ||||||||||||
Consulting fees (2) | 362 | - | 456 | 74 | - | - | ||||||||||||||||||
Travel and reimbursement (2) | 22 | 60 | 1,277 | 151 | - | - | ||||||||||||||||||
Rent expense, net (3) | (42 | ) | (60 | ) | (54 | ) | (119 | ) | - | - | ||||||||||||||
Equipment purchases (4) | - | - | 1,426 | - | - | - | ||||||||||||||||||
Promissory Note - 2024 (5) | 329 | - | 654 | - | (9,700 | ) | (9,700 | ) | ||||||||||||||||
Non-consolidated GR Companies (6) | - | - | - | - | - | 5,947 | ||||||||||||||||||
$ | 671 | $ | 535 | $ | 3,759 | $ | 1,300 | $ | (9,700 | ) | $ | (3,753 | ) |
(1) For the three and six months ended June 30, 2020, the Company recognized direct expenses of $535 and $1,195 for processing expenses with Sisu Extracts, a state licensed processor in California, that performed toll processing services for the Company. No such services were provided in the three and six months ended June 30, 2021. Cameron Forni, Select President, holds a passive investment in Sisu Extracts. Amounts recorded in connection with these expenses were recorded on a current cost basis at the time expenses were incurred. There are no ongoing contractual commitments related to these transactions.
30
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
(2) For the three and six months ended June 30, 2021, the Company recognized $22 and $1,277 in travel and other business development costs as expense to Measure 8 Venture Partners, a company controlled by Boris Jordan, Executive Chairman and control person of the Company. For the three and six months ended June 30, 2021, the Company recognized consulting expense of $92 and $186 for real estate management and advisory services to Frontline Real Estate Partners, LLC, a company controlled by Mitchell Kahn, a Board Member. Amounts recorded in connection with these expenses were recorded on a current cost basis at the time expenses were incurred. There are no ongoing contractual commitments related to these transactions.
(3) For the three and six months ended June 30, 2021, the Company recognized a rent expense credit of $60 and $119 for a sublease between Curaleaf NY, Inc. and Measure 8 Venture Partners, a company controlled by Boris Jordan, Executive Chairman and control person of the Company. For the three and six months ended June 30, 2021, the Company recognized a rent expense of $18 and $65 for a lease between GR Companies, Inc. and FREP Elm Place II, LLC, a company owned in part by Mitchell Kahn, a Board Member. Both arrangements represent on-going contractual commitments based on executed leases.
(4) For the three and six months ended June 30, 2021, the Company paid $1,426 to Sentia Wellness to purchase hemp processing equipment. Sentia Wellness is a Cannabidiol company that was formerly associated with Select, prior to the acquisition by Curaleaf. Boris Jordan, Executive Chairman and control person of the Company, and Cameron Forni, Select President, have interests in Sentia Wellness.
(5) For the period ended June 30, 2021, the Company had an outstanding notes payable balance of $9,700 and recognized a related interest expense of $329 and $654 for the three and six months ended June 30, 2021 on the Promissory Note - 2024, which is held with Baldwin Holdings, LLC, in which Joseph F. Lusardi, the Company's Executive Vice Chairman, has a direct equity interest. The Company entered into the Promissory Note - 2024 in October 2020 to replace the previously recorded contingent consideration liability (Note 11 - Notes payable). Amounts recorded in connection with these expenses were recorded on a current cost basis at the time expenses were incurred. The liability contains certain repayment and interest components that represents on-going contractual commitments.
(6) Through its acquisition of Grassroots, the Company acquired an option to purchase MCCW from its sole owner, KDW, subject to regulatory approval, which was received May 1, 2021. MCCW is the holder of cultivation, processing, and dispensary licenses in Maryland. MCCW is the sole owner of each of GR Vending MD Management, LLC and GR Vending MD, LLC. Mr. Kahn, a member of the Company's board of directors, is a minority stockholder, the sole director and an officer of KDW.
The Company's key management personnel have the authority and responsibility for planning, directing and controlling the activities of the Company and consists of the Company's executive management team and management directors. Key management personnel compensation and other related party expenses for the three and six months ended June 30, 2021 and 2020 are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
Key management personnel compensation | 2021 | 2020 | 2021 | 2020 | ||||||||||||
Short-term employee benefits | $ | 3,194 | $ | 1,251 | $ | 4,094 | $ | 2,287 | ||||||||
Other long-term benefits | 11 | 12 | 21 | 19 | ||||||||||||
Share-based payments | 4,323 | 4,598 | 6,741 | 8,152 | ||||||||||||
$ | 7,528 | $ | 5,861 | $ | 10,856 | $ | 10,458 |
31
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Note 20 - Fair value measurements
The Company's financial instruments consist of cash, restricted cash and cash equivalents, notes receivable, accounts payable, accrued expenses, long-term debt, and redeemable non-controlling interest contingency. The fair values of cash, restricted cash, notes receivable, accounts payable, and accrued expenses approximate their carrying values due to the relatively short-term to maturity. The carrying value of the Company's long-term notes payable at the effective interest rate approximates fair value.
Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and
Level 3 - Inputs for the asset or liability that are not based on observable market data.
The Company's assets measured at fair value on a nonrecurring basis include investments, long-lived assets, indefinite-lived intangible assets, and goodwill. The Company reviews the carrying amounts of such assets whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable or at least annually as of December 31, for indefinite-lived intangible assets and goodwill. Any resulting asset impairment would require that the asset be recorded at its fair value. The resulting fair value measurements of the assets are considered to be Level 3 measurements.
There have been no transfers between fair value levels during the three and six months ended June 30, 2021 and 2020.
Fair value measurements | ||||||||||||||||
as of June 30, 2021 using: | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Biological assets | $ | - | $ | - | $ | 64,263 | $ | 64,263 | ||||||||
$ | - | $ | - | $ | 64,263 | $ | 64,263 | |||||||||
Liabilities: | ||||||||||||||||
Non-controlling interest redemption and contingent consideration liabilities | $ | - | $ | - | $ | 167,327 | $ | 167,327 | ||||||||
$ | - | $ | - | $ | 167,327 | $ | 167,327 |
32
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Fair value measurements | ||||||||||||||||
as of December 31, 2020 using: | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Biological assets | $ | - | $ | - | $ | 46,210 | $ | 46,210 | ||||||||
$ | - | $ | - | $ | 46,210 | $ | 46,210 | |||||||||
Liabilities: | ||||||||||||||||
Non-controlling interest redemption and contingent consideration liabilities | $ | - | $ | - | $ | 4,592 | $ | 4,592 | ||||||||
$ | - | $ | - | $ | 4,592 | $ | 4,592 |
Biological assets
The fair value of biological assets is categorized in Level 3 on the fair value hierarchy. The Company measures its biological assets at fair value less costs to sell. This is determined using a model which estimates the expected harvest yield in grams for plants that are actively growing, and then adjusts that amount for the expected selling price per gram in the market in which the biological asset is growing. The estimates used in determining the fair value of biological assets are subject to volatility and several uncontrollable factors, which could significantly affect the fair value of biological assets in future periods. The significant assumptions used in determining the fair value of biological assets include:
· | Expected yield by plant - represents the expected number of grams of finished cannabis inventory which are expected to be obtained from each harvested cannabis plant; |
· | Wastage of plants - represents the weighted average percentage of biological assets which are expected to fail to mature into cannabis plants that can be harvested; |
· | Duration of the production cycle - represents the weighted average number of weeks out of the 12 week growing cycle that biological assets have reached as of the measurement date; |
· | Percentage of costs incurred as of this date compared to the total costs expected to be incurred - this is calculated as the cost per gram of harvested cannabis to complete the sale of cannabis plants post harvest, consisting of the cost of direct and indirect materials and labor related to further production, labeling, and packaging; |
· | Percentage of costs incurred for each stage of plant growth - represents the direct and indirect production costs incurred that are capitalized; and |
· | Market values - this is calculated as the current market price per gram in the market in which the biological asset is being produced. This is expected to approximate future selling price. |
The Company accretes fair value on a straight-line basis according to stage of growth. As a result, a cannabis plant that is 50% through its 12-week growing cycle would be ascribed approximately 50% of its harvest date expected fair value. All plants are to be harvested cannabis and as of June 30, 2021 and December 31, 2021, on average, were 52% and 57% complete, respectively. An increase or decrease in the estimated sale price would result in a significant change in the fair value of biological assets.
33
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
The following table highlights the sensitivities and impact of changes in significant assumptions to the fair value of biological assets:
Significant inputs & assumptions | Sensitivity Inputs ('000s) | Sensitivity | (+/-) Impact on Fair Value ('000s) | |||||||||||||||
June 30, 2021 |
December 31, 2020 |
June 30, 2021 |
December 31, 2020 | |||||||||||||||
Total expected grams yielded | 11,383 | 9,776 | (+/-) 10% grams yield | $ | 4,596 | $ | 3,017 | |||||||||||
Average cost per gram to complete production | $ | 1.20 | $ | 1.78 | (+/-) $1.00 per gram | $ | 11,383 | $ | 9,734 | |||||||||
Average selling price per gram, less cost | $ | 4.04 | $ | 3.09 | (+/-) $1.00 per gram | $ | 22,765 | $ | 9,713 |
Non-controlling interest contingency and buyout
During 2018 the Company agreed to acquire the remaining non-controlling interest in Costa Nursery Farms, LLC, d/b/a Modern Health Concepts ('MHC') and Double Road Holdings, LLC ('DRH'), therefore voiding the non-controlling interest put options and call options purchased by the non-controlling interest from the original agreements. The MHC acquisition's consideration was for $25,000 in cash as well as SVS and the DRH acquisition consideration was for $40,142 in cash as well as SVS. Upon closing of each acquisition, the Company reversed the non-controlling interest contingency liabilities.
The non-controlling interest in MHC of $12,000 was calculated using the fair value method of the assets acquired and liabilities assumed. The value used in this determination was the purchase price for the controlling interest. The Company used the fair value method as it believes that the risks and rewards of the acquired entity are shared by the Company and the holder of the non-controlling interest. The MHC purchase agreement contained a put option under which the holder of the non-controlling interest could require the Company to redeem its equity interest in MHC. The redemption value was to be determined by mutual agreement or by an independent valuation expert subject to certain parameters that include a 'floor' amount of $12,000 and a 'ceiling' amount equal to 75% of the excess of the fair market value over $40,000 times the percentage interest held by the holder of the non-controlling interest (30% at the acquisition date). The Company had a call option under which it may require the holder of the non-controlling interest to sell under the same terms.
PT Florida was owned 77.2% by the Company and 22.8% by third parties (the 'Remaining Florida Minority Holders'). The Remaining Florida Minority Holders, through their 22.8% non-controlling interest in PT Florida, indirectly held a 15.9% non-controlling interest in MHC as of December 31, 2019. In January 2020, half of the Remaining Florida Minority Holders agreed to sell their 11.4% equity in PT Florida for consideration of $2,500 cash and 1,772,062 SVS, valued at $12,272. In connection with this transaction, the Company paid the selling Remaining Florida Minority Holders $1,651 cash to retire principal and interest on the half of the Secured Promissory Notes - 2029 held by the selling Remaining Florida Minority Holders. In August 2020, the remaining half of the Remaining Florida Minority Holders agreed to sell their 11.4% equity in PT Florida for consideration of no cash and 2,375,000 SVS, valued at $19,996. In connection with this transaction, the Company paid the selling Remaining Florida Minority Holders $1,766 cash to retire principal and interest on the remaining half of the Secured Promissory Notes - 2029 held by the selling Remaining Florida Minority Holders.
34
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
In October 2018, the Company agreed to acquire from the minority members of DRH (the 'DRH Minority Members') their remaining 49% membership interests in DRH (the 'DRH Minority Membership Units') in consideration for $40,142 in cash (the 'Connecticut Minority Buy-Out') and $41,747 which was settled through the issuance of 4,755,548 SVS. This transaction closed immediately following completion of the Business Combination. The number of SVS payable to the DRH Minority Members for the DRH Minority Membership Units was subject to adjustment based upon an independent valuation to be conducted following the completion of the Business Combination. The purpose of the valuation was to establish the value of DRH as a percentage of the value of Curaleaf Inc. as of March 8, 2018 (the 'Exchange Ratio'), and then convert the Exchange Ratio into a percentage of the fully diluted equity as of the date of the closing of the Business Combination, not taking into account shares to be issued in connection with the related private placement (the 'Diluted Share Count'). Upon completion of this valuation, the number of additional SVS issuable to DRH Minority Members was to be determined based on a prescribed formula, provided that the aggregate number of SVS issued to the DRH Minority Holders shall not exceed an additional 1.96% of the Diluted Share Count representing 8,962,380 SVS. In February 2020, the Company issued 2,016,858 SVS to the former minority members of DRH as a result of the second independent valuation.
As of both June 30, 2021 and December 31, 2020, the Company recognized a non-controlling interest redemption liability in the amount of $2,694, with the offset being recognized in redeemable non-controlling interest buyout as contra equity. An increase or decrease in the weighted average cost of capital would result in an insignificant change in the fair value of the non-controlling interest contingency.
Curaleaf International put/call rights
On April 7, 2021, the Company established Curaleaf International together with a strategic investor who provided initial capital of $130,798 for 31.5% equity stake in Curaleaf International. Curaleaf and the strategic investor have entered into a shareholders' agreement regarding the governance of Curaleaf International pursuant to which Curaleaf has control over operational issues as well as raising capital and the ability to exit the business. In addition, the strategic investor's stake is subject to put/call rights which permit either party to cause the stake to be bought out by Curaleaf for Curaleaf equity starting the earlier of change of control or in 2025.
The Curaleaf International put/call rights represent a financial liability that is recorded at the present value of the redemption amount, with subsequent changes in fair value recognized in other comprehensive income . The redemption amount of the puttable option approximates the contribution amount by the strategic investor and represents a level 3 financial instrument, that is valued at each reporting period utilizing a Monte Carlo simulation valuation model. The fair value determination includes a high degree of subjectivity and judgement, which results in significant estimation uncertainty. As of June 30, 2021, the Curaleaf International put/call rights represent a financial liability of $126,372, with the offset being recognized separately from non-controlling interest in redeemable non-controlling interest within equity.
Financial risk management
The Company is exposed in varying degrees to a variety of financial instrument related risks. The Company's risk exposures and the impact on the Company's financial instruments are summarized below:
Credit risk
Credit risk is the risk of a potential loss to the Company if a customer or third party to a financial instrument fails to meet its contractual obligations and arises principally from the Company's notes and accounts receivable. The maximum credit exposure at June 30, 2021 and December 31, 2020 is the carrying amount of cash and cash equivalents, accounts receivable and notes receivable. The Company does not have significant credit risk with respect to its customers. All cash and cash equivalents are placed with major U.S. financial institutions.
The Company provides credit to its wholesale and MSA customers in the normal course of business and has established processes to mitigate credit risk. The amounts reported in the unaudited condensed interim consolidated statements of financial position are net of allowances for bad debts, estimated by the Company's management based on prior experience and its assessment of the current economic environment. The Company reviews its trade receivable accounts regularly and reduces amounts to their expected realizable values by adjusting the allowance for doubtful accounts when management determines that the account may not be fully collectible. The Company applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. The Company has not adopted standardized credit policies, but rather assesses on a customer-by-customer basis in an effort to minimize those risks.
Liquidity risk
Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with financial liabilities. The Company manages liquidity risk through the management of its capital structure. The Company's approach to managing liquidity is to ensure that it will have sufficient liquidity to settle obligations and liabilities when due.
35
Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
In addition to the commitments outlined for notes payable in Note 11 and lease liabilities in Note 18, the Company has the following gross remaining contractual obligations:
< 1 Year | 1 to 3 Years | Total | ||||||||||
For the six months ended June 30, 2021: | ||||||||||||
Accounts payable | $ | 42,957 | $ | - | $ | 42,957 | ||||||
Accrued expenses | 59,672 | - | 59,672 | |||||||||
Other current liabilities | 13,083 | - | 13,083 | |||||||||
Non-controlling interest redemption liability | - | 129,066 | 129,066 | |||||||||
Contingent consideration liability | 9,155 | 29,106 | 38,261 | |||||||||
$ | 124,867 | $ | 158,172 | $ | 283,039 |
The Company is monitoring the impacts of COVID-19 closely, and although liquidity has not been materially affected by the COVID-19 outbreak to date, the ultimate severity of the outbreak and its impact on the economic environment is uncertain. Given the current uncertainty of the future economic environment, the Company has taken additional measures in monitoring and deploying its capital to minimize the negative impact on liquidity. For more information, see Note 2 - COVID-19 Estimation Uncertainty and the heading 'Risk Factors - Risks Related to the COVID-19 Pandemic' in the Company's annual information form for the year ended December 31, 2020, which is available under the Company's profile on SEDAR.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Cash and cash equivalents bear interest at market rates. The Company's notes receivable and financial debts have fixed rates of interest and are carried at amortized cost. The Company does not account for any fixed-rate financial assets or financial liabilities at fair value; therefore, a change in interest rates at the reporting date would not affect profit or loss.
Capital management
The Company's objectives when managing capital are to ensure that there are adequate capital resources to safeguard the Company's ability to continue as a going concern and maintain adequate levels of funding to support its ongoing operations and development such that it can continue to provide returns to shareholders and benefits for other stakeholders.
The capital structure of the Company consists of items included in shareholders' equity and debt, net of cash and cash equivalents. The Company manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the Company's underlying assets. The Company plans to use existing funds, as well as funds from the future sale of products to fund operations and expansion activities.
As disclosed in Note 11 - Notes payable, the Company has various notes payable in place. Certain of these notes are subject to financial covenants which are mainly in the form of cash related covenants. Other than these items related to notes payable, as of June 30, 2021 and December 31, 2020, the Company was not subject to externally imposed capital requirements.
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Curaleaf Holdings, Inc.
Notes to Condensed Interim Consolidated Financial Statements
Unaudited
(in thousands, except for gram, share, and per share amounts)
Note 21 - Non-Controlling Interest
On April 7, 2021, the Company established an overseas subsidiary named Curaleaf International Holdings Limited ('Curaleaf International') together with a strategic investor who provided initial capital of $130,798 for 31.5% equity stake in Curaleaf International. Curaleaf International was used for the acquisition of EMMAC Life Sciences Limited ('EMMAC'), the largest vertically integrated independent cannabis company in Europe. This infusion of outside capital into Curaleaf International significantly accelerates Curaleaf's expansion plans in Europe by fully funding Curaleaf's cash outlay for the EMMAC Transaction (as defined below) and providing the capital required to support Curaleaf International's near-term European rollout. With its foreseeable expansion budget fully funded, Curaleaf's new international business can focus on executing its further European expansion.
Curaleaf and the strategic investor have entered into a shareholders' agreement regarding the governance of Curaleaf International pursuant to which Curaleaf has control over operational issues as well as raising capital and the ability to exit the business. In addition, the strategic investor's stake is subject to put/call rights which permit either party to cause the stake to be bought out by Curaleaf for Curaleaf equity starting the earlier of change of control or in 2025. See Note 4 - 2021 acquisition, for further details on the EMMAC Transaction.
The following table presents the Company's investment in Curaleaf International as of June 30, 2021 and 2020:
June 30, | ||||||||
2021 | 2020 | |||||||
Investment in Curaleaf International | $ | 184,346 | $ | - |
The following table presents the current and non-current assets, current and non-current liabilities, as well as revenues and net loss of the Company's investment in Curaleaf International for the six months ended June 30, 2021:
June 30, | |||
2021 | |||
Current assets | $ | 79,703 | |
Non-current assets | $ | 345,465 | |
Current liabilities | $ | 11,408 | |
Non-current liabilities | $ | 104,200 | |
Revenue | $ | 4,102 | |
Net Loss | $ | (8,007) |
Note 22 - Subsequent events
See Note 4 - Acquisitions, for information regarding additional acquisitions that were signed after June 30, 2021.
See Note 7 - Assets and liabilities held for sale, for information regarding transactions that were completed after June 30, 2021.
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Curaleaf Holdings Inc. published this content on 10 August 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 10 August 2021 10:22:37 UTC.