THE GREENROSE HOLDING COMPANY INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF GREENROSE FOR THE THREE AND NINE MONTHS ENDED
AND 2021.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our Consolidated Financial
Statements and related notes to the Consolidated Financial Statements of this
Quarterly Report on Form 10-Q (this "Quarterly Report") and our Annual Report on
Form 10-K for the year ended December 31 2021 . This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those discussed below. Factors that could
cause or contribute to such differences include, but are not limited to, those
identified below and those discussed in Item 1A "Risk Factors" of our Quarterly
Report.
References in this report (the "Quarterly Report") to "we," "us" or the
"Company" refer to The Greenrose Holding Company Inc. References to our
"management" or our "management team" refer to our officers and directors, and
references to the "Sponsor" refer to Greenrose Associates LLC . The following
discussion and analysis of the Company's financial condition and results of
operations should be read in conjunction with the financial statements and the
notes thereto contained elsewhere in this Quarterly Report.
This MD&A contains both historical and forward-looking statements, within the
meaning of the Private Securities Litigation Reform Act of 1995, that involve
risks and uncertainties. We make forward-looking statements related to future
expectations, estimates, and projections that are uncertain and often contain
words such as "anticipate," "believe," "could," "estimate," "expect,"
"forecast," "intend," "likely," "may," "outlook," "plan," "predict," "should,"
"target," or other similar words or phrases. These statements are not guarantees
of future performance and are subject to known and unknown risks, uncertainties,
and assumptions that are difficult to predict. Factors that might cause such
differences include, but are not limited to, those discussed in Part 2 of this
Form 10-Q under Item 1A., "Risk Factors," which are incorporated herein by
reference. Our future results and financial condition may be materially
different from those we currently anticipate, and historical results may not be
indicative of future performance.
Financial information and unit or share figures, except per-unit or per-share
amounts, presented in this MD&A are presented in thousands of US dollars ("$"),
unless otherwise indicated. We round amounts in this MD&A to the thousands and
calculate all percentages, per-unit, and per-share data from the underlying
whole-dollar amounts. Thus, certain amounts may not foot, cross foot, or
recalculate based on reported numbers due to rounding. Unless otherwise
indicated, all references to years are to our three months ended on September
30 .
Overview
The Greenrose Holding Company Inc. is a Delaware incorporated holding company
that was formed special purpose acquisition company under the name of Greenrose
Acquisition Corp. for the purpose of entering into a merger, share exchange,
asset acquisition, stock purchase, recapitalization, reorganization or similar
business combination with one or more businesses or entities. On November 24,
2021 , Greenrose Acquisition Corp. , changed name to The Greenrose Holding Company
Inc. ("Greenrose", the "Company", or "Successor"), and on November 26, 2021 , the
Company consummated its business combination (the "Theraplant Merger" or
"Theraplant Business Combination") with Theraplant, LLC , a Connecticut limited
liability company ("Theraplant" or "Predecessor"), a private operating company.
Theraplant is a cannabis producer licensed by the State of Connecticut ,
dedicated to providing patients options to improve their wellbeing. Theraplant
was Connecticut's first state-licensed medical cannabis producer, receiving its
license on February 7, 2014 , and in October 2014 became the first producer to
distribute medical cannabis in the Connecticut market. Theraplant designs
premium cannabis genetics to offer a wide variety of compositions to meet needs
of the state's medical cannabis cardholders for all approved treatment
conditions, while making quality medical cannabis affordable to the greatest
range of patients. Theraplant hand selects premium cannabis genetics grown in a
controlled, clean environment, under the watch of an award-winning cultivation
team, and tested by a third-party laboratory for pesticides and microbiologics.
Theraplant operates out of a cultivation facility with 68,000 square feet of
capacity, with an additional 30,000 square feet of capacity that was completed
in the first quarter of 2022.
41
On December 31, 2021 , the Company completed its acquisition of substantially all
of the assets and certain liabilities of True Harvest, LLC ("True Harvest") as
key part of its growth strategy. True Harvest is a limited liability company
established in 2015 in the State of Arizona . True Harvest cultivates,
manufactures, and sells medical marijuana in the State of Arizona , under a
cultivation agreement with a third-party licensor, who has a medical marijuana
dispensary registration certificate from Arizona Department of Health Services
and is authorized to operate an off-site cultivation facility.
Operational and Regulation Overview
We believe our operations are in material compliance with all applicable state and local laws, regulations, and licensing requirements in the states in which we operate. However, cannabis is illegal underUnited States federal law. Substantially all of our revenue is derived fromUnited States cannabis operations. For information about risks related toUnited States cannabis operation, See Risk Factors disclosure in our annual Report on Form 10-K filedApril 15, 2022 , as amended.
Theraplant Business Combination
OnNovember 26, 2021 , we consummated the Theraplant Business Combination. Under the terms of the acquisition, we paid consideration of$153,132 thousand at close, consisting of$91,196 thousand in cash,$43,500 thousand in shares of the Company's common stock,$9,616 thousand in the form of a convertible note, paid down$6,754 thousand of outstanding debt and agreed to pay an incremental$1,975 thousand based upon the sale of an investment and certain tax reimbursements on the date of the transaction. This acquisition qualified as a business combination in accordance with ASC 805, Business Combinations ("ASC 805"). We have recorded an allocation of the consideration to Theraplant's identified tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the Closing Date. The excess of the acquisition consideration over the fair value of the assets acquired and liabilities assumed was recorded as goodwill. True Harvest Acquisition OnDecember 31, 2021 , we consummated the business combination with True Harvest (the "True Harvest Business Combination") and entered into an amendment ("Amendment No. 3") to the Asset Purchase Agreement. Pursuant to the amended Asset Purchase Agreement,Greenrose paid aggregate consideration of$68,671 thousand at close, consisting of$12,500 thousand in cash,$20,892 thousand in the form of a convertible note, and$14,399 thousand in fair value of shares issued of the Company's common stock. In addition, Contingent upon True Harvest achieving a certain price point per pound of cannabis flower relative to total flower production within 36 months of the closing of the transaction, the Company will pay additional consideration of up to$35,000 thousand in the form of an earnout, payable in shares of common stock of the Company. The fair value of such contingent consideration was$20,880 thousand and is included in consideration transferred. Up to 1,100,000 shares are contingently returnable toGreenrose if theGreenrose common stock price reaches$12.50 per share for 20 consecutive trading days, and the fair value of such contingently returnable shares has been determined to be$0 as of the date of the transaction. COVID-19 InMarch 2020 , theWorld Health Organization declared the coronavirus (COVID-19) a global pandemic. The COVID-19 outbreak and the response of governmental authorities to try to limit it are having a significant impact on the private sector and individuals, including unprecedented business, employment, and economic disruptions. Management has been closely monitoring the impact of COVID-19, with a focus on the health and safety of the Company's employees, business continuity and supporting the communities where the Company operates. The company has implemented various measures to reduce the spread of the virus, including implementing social distancing measures at its cultivation facilities, manufacturing facilities, and dispensaries, enhancing cleaning protocols at such facilities and dispensaries and encouraging employees to adhere to preventative measures recommended by local, state, and federal health officials. It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on its business or results
of operations at this time.
Rising Inflation and Interest Rate
Recently, inflation has trended significantly higher than in prior periods, which may be negatively impacting our business. Ongoing labor shortages and surge of gas price, driven in part by the COVID-19 pandemic, geopolitical issues and the war inUkraine , continue to have adverse macroeconomics impact and may result in our cost overruns. Financial markets have also been volatile, reflecting heightened geopolitical risks and material tightening of financial conditions since theU.S. Federal Reserve began increasing interest rates in spring of 2022 and continued uncertainty regarding monetary policy. Driven in part by overall macroeconomics conditions, capital availability has significantly declined for regulated cannabis operators. 42
Key Performance Indicators and Non-GAAP Measures
Our management uses a variety of financial and operating metrics to evaluate our
business, analyze our performance, and make strategic decisions. We believe
these metrics and non-GAAP financial measures provide useful information to
investors and others in understanding and evaluating our operating results in
the same manner as management. However, these measures are not financial
measures calculated in accordance with GAAP and should not be considered as
substitutes for financial measures that have been calculated in accordance with
GAAP. We primarily review the following key performance indicators and non-GAAP
measures when assessing our performance: (i) revenue; (ii) EBITDA; (iii)
adjusted EBITDA; (iv) working capital; (v) cash flow; and (vi) return on capital
employed. We believe these indicators provide us with useful data with which to
measure our performance.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measures that represents earnings before
interest expense, income taxes, depreciations, and amortization, or EBITDA, and
further adjustments to EBITDA to exclude certain non- cash items and other
non-recurring items that management believes are not indicative of ongoing
operations. We disclose EBITDA and Adjusted EBITDA because these non-GAAP
measures are key measures used by our management to evaluate our business,
measure its operating performance, and make strategic decisions. We believe
EBITDA and Adjusted EBITDA may be useful for investors and others in
understanding and evaluating our operations results in the same manner as its
management. However, EBITDA and Adjusted EBITDA are not financial measures
calculated in accordance with GAAP and should not be considered as a substitute
for net income, income before income taxes, or any other operating performance
measure calculated in accordance with GAAP. Using these non-GAAP financial
measures to analyze our business would have material limitations because the
calculations are based on the subjective determination of management regarding
the nature and classification of events and circumstances that investors may
find significant. In addition, although other companies in our industry may
report measures titled EBITDA and Adjusted EBITDA or similar measures, such
non-GAAP financial measures may be calculated differently from how we calculate
non-GAAP financial measures, which reduces their overall usefulness as
comparative measures. Because of these limitations, you should consider EBITDA
and Adjusted EBITDA alongside other financial performance measures, including
net income and our other financial results presented in accordance with GAAP.
The following table presents a reconciliation of net income to EBITDA and
Adjusted EBITDA for each of the periods indicated:
For the three months ended For the nine months ended
September 30, September 30,
Successor Predecessor Successor Predecessor
(in thousands) 2022 2021 2022 2021
Net Income (Loss) $ (36,035 ) $ 2,852 $ (60,939 ) $ 8,912
Provision for income taxes 948 262 2,182 812
Interest expense, net 10,113 58 23,642 135
Depreciation & amortization 4,661 209 13,858 617
EBITDA (20,313 ) 3,381 (21,257 ) 10,476
Transaction related fees(a) - - 588 294
Change in Fair Value of Financial
Instruments(b) (13,861 ) - (15,025 ) -
Fair Value Step-up of Inventory (c) 1,152 - 5,497 - Goodwill impairment (d) 33,154 33,154 Infrequent events(e) 1,008 - 773 87 Management fees(f) - - - 400
Stock compensation expense (g) 148
- 810 - Adjusted EBITDA $ 1,228$ 3,381 $ 4,540 $ 11,257
(a) For the nine months ended
consulting legal and accounting fees related to the acquisitions of
Theraplant and True Harvest and their corresponding contractual filing
requirements of a Form S-1 to register shares. For the three and nine months
ended
accounting fees in preparation for the Theraplant Business Combination.
(b) Change in Fair Value of Financial Instruments represent the (gain)/loss
related to private warrants and other derivative instruments. For the three
and nine months ended
resulted primarily from fluctuations in the Company's stock price.
(c) Represents the impact to the cost of goods sold due to the fair value step up
of inventory from purchase accounting.
(d) Represents the impairment of
30, 2022.
(e) For the three months ended
of reclassifying the prior quarter of contingent consideration of
thousand to change in fair value in financial instruments. For the nine
months ended
thousand loss on note settlement. For the nine months ended
2021, the
to a fire in a grow room causing repair expenses that had not yet been
recovered by insurance, as well as
related to Connecticut cannabis regulation proposals.
43
(f) Represents management fees associated with management consulting services
that were not required to be paid after the closing of the Theraplant
Business Combination.
(g) Represents share based compensation incurred for the nine months ended
September 30, 2022 as part of the Company's equity incentive plan. Results of Operations
For the three and nine months ended
For the Three Months Ended For the Nine Months Ended
Predecessor Change Predecessor Change
September 30, September 30, Increase/(Decrease) September 30, September 30, Increase/(Decrease)
(in thousands) 2022 2021 $ % 2022 2021 $ %
Revenues, net
of discounts $ 7,849 $ 6,236 $ 1,613 26 % $ 25,229 $ 19,956 $ 5,273 26 %
Cost of goods
sold (5,246 ) (2,187 ) (3,059 ) 140 % (17,896 ) (7,012 ) 10,884 155 %
Gross margin 2,603 4,049 (1,446 ) -36 % 7,333 12,944 -5,611 -43 %
Selling and
marketing (25 ) (12 ) (13 ) 108 % (78 ) (199 ) (121 ) -61 %
General and
administrative (4,609 ) (850 ) (3,759 ) 442 % (12,881 ) (2,845 ) 10,036 353 %
Depreciation
and
amortization (3,968 ) (15 ) (3,953 ) NM (11,913 ) (41 ) 11,872 NM
Asset
impairment (33,154 ) - (33,154 ) 100 % (33,154 ) - 33,154 100 %
Income (loss)
from
operations (39,153 ) 3,172 (38,887 ) NM (50,693 ) 9,859 (69,851 ) NM
Other income
(expense), net 4,066 (58 ) 4,124 NM (8,064 ) (135 ) (7,929 ) NM
Provision for
income taxes (948 ) (262 ) (686 ) 262 % (2,182 ) (812 ) (1,370 ) 169 %
Net income
(loss) $ (36,035 ) $ 2,852 (38,887 ) -1363 % $ (60,939 ) $ 8,912 (69,851 ) -784 %
NM - Not Meaningful
Comparison of the three and nine months ended
The following discussion represents a comparison of our results of operations for the three and nine months endedSeptember 30, 2022 , compared to the three and nine months endedSeptember 30, 2021 . In the opinion of management, the unaudited condensed financial statements recognize all adjustments of a normal recurring nature considered necessary to fairly state our financial position, results of operations and cash flows for the periods presented. Revenue, net of discounts For the three months endedSeptember 30, 2022 , the Company's revenue, net of discounts increased$1,613 thousand or 26% compared to the prior year. The increase is primarily a result of the current period including Theraplant and True Harvest comparing to the prior year that included only Theraplant revenue. True Harvest revenue, net of discounts, of$3,041 thousand for the three months endedSeptember 30, 2022 , contributed to our revenue growth, which was lower than expected due to productions issues at the facility as a result of construction for the expansion of the facility. Theraplant revenue was$1,428 thousand lower as compared to the prior year. The decrease is a result of a reduction in the medicinal market inConnecticut along with increased competition. The decrease in revenue is also a result of new legislation for adult-use cannabis inConnecticut . With the law, "An Act Concerning Responsible and Equitable Regulation of Adult-Use Cannabis", passed inJune 2021 , we believe that prospective consumerswho previously obtained a medical card or considered obtaining a medical card decided to purchase cannabis outside of the medical market. This was the result of the decriminalization of cannabis as ofJuly 1, 2021 inConnecticut , which makes possible the forgoing of the cost of a doctor's visit and a state license registration. Further, the availability of black-market products for the larger new adult (non-medical) market has increased due to illegal events and delivery services, negatively impacting revenues. The new law now allows for adult use of the product inConnecticut . 44
For the nine months endedSeptember 30, 2022 , the Company's revenue, net of discounts increased$5,273 thousand or 26% compared to the prior year. The increase is primarily a result of the current period including Theraplant and True Harvest comparing to the prior year including only Theraplant revenue. True Harvest revenue, net of discounts, of$10,113 thousand for the nine months endedSeptember 30, 2022 , contributed to our revenue growth, which was lower than expected due to productions issues at the facility as a result of construction for the expansion of the facility. Theraplant revenue was$4,840 thousand lower as compared to the prior year. The decrease is a result of a reduction in the medicinal market inConnecticut along with increased competition discussed above with respect to the three months endedSeptember 30, 2022 . Cost of Goods Sold Cost of goods sold, net for the three months endedSeptember 30, 2022 increased$3,059 thousand or 140% compared to the prior year. The increase is due to purchase accounting considerations in the fair value step up of inventory. The sales of inventory held at fair value at Theraplant resulted in an increase in cost of goods sold of$758 thousand of additional cost due to purchase accounting. Additionally, True Harvest had cost of goods sold for the three months endedSeptember 30, 2022 of$1,758 thousand , including the fair value step up of inventory. The Company also had various increases in cost of goods sold related to bringing additional capacity online, and the Company incurred additional costs related to initial planting and production processes in the new production facility. These start up costs are expected to decrease in the remainder of 2022. Cost of goods sold, net for the nine months endedSeptember 30, 2022 , increased$10,884 thousand or 155% compared to the prior year. The increase is due to purchase accounting considerations in the fair value step up of inventory. The sales of inventory held at fair value at Theraplant resulted in an increase in cost of goods sold of$2,709 thousand of additional cost due to purchase accounting. Theraplant cost of goods sold, excluding the sales of inventory held at fair value, decreased$512 thousand . This decrease is due to the decrease in revenue for the nine months endedSeptember 30, 2022 which decreased similarly. Additionally, True Harvest had cost of goods sold for the nine months endedSeptember 30, 2022 of$8,687 thousand , including the fair value step up of inventory. The Company also had various increases in cost of goods sold related to bringing additional capacity online, and the Company incurred additional costs related to initial planting and production processes in the new production facility. These start up costs are expected to decrease in the remainder of
2022. Gross Profit Gross Profit for the three months endedSeptember 30, 2022 , decreased$1,446 thousand or 36% compared to the prior year. The decrease is due primarily to purchase accounting considerations in the fair value step up of inventory, causing an increase in cost of goods sold for Theraplant of$1,301 thousand . Further, Theraplant revenue decreased$1,428 thousand for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 offset by the gross profit of True Harvest included within the 2022 results of$1,283 thousand .
Gross Profit for the nine months endedSeptember 30, 2022 , decreased$5,611 thousand or 43% compared to the prior year. The decrease is due to purchase accounting considerations in the fair value step up of inventory, causing an increase in cost of goods sold for Theraplant of$2,197 thousand . Additionally, the decrease is due to decreasing Theraplant revenue of$4,840 thousand compared to the prior period while True Harvest had gross profit of$1,426 thousand included within the gross profit for the nine months endedSeptember 30, 2022 .
Selling and Marketing Expenses
Selling and marketing expenses for the three months endedSeptember 30, 2022 , increased$13 thousand or 108% compared to the prior period. This increase was primarily due to more purchases in marketing material. Selling and marketing expenses for the nine months endedSeptember 30, 2022 , decreased$121 thousand or 61% compared to the prior period. This decrease was primarily due to less purchases in marketing material.
General and Administrative Expenses
General and administrative expenses for the three months endedSeptember 30, 2022 , increased$3,759 thousand or 442% compared to the prior year. This increase is a result of the current period including Theraplant,Greenrose , and True Harvest comparing to the prior period that was inclusive of only Theraplant expenses. This resulted in incremental general and administrative expenses of True Harvest had General and Administrative expenses of$597 thousand andGreenrose had expenses of$3,287 thousand and comparative Theraplant general and administrative expenses remaining consistent year over year. 45
General and administrative expenses for the nine months endedSeptember 30, 2022 , increased$10,036 thousand or 353% compared to the prior year. This increase is a result of the current period including Theraplant,Greenrose , and True Harvest comparing to the prior period that was inclusive of only Theraplant expense which resulted in an increase in general and administrative expenses of$11,055 thousand . Theraplant's general and administrative expenses decreased approximately$1,036 thousand due primarily to a decrease in professional fees that include consulting and legal fees.
Depreciation and Amortization
Depreciation and amortization for the three months endedSeptember 30, 2022 , increased$3,953 thousand compared to the prior year. This increase is due to the amortization of the intangible assets for the period beginningDecember 31, 2021 . These intangible assets acquired in connection with the Theraplant Business Combination totaled$107,000 thousand and True Harvest Business Combination totaled$8,000 thousand . The amortization of the acquired intangible assets was$3,950 thousand for the three months endedSeptember 30, 2022 . Depreciation and amortization for the nine months endedSeptember 30, 2022 , increased$11,872 thousand compared to the prior year. This increase is due to the amortization of the intangible assets for the period beginningDecember 31, 2021 . These intangible assets acquired in connection with the Theraplant Business Combination totaled$107,000 thousand and True Harvest Business Combination totaled$8,000 thousand . The amortization of the acquired intangible assets was$11,850 thousand for the nine months endedSeptember 30, 2022 . Asset impairment Asset impairment for the three and nine months endedSeptember 30, 2022 , increased by$33,154 thousand compared to the prior year. Specifically, Theraplant incurred a$7,435 thousand goodwill impairment during the three and nine months endedSeptember 30, 2022 and True Harvest incurred a$25,719 thousand goodwill impairment during the three and nine months endedSeptember 30, 2022 . Other income (expense), net Other income (expense), net, which consists of interest expenses, net, changes in fair value of financial instruments, and gain/losses on settlements of financial instruments, for the three months endedSeptember 30, 2022 , increased$4,124 thousand compared to the prior year. As part of our acquisitions, the successor company had total notes payable of$165,116 thousand as ofSeptember 30, 2022 compared to the predecessor company of$5,147 thousand of total notes payable resulting in an increase in interest expense of$10,055 thousand . During the three months endedSeptember 30, 2022 , we made a correction to our debt for the True Harvest Convertible Note Payable and the Theraplant Deferred Cash causing an increase of interest expense of$829 thousand . This was offset by the change in fair value of our financial instruments totaling$13,504 thousand and loss on settlement of financial instruments of$1,683 thousand . Other expenses, net, which consists of interest expenses, net, and changes in fair value of financial instruments, for the nine months endedSeptember 30, 2022 , increased$7,929 thousand compared to the prior year. As part of our acquisitions, the successor company had total notes payable of$165,116 thousand as ofSeptember 30, 2022 compared to the predecessor company of$5,147 thousand of total notes payable resulting in an increase in interest expense of$23,507 thousand . During the nine months endedSeptember 30, 2022 , we made a correction to our debt for the True Harvest Convertible Note Payable and the Theraplant Deferred Cash causing an increase of interest expense of$829 thousand . This was offset by the change in fair value of our financial instruments totaling$14,668 thousand and loss on settlement of financial instruments of$1,683 thousand . Provision for Income Taxes Provision for income taxes for the three months endedSeptember 30, 2022 was$948 thousand , an increase of$686 thousand or 262%. This is primarily due to Theraplant being an LLC in 2021, whileGreenrose Holdings is aC-Corp . The statutory federal tax rate was 21% during both periods. During the three months endedSeptember 30, 2022 and 2021, the Company had operations in two and oneU.S. geographic market, respectively. The Company's quarterly tax provision is calculated under the discrete method which treats the interim period as if it were the annual period and determines the income tax expense or benefit on that basis. The discrete method is applied when application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The Company believes, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method due to the high degree of uncertainty in estimating annual pre-tax income due to the early stage of the business. 46
Provision for income taxes for the nine months endedSeptember 30, 2022 was$2,182 thousand , an increase of$1,370 thousand or 169%. This is primarily due to Theraplant being an LLC in 2021, whileGreenrose Holdings is aC-Corp . The statutory federal tax rate was 21% during both periods. During the nine months endedSeptember 30, 2022 and 2021, the Company had operations in two and oneU.S. geographic market, respectively. The Company's quarterly tax provision is calculated under the discrete method which treats the interim period as if it were the annual period and determines the income tax expense or benefit on that basis. The discrete method is applied when application of the estimated annual effective tax rate is impractical because it is not possible to reliably estimate the annual effective tax rate. The Company believes, at this time, the use of this discrete method is more appropriate than the annual effective tax rate method due to the high degree of uncertainty in estimating annual pre-tax income due to the early stage of the business.
Liquidity and Capital Resources
Our primary sources of liquidity are cash from operations, cash and cash equivalents on hand and private financing. Our primary requirements for liquidity are to fund our working capital needs, debt service, operating lease obligations, capital expenditures and general corporate needs. Theraplant and True Harvest are generating cash from sales and Theraplant is deploying its capital reserves to acquire and develop assets capable of producing additional revenues and earnings over both the immediate and near term to support its business growth and expansion. As ofSeptember 30, 2022 , we maintained a cash and cash equivalents balance of$962 thousand , and$4 thousand of restricted cash with a working capital deficit of$135,638 thousand . The working capital deficit is primarily due to the current portion of the notes payable of$132,317 , due to the reclassification of all the debt to short term because of an event of default. Refer to Note 8 in the Notes to the Consolidated Financial Statements for further information
on the event of default.
Based on our forecasted expenditures, due to the significant expenses that we have incurred in relation to our acquisitions, and taking into account our cash flow projections, we do not believe we will have sufficient cash on hand or available liquidity to meet our financial obligations through the twelve months from the date of issuance of the consolidated financial statements for the three and nine months endedSeptember 30, 2022 . We expect our cash flows to increase over time, but not sufficiently in the short term to pay for the forecasted expenses, without raising additional capital. As a result, substantial doubt exists regarding the going concern assumption on our consolidated financial statements. If we are unable to generate additional revenue and obtain financing on acceptable terms, or at all, we will likely be required to cease our operations, pursue a plan to sell our operating assets, or otherwise modify our business strategy, which could materially harm our future business prospects. Pursuant to the Credit Agreement (as defined in the below section titled "Financing Arrangements") and the Loan Documents (as defined in the Credit Agreement), which constitute our primary debt obligation incurred for the purpose of funding our Theraplant and True Harvest acquisitions, onOctober 2, 2022 , we received a notice of default and onOctober 10, 2022 an additional notice of default from our Agent and Lenders. While no acceleration of indebtedness has been invoked by our Lenders as the result of the notice of default and corresponding cross defaults, we are required to classify our long-term obligations as current liabilities because of an occurrence of an event of default, if not timely cured, can cause all amounts outstanding under our Credit Agreement to be declared to be immediately due and payable (which is how our financial statements are presented). The Company has not cured any defaults under the Credit Agreement. If defaults are not cured and if the indebtedness under the Credit Agreement is accelerated, there can be no assurance that we will have sufficient assets to satisfy our obligations. However, onNovember 10, 2022 , the Company, executed the Transaction Support Agreement, Amendment No. 2 to Credit Agreement and Forbearance Agreement with our Lenders and its Agents and has secured thereby$10,000 thousand of loans to, among other things, allow the Company to continue to operate in the ordinary course and make the necessary payments to theConnecticut state regulator for conversion of Theraplant's license to adult-use recreational (see Note 17 to the Consolidated Financial Statements). Further, there are other factors which may make financing our operations more difficult, including the cannabis industry we operate in and any other risk factors listed in Item 1A. of Part 2 of our Quarterly Report on Form 10-Q and Item 1A. of Part 1 of our Annual Report. In consideration of our plans, substantial doubt is not alleviated. 47 The following table presentsGreenrose's cash and outstanding debt as of the dates indicated. Due to an event of default, all debt has been classified as current within the consolidated balance sheet as ofSeptember 30, 2022 and
December 31, 2021 : Cash Flows The following table presents the summary cash flow information for the periods indicated: For the nine months ended September 30, (in thousands) 2022 2021 Net cash provided by (used in) operating activities$ (5,786 ) $ 9,848 Net cash used in investing activities$ (1,085 ) $ (4,799 ) Net cash used in financing activities$ (1,220 ) $ (3,571 ) Net increase (decrease) in cash and cash equivalents$ (8,091 ) $ 1,478
Cash Flow from Operating Activities
During the nine months endedSeptember 30, 2022 , cash flows used in operating activities were$5,786 thousand . The cash flows used in operating activities resulted from net loss of$60,939 thousand , offset by goodwill impairment of$33,154 thousand , depreciation and amortization of$13,858 thousand and operating assets and liabilities increase of$11,175 thousand . Our$60,939 thousand of net loss was primarily related decreased sales inConnecticut , production issues resulting in lower sales at True Harvest, the goodwill impairment, and our significant interest expense of$23,642 thousand . The net cash used in operating activities was offset by an increase that was primarily driven by the timing of payments to suppliers and vendors, the timing and amount of debt payments, and the timing of other working capital payments, as well as an increase in inventory, and current tax payable, and a decrease in accounts receivable and prepaid expenses and other assets related to prepaid insurance. During the nine months endedSeptember 30, 2021 , cash flows provided by operating activities were$9,848 thousand . The cash flows provided by operating activities resulted from net income of$8,912 thousand as well as an add back for depreciation and amortization of$617 thousand and an increase in operating assets and liabilities of$319 thousand .
Cash Flow from Investing Activities
Net cash used in investing activities was$1,085 thousand for the nine months endedSeptember 30, 2022 , a decrease of$3,714 thousand , compared to net cash used in investing activities of$4,799 thousand during fiscal 2021 (Predecessor). The decrease primarily relates the Company's capital expenditures that decreased to$1,470 thousand for the fiscal 2022 period compared to$4,799 thousand during fiscal 2021 due to the expansion of the Theraplant facility. This decrease is offset by the proceeds on sale of investment during the nine months endedSeptember 30, 2022 of$385 thousand .
Cash Flow from Financing Activities
Net cash used in financing activities was$1,220 thousand for fiscal 2022 period, an increase of$2,351 thousand , compared to net cash used by financing activities of$3,571 thousand during fiscal 2021. The increase of cash used was primarily related to the principal repayments of notes payable of$1,220 thousand compared to the prior year of$51 thousand of principal repayments of notes payable, as well as prior year distributions to members of$7,170 thousand . This was offset by$3,650 thousand of proceeds from notes payable
in
the prior year.
Financing Arrangements
The primary objective of our financing strategy is to maintain a prudent capital
structure that provides us flexibility to pursue our growth objectives. We use
short-term debt as management determines is reasonable, principally to finance
ongoing operations, including our seasonal requirements for working capital
(generally accounts receivable, inventory, and prepaid expenses and other
current assets, less accounts payable, accrued payroll, and other accrued
liabilities), and a combination of equity and long-term debt to finance both our
base working capital needs and our non-current assets.
48
Term Loans
On November 26, 2021 , we entered into the "Credit Agreement" with DXR Finance
LLC , as Agent, and DXR-GL Holdings I, LLC , DXR-GL Holdings II, LLC , and DXR-GL
Holdings III, LLC as Lenders, whereby the Lenders agreed to provide an initial
term loan (the "Initial Term Loan") in an amount equal to $88,000 thousand . The
proceeds of the term loan were used to acquire the net assets of Theraplant.
Additionally, the Credit Agreement includes a Delayed Draw Term Loan (the
"Delayed Draw Term Loan" and collectively with the Initial Term Loan "the Term
Loans") in amount equal to $17,000 thousand . As detailed in the agreement, the
Delayed Draw Term Loan provided funding for the acquisition of True Harvestand related transaction costs. We are required to make principal payments on the Term Loans of$5,000 thousand on each Installment Date. The Installment Date is the last business day of each March, June, September and December, beginning with the earlier of (i) the second full fiscal quarter following the Trigger Date and (ii) the ninth fiscal quarter following the Closing Date. The Trigger Date is the date of the introduction and implementation (meaning the first day that sales are permitted whether or not the Borrower or its subsidiaries make sales on such date) of the Adult Use Cannabis market in the state ofConnecticut . The Term Loans bear interest on the unpaid principal amount thereof from the date made through repayment (whether by acceleration or otherwise) thereof at the greater of LIBOR or 1% plus the Applicable Margin (Section 2.4 (a)). Interest on each term loan attributable to the PIK Rate shall be payable on each Interest Payment Date by capitalizing the amount thereof, added to the outstanding amount. All interest and applicable fees chargeable under the Loan Documents shall be computed on the basis of a three hundred sixty (360) day year (Section 2.4(d)), in each case, for the actual number of days elapsed in the period during which the interest or fees accrue. The Applicable Margin means 16.00% per annum, provided that for the first 12 months following the Closing Date, 8.5% per annum may be payable in kind and thereafter, 5.00% per annum may be payable in kind (the amounts payable in kind, the "PIK Rate"). The PIK balance will be paid in cash at the end of the term loan. The accrued and unpaid interest on both Term Loans shall be due and payable on the earliest of maturity date, change of control, the sale of all or substantially all assets ofGreenrose , or the date of the acceleration. The Term Loans are collateralized by substantially all the assets and liabilities of the Company. The Credit Agreement contains certain affirmative and negative covenants as to operations and the financial condition of the Company. The Company was in compliance with its financial covenants for the period endedSeptember 30, 2022 , however, on each ofOctober 2, 2022 andOctober 10, 2022 , the Agent and the Lenders gave the Company Notices of Default citing events of default pursuant to the Credit Agreement and its Loan Documents, but not calling for acceleration of debt. OnNovember 10, 2022 , the Company, executed the Transaction Support Agreement, Amendment No. 2 to Credit Agreement and Forbearance Agreement with our Lenders and its Agents. Refer to Note 17 to the Consolidated Financial Statements.
Refer to Note 8 in the Notes to the Consolidated Financial Statements for additional information on the Term Loans.
Warrant Liabilities
In connection with the Initial Term Loan, we entered into Warrant Agreement (the "Warrant Agreement") with theDXR Holdings to acquire 2,000,000 fully paid and nonassessable shares of our non-voting common stock. The warrants are immediately exercisable and have an exercise price of$0.01 per warrant (i.e., penny warrants). The holder can exercise the right to purchase the common stock in part or in whole at any time or from time to time. The warrants will expire and no longer exercisable onNovember 25, 2026 . The holder of the warrants has the option to exercise the warrants in equity or in cash. OnDecember 31, 2021 the Company amended the Warrant Agreement by adding a price floor to the cash election feature whereas the Lender can elect to net cash settle the warrants for an amount that is the greater of the fair market value of the Company's share price or the price floor. The price floor starts at$6.00 per share and increases$1.00 in each subsequent year on the initial term loan anniversary date. Additionally, the expiration date of the warrants is now able to be extended by five successive one-year extensions if the sale of cannabis continues to be federally illegal at the expiration date (the fifth anniversary of the issuance date and subject to five 1-year extensions at the election
of
the holder).
In connection with the funding of the Delayed Draw Term Loan, the Company issued
another 550,000 warrants with identical terms as the other 2,000,000 warrants as
amended by the Warrant Amendment for total Lender warrants of 2,550,000.
49
We accounted for the warrants as liabilities in accordance with ASC 815-40 and are they are presented within the warrant liabilities within the consolidated balance sheet. The warrants are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of in financial instruments within the consolidated statements of operations. OnSeptember 8, 2022 , we received notices of exercise from the holder of our Lender Warrants. Under the terms of the Warrants, the holder elected to exercise the Warrants by making a cash election in return for a cash payment of our common shares based on the floor amount of$6.00 per share. We elected to pay the holder in form of a promissory note, as we determined that the cash payment would result in our liquidity being less than sufficient to enable us to pay our obligations in the ordinary course of business. OnOctober 12, 2022 , we issued a secured promissory note ("Secured Promissory Note") in the amount of$15,300 thousand to the Warrants holders. The Secured Promissory Note matures onOctober 12, 2024 and principal payments of$1,913 thousand are due quarterly. The Secured Promissory Note bears interest daily on the basis of a 360 day year at the LIBOR rate plus 16% with a minimum LIBOR rate of 1%; provided that upon the occurrence and during the continuance of an Event of Default (as defined in the Forbearance Agreement), the outstanding principal amount of the Secured Promissory Note and any accrued and unpaid interest and all other overdue amounts shall each bear interest until paid at the stated rate plus 2% per
annum. Derivative Liability In order to help facilitate the closing of the Theraplant Business Combination, onOctober 20, 2021 ,Greenrose and an investor (the "Investor"), entered into a Non-Redemption Agreement (the "Non-Redemption Agreement"), pursuant to which the Investor agreed to purchase up to 1,000,000 shares common stock of the Company,$0.0001 par value per share, in open market transactions or in private transactions from the certain selling shareholderswho are not affiliated with the Company, at a purchase price not to exceed$10.14 per share. In connection with the entry of the Non-Redemption Agreement,Greenrose entered into a Registration Rights Agreement with the Investor (the "Registration Rights Agreement") pursuant to whichGreenrose agrees that to file a registration statement with theSecurities and Exchange Commission (the "SEC") covering the resale of the Common Stock requested to be included in such registration statement (the "Resale Registration Statement"), andGreenrose shall use its best efforts to have the Resale Registration Statement declared effective as soon as practicable after the filing thereof, but in no event later than the 45th calendar day following the filing of the Resale Registration Statement (or, the fifth calendar day following the date on which the Company is notified by theSEC that the Resale Registration Statement will not be or is no longer subject to further review and comments. Further, as part of the Non-Redemption Agreement,Greenrose and the Investor agreed thatGreenrose shall issue and sell to the Investor, and the Investor shall purchase fromGreenrose , for the sum of$500,000 , an aggregate of 500,000 newly issued shares of Greenrose Common Stock ("Investor Shares"). When issued, these shares are to be subject to a lock-up and will be released based on a contractual calculation each month for six months. Any shares not released within that six-month period shall be forfeited. During the period endedDecember 31, 2021 , the Company released 140,947 shares from lock-up, and as ofSeptember 30, 2022 the remaining 359,053 shares were released from lock-up ("Released Shares"). The Investor Shares are considered derivative liabilities in accordance with ASC 815-40, due to certain settlement provisions in the corresponding warrant agreement that do not meet the criteria to be classified in stockholders' equity. Pursuant to ASC 815-40, the Investor Shares are classified as a liability at fair value on the Company's consolidated balance sheet, and the change in the fair value of such liability in each period is recognized as a non-cash gain or loss in the Company's consolidated statements of operations. Private Warrant Liabilities Prior to the Theraplant Business Combination,Greenrose sold 1,980,000 private warrants toGreenrose Associates, LLC (the "Sponsor") andImperial Capital, LLC ("Imperial"). Each private warrant is exercisable to purchase one share of common stock at an exercise price of$11.50 per share. OnJanuary 31, 2022 , theGreenrose board of directors and the Lender have approved the final settlement amount of the Sponsor Notes. The aggregate principal amount outstanding on the date of settlement was$2,640 thousand and was settled for 685,000 shares ofGreenrose common stock and 1,893,000 private warrants which was determined to approximate the principal amount outstanding. OnFebruary 2, 2022 ,Greenrose entered into an exchange agreement (the "Exchange Agreement") withGreenrose Associates LLC , the Company's sponsor to convert$2,640 thousand in aggregate principal amount of promissory notes and convertible notes into (i) 685,000 shares of common stock of the Company, par value of$0.0001 per share, and (ii) 1,893,000 non-callable private warrants entitling the holder thereof to purchase one share of Common Stock at$11.50 per share for five (5) years from the date of issuance. The Sponsor Notes were non-interest bearing and did not contain a stated maturity date. The non-callable private warrants contained the same terms and conditions as the private warrants issued to the Company's Sponsor and the Company's underwriters in connection with itsFebruary 11, 2020 initial public offering. Simultaneously with the entry of the Exchange Agreement,Greenrose issued all 685,000 shares of common stock of the Company to the Sponsor in a private placement exempt from registration pursuant to Rule 506(b) of Regulation D under Section 4(a)(2) of the Securities Act of 1933, as amended. Upon the issuance of the 685,000 shares of common stock and 1,893,000 warrants of the Company, the Sponsor Notes were cancelled and are no longer outstanding. 50
The terms and conditions of the conversion of the Sponsor Notes into shares of common stock and Private Warrants of the Company, including the conversion price, were approved at a meeting of a special committee of the independent members of the board of directors of the Company, in which members of the board of directorswho were also members of the Sponsor were recused. The private warrants are exercisable for cash or on a cashless basis, at the holder's option, and non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the private warrants are held by someone other than the initial purchasers or their permitted transferees, the private warrants will be redeemable by the Company and exercisable by such holders on the same basis as the public warrants. The private warrants are accounted for as liabilities in accordance with ASC 815-40 and are presented within the private warrant liabilities within the consolidated balance sheet. The private warrants are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of in financial instruments within the consolidated statements of operations. Other Notes Payable
In connection with the True Harvest Acquisition, the Company assumed$4,600 thousand of debt. The debt consisted of three promissory notes (the "Promissory Notes"). The Promissory Notes matureDecember 2023 and bear interest at 12% of the outstanding loan principal. Equal interest and principal payments are due each month.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements as ofSeptember 30, 2022 . We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets. Contractual Obligations We engaged Imperial inOctober 2019 (pursuant to an engagement letter agreement amended inJanuary 2020 ) as an advisor in connection with a business combination to assist us in holding meetings with our shareholders to discuss the potential business combination and the target business' attributes, introduce us to potential investors that are interested in purchasing our securities in connection with a business combination, assist us in obtaining shareholder approval for the business combination and assist us with our press releases and public filings in connection with the business combination. Pursuant to the terms of our engagement of Imperial, a cash fee for such services was to be payable upon the consummation of a business combination in an amount equal to 4.5% of the gross proceeds of Initial Public Offering, or$7,763 thousand (exclusive of any applicable finders' fees which might become payable); provided that up to 20% of the fee may be allocated at our sole discretion to otherFINRA members that assist us in identifying and consummating a Business Combination. Additionally, the original terms of our engagement of Imperial included provision to pay Imperial a cash fee for assisting us in obtaining financing for the business combination in an amount equal to 5% of the face amount of any equity securities and 3% of the face amount of any debt sold or arranged as part of the business combination (exclusive of any applicable finders' fees which might become payable). Our engagement of Imperial was amended as ofApril 13, 2022 to reflect new agreed compensation terms. Pursuant to theApril 2022 amendment we have agreed to compensate Imperial (i) a retainer of shares of common stock of the Company equivalent to$250 thousand (as determined by the five consecutive trading day volume weighted average price of the Company's common stock following execution of theApril 2022 amendment; (ii) a quarterly fee payable in shares of the Company equivalent to$75 thousand per quarter (as determined by the five consecutive trading day volume weighted average price of the Company's common stock as of first day of each quarter), such amount to increase to an equivalent of$150 thousand per quarter following the sixth consecutive month of the amended engagement, plus a fee payable on the closing of a business combination or business combinations as we and Imperial shall agree and consistent with industry custom and usage. All fees earned and paid to Imperial under the amended engagement shall be credited against the amount owed and payable under the$10,423 thousand non-interest-bearing note issued by the Company to Imperial inApril 2022 in satisfaction of amounts otherwise payable under the terms of the 2019 engagement, as amended. OnJanuary 1, 2022 , we entered into a Cultivation Services Agreement with a vendor to provide certain cultivation and managerial services, in addition to brand licensing. The total monthly fee is comprised of a Management Fee and Grow Room Fee. The Management Fee is$156 thousand per month for operational management and accounting services. The Grow Room Fee is$11 thousand per grow room per month for cultivation expertise. The total monthly fee is not to exceed$200 thousand . As ofSeptember 30, 2022 , the Company is paying the maximum monthly fee of$200 thousand . The initial term of this agreement is three years and renews yearly thereafter, unless either Party provides the other Party with notice within sixty days of the renewal. We have entered into an engagement agreement (the "Engagement Agreement") withSierraConstellation Partners LLC ("SCP") to provide certain management services to the Company. As part of the engagement,Timothy Bossidy has been appointed as Interim Chief Executive Officer (the "Interim CEO"). Under the terms of the Engagement Agreement, it is expected thatMr. Bossidy will serve the Company in his role untilJanuary 2023 , unless the Engagement Agreement is terminated sooner or extended pursuant to its terms. Under the terms of the Engagement Agreement, SCP andMr. Bossidy will perform all duties determined as appropriate by the Board. In exchange for the services rendered under the Engagement Agreement, the Company paid SCP an "evergreen"$60 thousand retainer paid to SCP at the execution of this Agreement (the "Retainer"). The Retainer is to be held by SCP as an advance towards Services and Reimbursable Expenses (as defined in the Engagement Agreement), including the services ofMr. Bossidy in the amount of$24 thousand per week plus certain other SCP capped services charged at an hourly rate of$995 per hour. 51 We manage and operates a facility located at 4301 W. Buckeye,Phoenix, AZ (the "Facility") to cultivate and manufacture medical marijuana since the inception of True Harvest, expanding cultivation space within the Facility over time. The Facility is under a ten-year lease since 2017 with a ten-year renewal option. Related Party Transactions OnFebruary 2, 2022 ,Greenrose entered into an exchange agreement (the "Exchange Agreement") withGreenrose Associates LLC , the Company's sponsor to convert$2,640 thousand in aggregate principal amount of promissory notes and convertible notes into (i) 685,000 shares of common stock of the Company, par value of$0.0001 per share, and (ii) 1,893,000 non-callable private warrants entitling the holder thereof to purchase one share of Common Stock at$11.50 per share for five (5) years from the date of issuance. The Sponsor Notes were non-interest bearing and did not contain a stated maturity date. The non-callable private warrants contained the same terms and conditions as the private warrants issued to the Company's Sponsor and the Company's underwriters in connection with itsFebruary 11, 2020 initial public offering. Simultaneously with the entry of the Exchange Agreement,Greenrose issued all 685,000 shares of common stock of the Company to the Sponsor in a private placement exempt from registration pursuant to Rule 506(b) of Regulation D under Section 4(a)(2) of the Securities Act of 1933, as amended. Upon the issuance of the 685,000 shares of common stock and 1,893,000 warrants of the Company, the Sponsor Notes were cancelled and are no longer outstanding.
There were no Related Party Transactions during the three months ended
Recently Issued Accounting Pronouncements
See Note 1 to the consolidated financial statements contained in Part I, Item 1 of our Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements in conformity with GAAP requires management to make judgments, estimates, and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and underlying assumptions are reviewed on an ongoing basis. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates, and revisions to accounting estimates are recognized in the period in which the estimate is revised. We have adopted various accounting policies to prepare the Unaudited Condensed Consolidated Financial Statements in accordance with GAAP. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. In our 2021 Annual Report on Form 10-K, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements. As ofSeptember 30, 2022 there have been no material changes to our critical accounting policies and estimates from those previously disclosed in our 2021 Annual Report on Form 10-K for the year endedDecember 31, 2021 .
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