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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q/A

Amendment No. 1

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-56228

IANTHUS CAPITAL HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

British Columbia, Canada

98-1360810

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

214 King Street, Suite 314

Toronto, Ontario M5H 3S6

M5H 3S6

(Address of principal executive offices)

(Zip Code)

(646) 518-9418

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

Number of common shares outstanding as of October 30, 2023 was 6,510,526,890.


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EXPLANATORY NOTE

 

iAnthus Capital Holdings, Inc. (together with its consolidated subsidiaries, the "Company") is filing this Amendment No. 1 on Form 10-Q/A to amend its Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, initially filed with the Securities and Exchange Commission and SEDAR on November 9, 2023 (the "Original Form 10-Q"). This Form 10-Q/A amends and restates Items 1, 2, and 4 of Part I of the Original Form 10-Q which includes the Company's restated unaudited interim condensed consolidated financial statements for the three and nine months ended September 30, 2023 and related notes (the "Amended Form 10-Q").

 

In connection with the preparation of the Company's consolidated financial statements for the fiscal year ended December 31, 2023, the Company’s management identified an error related to its financial reporting process in connection with an intercompany consolidation of two wholly-owned subsidiaries and in the valuation of inventory, both resulting in an overstatement of inventory in the Original Form 10-Q. This error resulted in an overstatement of 'inventories, net' and 'accrued and other current liabilities' on the unaudited interim condensed consolidated balance sheet as of September 30, 2023, and an overstatement of 'income tax expense', and an understatement of 'cost and expenses applicable to revenues', on its unaudited interim condensed consolidated statements of operations for the three and nine months ended September 30, 2023. This error has no impact on the cash balance as of September 30, 2023 and results in no net change in cash flows for the nine months ended September 30, 2023, which is illustrated in further detail in Note 15 of the Financial Statements in Item 1 of Part I of this Amended Form 10-Q.

 

The Company has made no attempt in this Quarterly Report on Form 10-Q/A to modify or update the disclosures presented in the Original Form 10-Q other than as noted in the previous paragraph. Except as noted above, this Quarterly Report on Form 10-Q/A does not reflect events occurring after the filing of the Original Report. Accordingly, this Quarterly Report on Form 10-Q/A should be read in conjunction with the Company’s other filings with the Securities and Exchange Commission (“SEC”) subsequent to the filing of the Original Form 10-Q, including any amendments thereto.

 

In accordance with Rule 12b-15 of the Securities and Exchange of Act of 1934, as amended (the "Exchange Act"), this Form 10-Q/A includes new certifications by the Company's Chief Executive Officer and Chief Financial Officer filed as Exhibits 31.1, 31.2, 32.1 and 32.2 to this Form 10-Q/A.

 

 

 

 

 

2


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" "

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PART I. FINANCIAL INFORMATION

 

 

Item 1.

Financial Statements

5

 

Interim Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited and Restated) and December 31, 2022 (Audited)

5

 

Unaudited Interim Condensed Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2023 (Restated) and 2022

6

 

Unaudited Interim Condensed Consolidated Statements of Changes in Shareholders’ (Deficit) Equity for the Three and Nine Months ended September 30, 2023 (Restated) and 2022

7

 

 

Unaudited Interim Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 (Restated) and 2022

8

 

Notes to Unaudited Interim Condensed Consolidated Financial Statements

9

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

42

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

 

Item 4.

Controls and Procedures

56

 

PART II. OTHER INFORMATION

57

 

Item 1.

Legal Proceedings

57

 

Item 1A.

Risk Factors

58

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

59

 

Item 3.

Defaults Upon Senior Securities

59

 

Item 4.

Mine Safety Disclosure

59

 

Item 5.

Other Information

59

 

Item 6.

Exhibits

60

 

Signatures

61

3


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Quarterly Report on Form 10-Q/A contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q/A about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common shares and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statements.

Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout our most recent Annual Report on Form 10-K and any updates described in our Quarterly Reports and Current Reports on Form 8-K as may be amended, supplemented or superseded from time to time by other reports we file with the U.S. Securities and Exchange Commission (the “SEC”). You should read this Quarterly Report and the documents that we referenced herein and have filed as exhibits to the reports we file with the SEC, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this Quarterly Report on Form 10-Q/A is accurate as of the date hereof. Because the risk factors in our SEC reports could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this Quarterly Report on Form 10-Q/A, and particularly our forward-looking statements, by these cautionary statements.

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ITEM 1. FINANCIAL STATEMENTS

iANTHUS CAPITAL HOLDINGS, INC.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands of U.S. dollars or shares)

 

 

 

September 30, 2023

 

December 31, 2022

 

 

(Unaudited and Restated)

 

(Audited)

Assets

 

 

 

 

 

 

Cash

 

$

15,104

 

$

14,336

Restricted cash

 

 

70

 

 

70

Accounts receivable, net of allowance for doubtful accounts of $85
   (December 31, 2022 - $
87)

 

 

4,850

 

 

3,999

Prepaid expenses

 

 

2,497

 

 

2,215

Inventories, net

 

 

27,571

 

 

29,800

Other current assets

 

 

555

 

 

202

Current Assets

 

 

50,647

 

 

50,622

Investments

 

 

826

 

 

232

Property, plant and equipment, net

 

 

95,668

 

 

103,320

Operating lease right-of-use assets, net

 

 

26,377

 

 

28,399

Other long-term assets

 

 

3,809

 

 

3,847

Intangible assets, net

 

 

108,787

 

 

117,047

Total Assets

 

$

286,114

 

$

303,467

Liabilities and Shareholders' (Deficit) Equity

 

 

 

 

 

 

Accounts payable

 

$

16,419

 

$

10,690

Accrued and other current liabilities

 

 

93,998

 

 

74,036

Current portion of long-term debt, net of issuance costs

 

 

15,136

 

 

51

Current portion of operating lease liabilities

 

 

7,747

 

 

7,789

Current Liabilities

 

 

133,300

 

 

92,566

Long-term debt, net of issuance costs

 

 

145,416

 

 

147,261

Deferred income tax

 

 

23,763

 

 

23,815

Long-term portion of operating lease liabilities

 

 

27,274

 

 

28,836

Total Liabilities

 

 

329,753

 

 

292,478

Commitments (Refer to Note 10)

 

 

 

 

 

 

Shareholders' (Deficit) Equity

 

 

 

 

 

 

Common shares - no par value. Authorized - unlimited
   number.
6,459,844 - issued and outstanding (December 31,
   2022 -
6,403,289 - issued and outstanding)

 

 

 

 

Additional paid-in capital

 

 

1,265,310

 

 

1,262,012

Accumulated deficit

 

 

(1,308,949)

 

 

(1,251,023)

Total Shareholders' (Deficit) Equity

 

$

(43,639)

 

$

10,989

Total Liabilities and Shareholders' (Deficit) Equity

 

$

286,114

 

$

303,467

 

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

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iANTHUS CAPITAL HOLDINGS, INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of U.S. dollars, except per share amounts)

 

 

For the Three Months Ended September 30,

 

For the Nine Months Ended September 30,

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

 

(Restated)

 

 

 

 

(Restated)

 

 

Revenues, net of discounts

$

42,890

 

$

39,371

 

$

118,358

 

$

125,642

Costs and expenses applicable to revenues (exclusive of depreciation and amortization expense shown separately below)

 

(29,542)

 

 

(23,190)

 

 

(71,108)

 

 

(67,301)

Gross profit

 

13,348

 

 

16,181

 

 

47,250

 

 

58,341

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

18,917

 

 

23,220

 

 

58,997

 

 

104,756

Depreciation and amortization

 

6,134

 

 

7,824

 

 

18,882

 

 

23,040

(Recoveries), write-downs and other charges, net

 

(69)

 

 

(1,139)

 

 

467

 

 

(928)

Total operating expenses

 

24,982

 

 

29,905

 

 

78,346

 

 

126,868

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

(11,634)

 

 

(13,724)

 

 

(31,096)

 

 

(68,527)

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other income

 

712

 

 

663

 

 

1,589

 

 

12,917

Interest expense

 

(4,014)

 

 

(3,455)

 

 

(11,648)

 

 

(15,142)

Accretion expense

 

(994)

 

 

(1,020)

 

 

(2,946)

 

 

(2,561)

Provision for debt obligation fee

 

 

 

 

 

 

 

(804)

Loss on debt extinguishment (Refer to Note 5)

 

 

 

 

 

(1,288)

 

 

(316,577)

Gains/(losses) from changes in fair value of financial instruments

 

59

 

 

(134)

 

 

15

 

 

(374)

Loss before income taxes

 

(15,871)

 

 

(17,670)

 

 

(45,374)

 

 

(391,068)

Income tax expense

 

3,311

 

 

4,325

 

 

12,552

 

 

14,591

Net loss

$

(19,182)

 

$

(21,995)

 

$

(57,926)

 

$

(405,659)

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share - basic and diluted

$

(0.00)

 

$

(0.00)

 

$

(0.01)

 

$

(0.17)

Weighted average number of common shares outstanding - basic and diluted

 

6,421,756

 

 

6,244,489

 

 

6,427,023

 

 

2,351,683

 

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

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iANTHUS CAPITAL HOLDINGS, INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ (DEFICIT) EQUITY

(In thousands of U.S. dollars or shares)

 

 

 

Three Months Ended September 30, 2023

 

 

Number of Common Shares ('000)

 

Additional Paid-in-Capital

 

Accumulated Deficit (Restated)

 

Total Shareholders’ (Deficit) (Restated)

Balance – June 30, 2023

 

 

6,445,223

 

$

1,264,863

 

$

(1,289,767)

 

$

(24,904)

Share-based compensation

 

 

19,439

 

 

473

 

 

 

 

473

Share settlement for taxes paid related to restricted stock units

 

 

(4,818)

 

 

(26)

 

 

 

 

(26)

Net loss (Restated)

 

 

 

 

 

 

(19,182)

 

 

(19,182)

Balance – September 30, 2023

 

 

6,459,844

 

$

1,265,310

 

$

(1,308,949)

 

$

(43,639)

 

 

 

Nine Months Ended September 30, 2023

 

 

Number of
Common Shares ('000)

 

Additional Paid-in-Capital

 

Accumulated Deficit (Restated)

 

Total Shareholders’ Equity (Deficit) (Restated)

Balance – January 1, 2023

 

 

6,403,289

 

$

1,262,012

 

$

(1,251,023)

 

$

10,989

Share-based compensation

 

 

72,252

 

 

3,555

 

 

 

 

3,555

Share settlement for taxes paid related to restricted stock units

 

 

(15,697)

 

 

(257)

 

 

 

 

(257)

Net loss (Restated)

 

 

 

 

 

 

(57,926)

 

 

(57,926)

Balance – September 30, 2023

 

 

6,459,844

 

$

1,265,310

 

$

(1,308,949)

 

$

(43,639)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2022

 

 

Number of
Common Shares ('000)

 

Shares to be Issued

 

Additional Paid-in-Capital

 

Accumulated Deficit

 

Total Shareholders’ Equity

Balance – June 30, 2022

 

 

6,244,298

 

$

1,531

 

$

1,254,741

 

$

(1,185,296)

 

$

70,976

Share-based compensation

 

 

 

 

 

 

4,657

 

 

 

 

4,657

Share issuance - MPX purchase option

 

 

408

 

 

(1,500)

 

 

1,500

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

(21,995)

 

 

(21,995)

Balance – September 30, 2022

 

 

6,244,706

 

$

31

 

$

1,260,898

 

$

(1,207,291)

 

$

53,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2022

 

 

Number of
Common Shares ('000)

 

Shares to be Issued

 

Additional Paid-in-Capital

 

Accumulated Deficit

 

Total Shareholders’ (Deficit) Equity

Balance – January 1, 2022 - (Revised)

 

 

171,718

 

$

1,531

 

$

776,462

 

$

(801,632)

 

$

(23,639)

Share-based compensation

 

 

 

 

 

 

27,493

 

 

 

 

27,493

Share issuance - Recapitalization Transaction

 

 

6,072,580

 

 

 

 

455,443

 

 

 

 

455,443

Share issuance - MPX purchase option

 

 

408

 

 

(1,500)

 

 

1,500

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

(405,659)

 

 

(405,659)

Balance – September 30, 2022

 

 

6,244,706

 

$

31

 

$

1,260,898

 

$

(1,207,291)

 

$

53,638

 

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

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iANTHUS CAPITAL HOLDINGS, INC.

UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of U.S. dollars)

 

 

 

Nine Months Ended September 30,

 

 

2023

 

2022

 

 

 

(Restated)

 

 

CASH FLOW FROM OPERATING ACTIVITIES

 

 

 

 

 

 

    Net loss

 

$

(57,926)

 

$

(405,659)

   Adjustments to reconcile net loss to net cash provided by (used in) operations:

 

 

 

 

 

 

Interest income

 

 

(4)

 

 

(83)

Interest expense

 

 

11,648

 

 

15,142

Accretion expense

 

 

2,946

 

 

2,561

Provision for debt obligation fee

 

 

 

 

804

Depreciation and amortization

 

 

20,397

 

 

24,788

Write-downs, (recoveries) and other charges, net

 

 

467

 

 

(928)

Inventory reserve

 

 

814

 

 

Share-based compensation

 

 

3,555

 

 

27,493

(Gains)/losses from changes in fair value of financial instruments

 

 

(15)

 

 

374

Gain from nonmonetary consideration from acquisition (Refer to Note 4)

 

 

 

 

(10,460)

Loss on debt extinguishment (Refer to Note 5)

 

 

1,288

 

 

316,577

   Change in operating assets and liabilities (Refer to Note 13)

 

 

21,575

 

 

15,246

   NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES

 

$

4,745

 

$

(14,145)

CASH FLOW FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchase of property, plant and equipment

 

 

(2,488)

 

 

(5,764)

Acquisition of other intangible assets

 

 

(2,404)

 

 

(108)

Proceeds from sale of property, plant and equipment

 

 

1,277

 

 

2,399

Issuance of related party promissory note

 

 

 

 

(92)

Cash impact of deconsolidation of subsidiaries

 

 

(68)

 

 

Purchase of subsidiaries, net of cash acquired

 

 

 

 

4

   NET CASH USED IN INVESTING ACTIVITIES

 

$

(3,683)

 

$

(3,561)

CASH FLOW FROM FINANCING ACTIVITIES

 

 

 

 

 

 

Repayment of debt

 

 

(37)

 

 

(347)

Proceeds from issuance of debt

 

 

 

 

24,250

Taxes paid related to net share settlement of restricted stock units

 

 

(257)

 

 

   NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES

 

$

(294)

 

$

23,903

CASH AND RESTRICTED CASH

 

 

 

 

 

 

NET INCREASE IN CASH AND RESTRICTED CASH DURING
   THE PERIOD

 

 

768

 

 

6,197

CASH AND RESTRICTED CASH, BEGINNING OF PERIOD (Refer to Note 13)

 

 

14,406

 

 

16,578

CASH AND RESTRICTED CASH, END OF PERIOD (Refer to Note 13)

 

$

15,174

 

$

22,775

 

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

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

Note 1 – Organization and Description of Business

(a) Description of Business

iAnthus Capital Holdings, Inc. (“ICH”), together with its consolidated subsidiaries (the “Company”) was incorporated under the laws of British Columbia, Canada, on November 15, 2013. The Company is a vertically-integrated multi-state owner and operator of licensed cannabis cultivation, processing and dispensary facilities in the United States. Through the Company’s subsidiaries, licenses, interests and contractual arrangements, the Company has the capacity to operate dispensaries and cultivation/processing facilities, and manufacture and distribute cannabis across the states in which the Company operates in the U.S.

The Company’s registered office is located at 1055 West Georgia Street, Suite 1500, Vancouver, British Columbia, V6E 4N7, Canada. The Company is listed on the Canadian Securities Exchange (the “CSE”) under the ticker symbol “IAN” and on the OTCQB Tier of the OTC Markets Group Inc. under the symbol “ITHUF.”

The Company’s business activities, and the business activities of its subsidiaries, which operate in jurisdictions where the use of marijuana has been legalized under state and local laws, currently are illegal under U.S. federal law. The U.S. Controlled Substances Act classifies marijuana as a Schedule I controlled substance. Any proceeding that may be brought against the Company could have a material adverse effect on the Company’s business plans, financial condition and results of operations.

(b) Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements (the “financial statements”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements and, therefore, certain information, footnotes and disclosures normally included in the annual financial statements, prepared in accordance with U.S. GAAP, have been condensed or omitted in accordance with SEC rules and regulations.

The financial data presented herein should be read in conjunction with the audited consolidated financial statements and accompanying notes for the year ended December 31, 2022, included in the Company’s Annual Report on the Form 10-K filed with the SEC on March 30, 2023. In the opinion of management, the financial data presented includes all adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented. These unaudited interim condensed consolidated financial statements include estimates and assumptions of management that affect the amounts reported on the unaudited interim condensed consolidated financial statements. Actual results could differ from these estimates.

The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2023, or any other period.

Except as otherwise stated, these unaudited interim condensed consolidated financial statements are presented in U.S. dollars.

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

(c) Consummation of Recapitalization Transaction

On June 24, 2022 (the “Closing Date”), the Company completed its previously announced recapitalization transaction (the “Recapitalization Transaction”) pursuant to the terms of the Restructuring Support Agreement (the “Restructuring Support Agreement”) dated July 10, 2020, as amended on June 15, 2021, by and among the Company, all of the holders (the “Secured Lenders”) of the 13.0% senior secured convertible debentures (the “Secured Notes”) issued by iAnthus Capital Management, LLC (“ICM”), a wholly-owned subsidiary of the Company, and a majority of the holders (the “Consenting Unsecured Lenders”) of the Company’s 8.0% unsecured convertible debentures (the “Unsecured Debentures”). Closing of the Recapitalization Transaction through an amended and restated plan of arrangement (the “Plan of Arrangement”) was subject to certain conditions, including: approval of the Secured Lenders, all of the holders (the “Unsecured Lenders” and together with the Secured Lenders, the “Lenders”) of the Unsecured Debentures and existing holders of our common shares, warrants and options; approval of the Plan of Arrangement by the Supreme Court of British Columbia (the "Court"); and the receipt of all necessary state regulatory approvals in which the Company operates that required approval; and approval by the Canadian Securities Exchange (collectively, the "Requisite Approvals"). All Requisite Approvals required to close the Recapitalization Transaction were satisfied, conditioned, or waived by the Company, the Secured Lenders and Consenting Unsecured Lenders on the Closing Date. Pursuant to the terms of the Restructuring Support Agreement, Gotham Green Admin 1, LLC as collateral agent (the “Collateral Agent”), the Secured Lenders and the Consenting Unsecured Lenders agreed to forbear from further exercising any rights or remedies in connection with any events of default that existed or may have existed in the future arising under any of the purchase agreements with respect to the Secured Notes and all other agreements delivered in connection therewith, the purchase agreements with respect to the Unsecured Debentures and all other agreements delivered in connection therewith and any other agreement to which the Collateral Agent, Secured Lenders, or Consenting Unsecured Lenders are a party to (collectively, the “Defaults”). As of the Closing Date, the Collateral Agent, Secured Lenders and Consenting Unsecured Lenders irrevocably waived all Defaults.

In connection with the closing of the Recapitalization Transaction, the Company issued an aggregate of 6,072,580 common shares to the Secured Lenders and the Unsecured Lenders. Specifically, the Company issued 3,036,290 common shares (the “Secured Lender Shares”), or 48.625% of the outstanding common shares of the Company, to the Secured Lenders and 3,036,290 common shares (the “Unsecured Lender Shares” and together with Secured Lender Shares, the “Shares”), or 48.625% of the outstanding common shares of the Company, to the Unsecured Lenders. As of the Closing Date, there were 6,244,298 common shares of the Company issued and outstanding. As of the Closing Date, the then existing holders of the Company’s common shares collectively held 171,718 common shares, or 2.75% of the outstanding common shares of the Company.

As of the Closing Date, the outstanding principal amount of the Secured Notes (including the interim financing secured notes in the aggregate principal amount of approximately $14.7 million originally due on July 13, 2025) together with interest accrued and fees thereon were forgiven in part and exchanged for (A) the Secured Lender Shares, (B) the June Secured Debentures (as defined below) in the aggregate principal amount of $99.7 million and (C) the June Unsecured Debentures (as defined below) in the aggregate principal amount of $5.0 million. Also, as of the Closing Date, the outstanding principal amount of the Unsecured Debentures together with interest accrued and fees thereon were forgiven in part and exchanged for (A) the Unsecured Lender Shares and (B) the June Unsecured Debentures in the aggregate principal amount of $15.0 million. Furthermore, all existing options and warrants to purchase common shares of the Company, including certain debenture warrants and exchange warrants previously issued to the Secured Lenders, the warrants previously issued in connection with the Unsecured Debentures and all other Affected Equity (as defined in the Plan of Arrangement), were cancelled and extinguished for no consideration.

Secured Debenture Purchase Agreement

In connection with the closing of the Recapitalization Transaction, the Company entered into a Third Amended and Restated Secured Debenture Purchase Agreement (the “Secured DPA”), dated as of June 24, 2022, with ICM, the other Credit Parties (as defined in the Secured DPA), the Collateral Agent, and the lenders party thereto (the “New Secured Lenders”) pursuant to which ICM issued the New Secured Lenders 8.0% secured debentures (the “June Secured Debentures”) in the aggregate principal amount of $99.7 million pursuant to the Plan of Arrangement.

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

The June Secured Debentures accrue interest at a rate of 8.0% per annum (increasing to 11.0% upon the occurrence of an Event of Default (as defined in the Secured DPA)), are due on June 24, 2027 and may be prepaid on a pro rata basis from and after the third anniversary of the Closing Date upon prior written notice to the New Secured Lenders without premium or penalty. Upon receipt of a Change of Control Notice (as defined in the Secured DPA), each New Secured Lender may provide notice to ICM to either (i) purchase the June Secured Debenture at a price equal to 103.0% of the then outstanding principal amount together with interest accrued thereon (the “Offer Price”) or (ii) if the Change of Control Transaction (as defined in Secured DPA) results in a new issuer, or if the New Secured Lender desires that the June Secured Debenture remain unpaid and continue in effect after the closing of the Change of Control Transaction, convert or exchange the June Secured Debenture into a replacement debenture of the new issuer or ICM, as applicable, in the aggregate principal amount of the Offer Price on substantially equivalent terms to those terms contained in the June Secured Debenture. Notwithstanding the foregoing, if 90.0% or more of the principal amount of all June Secured Debentures outstanding have been tendered for redemption on the date of the Change of Control Notice, ICM may, at its sole discretion, redeem all of the outstanding June Secured Debentures at the Offer Price. As security for the Obligations (as defined in the Secured DPA), ICM and the Company granted to the Collateral Agent, for the benefit of the New Secured Lenders, a security interest over all of their present and after acquired personal property.

Pursuant to the Secured DPA, so long as Gotham Green Partners, LLC or any of its Affiliates (as defined in the Secured DPA) hold at least 50.0% of the outstanding principal amount of June Secured Debentures, the Collateral Agent will have the right to appoint two non-voting observers to the Company’s board of directors (the "Board" or "Board of Directors"), each of which shall receive up to a maximum amount of $25 in any 12-month period for reasonable out-of-pocket expenses.

In addition, pursuant to the Secured DPA, the New Secured Lenders purchased an additional $25.0 million of June Secured Debentures (the “Additional Secured Debentures”).

 

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

Unsecured Debenture Purchase Agreement

In connection with the closing of the Recapitalization Transaction, ICH, as guarantor of the Guaranteed Obligations (as defined in the Unsecured DPA (as defined herein)), entered into an Unsecured Debenture Purchase Agreement (the “Unsecured DPA”) dated as of June 24, 2022 with ICM, the Secured Lenders and the Consenting Unsecured Lenders pursuant to which ICM issued 8.0% unsecured debentures (the “June Unsecured Debentures”) in the aggregate principal amount of $20.0 million pursuant to the Plan of Arrangement, including $5.0 million to the Secured Lenders and $15.0 million to the Unsecured Lenders.

The June Unsecured Debentures accrue interest at a rate of 8.0% per annum (increasing to 11.0% upon the occurrence of an Event of Default (as defined in the Unsecured DPA)), are due on June 24, 2027 and may be prepaid on a pro rata basis from and after the third anniversary of the Closing Date upon prior written notice to the Unsecured Lenders without premium or penalty. Upon receipt of a Change of Control Notice (as defined in the Unsecured DPA), each Unsecured Lender may provide notice to ICM to either (i) purchase the June Unsecured Debenture at a price equal to 103.0% of the then outstanding principal amount together with interest accrued thereon (the “Unsecured Offer Price”) or (ii) if the Change of Control Transaction (as defined in Unsecured DPA) results in a new issuer, or if the Unsecured Lender desires that the June Unsecured Debenture remain unpaid and continue in effect after the closing of the Change of Control Transaction, convert or exchange the June Unsecured Debenture into a replacement debenture of the new issuer or ICM, as applicable, in the aggregate principal amount of the Unsecured Offer Price on substantially equivalent terms to those terms contained in the June Unsecured Debenture. Notwithstanding the foregoing, if 90.0% or more of the principal amount of all June Unsecured Debentures outstanding have been tendered for redemption on the date of the Change of Control Notice, ICM may, at its sole discretion, redeem all of the outstanding June Unsecured Debentures at the Unsecured Offer Price. Pursuant to the Unsecured DPA, the Obligations (as defined in the Unsecured DPA) are subordinated in right of payment to the Senior Indebtedness (as defined in the Unsecured DPA).

Refer to Note 5 for further discussion regarding the Recapitalization Transaction.

(d) Going Concern

These unaudited interim condensed consolidated financial statements have been prepared under the assumption that the Company will be able to continue its operations and will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. For the three and nine months ended September 30, 2023, the Company reported net losses of $19.2 million and $57.9 million, respectively, an operating cash inflow of $4.7 million for the nine months ended September 30, 2023, and an accumulated deficit of $1,308.9 million as of September 30, 2023.

The closing of the Recapitalization Transaction resulted in lower interest rates on the June Secured Debentures and the $11.0 million senior secured bridge notes issued by iAnthus New Jersey, LLC (“INJ”) on February 2, 2021 (“Senior Secured Bridge Notes”) and allows interest to be paid-in-kind. As such, the Company believes it may continue to generate positive cash flows from operations in the near future. Notwithstanding the foregoing, the Company’s substantial losses and working capital deficiency cast substantial doubt on the Company’s ability to continue as a going concern for a period of no less than 12 months from the date of this report. These unaudited interim condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

(e) Basis of Consolidation

The unaudited interim condensed consolidated financial statements include the accounts of ICH together with its consolidated subsidiaries, except for subsidiaries which ICH has identified as variable interest entities where ICH is not the primary beneficiary.

(f) Use of Estimates

The preparation of the unaudited interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the application of accounting policies and the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of unaudited interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates and assumptions are continuously evaluated and are based on management’s experience and other factors, including expectations regarding future events that are believed to be reasonable under the circumstances. Actual results may differ significantly from these estimates.

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

Significant estimates made by management include, but are not limited to: economic lives of leased assets; inputs used in the valuation of inventory; allowances for potential uncollectability of accounts receivable, provisions for inventory obsolescence; impairment assessment of long-lived assets; depreciable lives of property, plant and equipment; useful lives of intangible assets; accruals for contingencies including tax contingencies; valuation allowances for deferred income tax assets; estimates of fair value of identifiable assets and liabilities acquired in business combinations; estimates of fair value of derivative instruments; and estimates of the fair value of stock-based payment awards.

(g) Coronavirus Pandemic

The Company may be impacted by business interruptions from pandemics and public health emergencies, including those related to the novel coronavirus, known as COVID-19 (“COVID-19”). In the event of an outbreak of infectious disease, a pandemic, or a similar public health threat, such as the outbreak of COVID-19, or a fear of any of the foregoing, the Company may take actions that alter its business operations as may be required by federal, state or local authorities’ guidance and orders or take other steps that the Company determines are in the best interest of its employees, customers, partners, suppliers, shareholders, and stakeholders.

Any such alterations or modifications could cause substantial interruption to the Company’s business and could have a material adverse effect on the Company’s business, operating results, financial condition, and the trading price of the Company’s common shares. For example, COVID-19 previously resulted in temporary closures of some of the Company’s facilities; labor shortages; adverse impacts on the Company’s supply chain and distribution channels; and increased network vulnerability and risk of data loss resulting from increased use of remote access and removal of data from the Company’s facilities. In addition, a health epidemic, such as COVID-19, could negatively impact capital expenditures and overall economic activity in the impacted regions, which could impact the demand for the Company’s products and services.

It is unknown whether and how the Company may be impacted if the COVID-19 pandemic continues to persist or if there are increases in its breadth or in its severity, including as a result of the waiver of regulatory requirements or the implementation of emergency regulations to which the Company is subject.

The Company may incur expenses or delays relating to such events outside of its control, which could have a material adverse impact on its business, operating results, financial condition and the trading price of its common shares.

(h) Revision of Prior Period Financial Statements

During the three months ended March 31, 2022, the Company determined that it had not appropriately recorded cost of inventory as of December 31, 2021. This resulted in an overstatement of the inventory balance, accrued and other current liabilities, income tax expense and accumulated deficit as of December 31, 2021, and an understatement of costs and expenses applicable to revenues for the year ended December 31, 2021.

Based on an analysis of Accounting Standards Codification (“ASC”) 250 – “Accounting Changes and Error Corrections” (“ASC 250”), Staff Accounting Bulletin 99 – “Materiality” (“SAB 99”) and Staff Accounting Bulletin 108 – “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), the Company determined that these errors were immaterial to the previously issued financial statements, and as such no restatement was necessary. Correcting prior period financial statements for immaterial errors would not require previously filed reports to be amended.

The effect of the adjustments on the line items within the Company’s unaudited interim condensed consolidated statements of changes in shareholders’ deficit for three and nine months ended September 30, 2022 is as follows:

 

 

 

September 30, 2022

 

 

As reported

 

Adjustment

 

As revised

Accumulated deficit – Balance January 1, 2022

 

$

(800,390)

 

$

(1,242)

 

$

(801,632)

Total shareholders’ deficit – January 1, 2022

 

 

(22,397)

 

 

(1,242)

 

 

(23,639)

 

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

Note 2 – Leases

The Company mainly leases office space and cannabis cultivation, processing and retail dispensary space. Leases with an initial term of less than 12 months are not recorded on the unaudited interim condensed consolidated balance sheets. The Company recognizes operating lease right-of-use assets and operating lease liabilities based on the present value of future minimum lease payments over the lease term at commencement date and lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years or more. The Company has determined that it was reasonably certain that the renewal options on the majority of its cannabis cultivation, processing and retail dispensary space would be exercised based on operating history and knowledge, current understanding of future business needs and the level of investment in leasehold improvements, among other considerations. The incremental borrowing rate used in the calculation of the lease liability is based on the rate available to the parent company. The depreciable life of assets and leasehold improvements are limited by the expected lease term. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Certain subsidiaries of the Company rent or sublease certain office space to/from other subsidiaries of the Company. These intercompany subleases are eliminated on consolidation and have lease terms ranging from less than one year to 15 years.

Maturities of lease liabilities for operating leases as of September 30, 2023, were as follows:

 

 

 

 

Operating Leases

2024

 

 

 

$

7,747

2025

 

 

 

 

7,869

2026

 

 

 

 

7,825

2027

 

 

 

 

7,246

2028

 

 

 

 

7,143

Thereafter

 

 

 

 

48,668

Total lease payments

 

 

 

$

86,498

Less: interest expense

 

 

 

 

(51,477)

Present value of lease liabilities

 

 

 

$

35,021

Weighted-average remaining lease term (years)

 

 

 

 

10.5

Weighted-average discount rate

 

 

 

 

20%

 

For the three and nine months ended September 30, 2023, the Company recorded operating lease expenses of $2.3 million and $6.8 million, respectively (September 30, 2022—$2.4 million and $7.1 million, respectively), which are included in costs and expenses applicable to revenues and selling, general and administrative expenses on the unaudited interim condensed consolidated statements of operations.

The Company has entered into multiple sublease agreements pursuant to which it serves as lessor to the sublessees. The gross rental income and underlying lease expense are presented gross on the Company’s unaudited interim condensed consolidated statements of operations. For the three and nine months ended September 30, 2023, the Company recorded sublease income of $0.2 million and $0.7 million, respectively (September 30, 2022 – $0.2 million and $0.7 million, respectively), which is included in other income on the unaudited interim condensed consolidated statements of operations.

Supplemental balance sheet information related to leases are as follows:

 

 

 

 

September 30,

 

December 31,

Balance Sheet Information

 

Classification

 

2023

 

2022

Operating right-of-use assets, net

 

Operating leases

 

$

26,377

 

$

28,399

Lease liabilities

 

 

 

 

 

 

 

 

Current portion of operating lease liabilities

 

Operating leases

 

$

7,747

 

$

7,789

Long-term portion of operating lease liabilities

 

Operating leases

 

 

27,274

 

 

28,836

Total

 

 

 

$

35,021

 

$

36,625

 

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

 

Note 3 - Inventories, net

Inventories are comprised of the following items:

 

 

September 30,

 

December 31,

 

 

2023

 

2022

 

 

 

(Restated)

 

(Audited)

Supplies

 

$

4,111

 

$

7,018

Raw materials

 

 

10,522

 

 

8,903

Work in process

 

 

5,369

 

 

5,807

Finished goods

 

 

8,135

 

 

8,703

Inventory reserve

 

 

(566)

 

 

(631)

Total

 

$

27,571

 

$

29,800

 

Inventories are written down for any obsolescence or when the net realizable value considering future events and conditions is less than the carrying value. For the three and nine months ended September 30, 2023, the Company recorded $Nil and $0.9 million, respectively (September 30, 2022 – $Nil and $0.5 million, respectively), related to spoiled inventory in costs and expenses applicable to revenues on the unaudited interim condensed consolidated statements of operations.

 

Note 4 – Acquisitions

Acquisition of MPX New Jersey LLC

On February 1, 2022, the Company’s wholly-owned subsidiary, INJ, closed on its acquisition of MPX New Jersey LLC (“MPX NJ”), a New Jersey-based entity with a New Jersey medical cannabis permit and, as of April 13, 2023, an expanded cannabis permit to allow for certain adult-use operations. The acquisition consisted of INJ exercising its right to convert the principal balance of a loan and accrued interest owed pursuant to its loan agreement of $4.6 million into a 99% equity interest in MPX NJ. In addition, pursuant to an option agreement, INJ exercised its option to acquire the remaining 1% of MPX NJ for nominal consideration. The transaction with MPX NJ is a related party transaction due to the fact that Elizabeth Stavola, a former officer and director of the Company, is a former officer, director and majority owner of MPX NJ.

This transaction was treated as an asset acquisition under U.S. GAAP as substantially all of the fair value of the gross assets acquired were deemed to be associated with the acquired cultivation, production and retail licenses recognized as intangible assets in the table below.

The following table summarizes the allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed:

Consideration

 

 

 

   Cash

 

$

1

   Settlement of pre-existing relationships

 

 

19,193

Fair value of consideration

 

$

19,194

Assets acquired and liabilities assumed

 

 

 

   Cash

 

$

5

   Fixed assets

 

 

100

   Other non-current assets

 

15

   Intangible assets

 

 

19,100

   Accounts payable

 

 

(15)

   Accrued and other current liabilities

 

 

(11)

Net assets acquired

 

$

19,194

 

The Company has determined that this acquisition is an asset acquisition under ASC 805 Business Combinations whereby the total consideration is allocated to the acquired net tangible and intangible assets based on their estimated fair values as of the closing date. The Company determined the fair value of the net identifiable assets received from the asset acquisition was a more reliable

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

measurement of the assets exchanged as part of this asset acquisition. The Company concluded that the consideration included a nonmonetary component of $14.5 million as noncash consideration exchanged for the net identifiable assets received from MPX NJ. The related tax impact of $4.1 million was netted against this gain. As a result, the Company recorded a $10.5 million gain within other income on the unaudited interim condensed consolidated statements of operations for the nine months ended September 30, 2022.

Operating results have been included in these unaudited interim condensed consolidated financial statements from the date of the acquisition. Supplemental pro forma financial information has not been presented as the impact was not material to the Company’s unaudited interim condensed consolidated financial statements. The Company recorded acquisition costs of $Nil and $0.3 million within selling, general and administrative expenses on the unaudited interim condensed consolidated statements of operations for the nine months ended September 30, 2023 and 2022, respectively.

Note 5 - Long-Term Debt

As discussed in Note 1(c), the Company consummated the Recapitalization Agreement with the Secured Lenders and the Unsecured Lenders on the Closing Date, at which time the Company issued the Shares as well as the June Secured Debentures and June Unsecured Debentures in the aggregate principal amount of $119.7 million in exchange for the full satisfaction of the Secured Notes, Unsecured Debentures and the accrued interest and accrued fee obligations in the aggregate amount of $238.2 million. Upon the consummation of the Recapitalization Transaction and as of the Closing Date, all existing Defaults under the Secured Notes and Unsecured Debentures were waived. As a result of the consummation of the Recapitalization Agreement, as of the Closing Date, the Secured Lenders and the Unsecured Lenders owned, in the aggregate, 97.25% of the Company’s common shares.

Background of Recapitalization Transaction

On March 31, 2020, the Company did not make interest payments due to the Secured Lenders and the Unsecured Lenders. Through June 24, 2022, the Company had been in default on the Secured Notes and Unsecured Debentures, which, as of June 24, 2022, consisted of $97.5 million and $60.0 million of principal amount and $38.5 million and $11.9 million in accrued interest, respectively. In addition, as a result of the default, the Company had accrued additional fees and interest of $16.2 million in excess of the aforementioned amounts.

As a result of the March 31, 2020 default, the Board of Directors formed a special committee comprised of the Company’s then five independent, non-management directors (the “Special Committee”) to, among other matters, explore and consider strategic alternatives available to the Company in light of the prospective liquidity requirements of the Company, the condition of the capital markets affecting companies in the cannabis industry, and the rapid change in the state of the economy and capital markets generally caused by COVID-19, including, but not limited to:

renegotiation of existing financing arrangements and other material contracts, including any amendments, waivers, extensions or similar agreements with the Lenders and/or stakeholders of ICH and/or its subsidiaries that the Special Committee determined to be in the best interest of ICH and/or its subsidiaries;
managing available sources of capital, including equity investments or debt financing or refinancing and the terms thereof;
implementing the operational and financial restructuring of ICH and its subsidiaries and their respective businesses, assets and licensure and other rights; and
implementing other potential strategic transactions.

The Special Committee engaged Canaccord Genuity Corp. as its financial advisor to assist it in analyzing various strategic alternatives to address its capital structure and liquidity challenges.

On June 22, 2020, the Company received notice from the Collateral Agent, as collateral agent holding security for the benefit of the Secured Lenders, with a demand for repayment (the “Demand Letter”) under the Amended and Restated Secured Debenture Purchase Agreement dated October 10, 2019 (the “Secured Notes Purchase Agreement”) of the entire principal amount of the Secured Notes, together with interest, fees, costs and other allowable charges that had accrued or might accrue in accordance with the Secured Notes Purchase Agreement and the other Transaction Agreements (as defined in the Secured Notes Purchase Agreement). The Collateral Agent also concurrently provided the Company with a Notice of Intention to Enforce Security under section 244 of the Bankruptcy and Insolvency Act (Canada).

On July 10, 2020, ICH and certain of its subsidiaries entered into the Restructuring Support Agreement with the Secured Lenders and the Consenting Unsecured Lenders to affect the Recapitalization Transaction. Under the Restructuring Support Agreement, certain of the Secured Lenders agreed to provide interim financing in the amount of $14.7 million (the “Tranche Four Secured Notes”).

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

Subject to compliance with the Restructuring Support Agreement, the Secured Lenders and the Consenting Unsecured Lenders agreed to forbear from further exercising any rights or remedies in connection with any Defaults.

Consummation of the Recapitalization Transaction through the Plan of Arrangement was subject to certain conditions, including obtaining the Requisite Approvals. All Requisite Approvals required to consummate the Recapitalization Transaction were satisfied, conditioned, or waived by the Company, Secured Lenders and Consenting Unsecured Lenders, for purposes of closing the Recapitalization Transaction on the Closing Date.

The following table summarizes long term debt outstanding as of September 30, 2023:

 

 

Secured Notes

 

June Secured Debentures

 

Additional Secured Debentures

 

June Unsecured Debentures

 

Other

 

Total

As of January 1, 2023

 

$

13,852

 

$

90,273

 

$

26,067

 

$

16,175

 

$

945

 

$

147,312

Fair value of financial
   liabilities issued

 

 

15,019

 

 

6,437

 

 

1,614

 

 

1,291

 

 

 

 

24,361

Accretion of balance

 

 

99

 

 

2,151

 

 

 

 

696

 

 

 

 

2,946

Debt extinguishment

 

 

(13,886)

 

 

 

 

 

 

 

 

 

 

(13,886)

Deconsolidation

 

 

 

 

 

 

 

 

 

 

(144)

 

 

(144)

Repayment

 

 

 

 

 

 

 

 

 

 

(37)

 

 

(37)

As of September 30, 2023

 

$

15,084

 

$

98,861

 

$

27,681

 

$

18,162

 

$

764

 

$

160,552

Accounting for the Recapitalization Transaction

On the Closing Date, the Company completed its previously announced Recapitalization Transaction pursuant to the terms of the Restructuring Support Agreement. The Recapitalization Transaction closed pursuant to the terms of the Plan of Arrangement under the Business Corporations Act (British Columbia) approved by the Court.

In accordance with debt extinguishment accounting rules outlined in ASC 470-50, Debt-Modifications and Extinguishments, (“ASC 470”), the Company recorded a loss on extinguishment of debt of $316.6 million on the Closing Date. In connection with the extinguishment in the aggregate amount of $238.2 million, the Company issued new debt in the principal amount of $119.7 million, which was recorded at fair value of $99.4 million and 6,072,580 common shares in the amount of $455.4 million issued which were valued based upon the closing price of the Company’s common shares on the Closing Date.

On the Closing Date, the Company fully amortized the debt discount costs related to the old debt that was extinguished. As of September 30, 2023, the total and unamortized debt discount costs related to new debt were $20.4 million and $15.6 million, respectively (December 31, 2022— $20.3 million and $18.4 million, respectively). As of September 30, 2023, the total and unamortized debt issuance costs related to debts that were not part of the Recapitalization Transaction were $0.7 million and $Nil, respectively (December 31, 2022—$0.7 million and less than $0.1 million, respectively).

As of September 30, 2023, the total interest accrued on both current and long-term debt was $Nil (December 31, 2022 - $Nil). As of the Closing Date, the total accrued interest of $56.3 million was extinguished and settled in full as part of the Recapitalization Transaction.

(a) Secured Notes

Tranche One

On May 14, 2018, the Company issued $40.0 million secured notes (the “Tranche One Secured Notes”) with a maturity date of May 14, 2021. The principal amount of such notes along with accrued interest at the default rate of 16.0% per annum were extinguished on June 24, 2022 in connection with the closing of the Recapitalization Transaction.

For the three and nine months ended September 30, 2023, interest expense of $Nil and $Nil, respectively (September 30, 2022 - $Nil and $3.2 million, respectively), was recorded on the unaudited interim condensed consolidated statements of operations.

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

As of June 24, 2022, immediately prior to the consummation of the Recapitalization Transaction, the Company was not in compliance with the market value test, and the Company did not make interest payments, and therefore was in breach of a financial covenant with respect to the Tranche One Secured Notes, Tranche Two Secured Notes (as defined herein), and Tranche Three Secured Notes (as defined herein). Furthermore, the Company was in default on its Secured Notes as of March 31, 2020, and as a result, an event of default occurred on April 4, 2020. This default was triggered on the Company’s long-term debt, which, as of June 24, 2022, consisted of $97.5 million and $60.0 million of principal amount and $38.5 million and $11.9 million in accrued interest on the Secured Notes and the Unsecured Debentures, respectively. Furthermore, the Company also became obligated to pay an exit fee (the “Exit Fee”) of $10.3 million that accrues interest at a rate of 16% annually in relation to the Secured Notes. As a result of the default and through June 24, 2022, the Company classified the Tranche One Secured Notes, Tranche Two Secured Notes, and Tranche Three Secured Notes as current liabilities on the unaudited interim condensed consolidated balance sheets. As of June 24, 2022, this debt, related accrued interest and fees were fully satisfied pursuant to the terms of the Restructuring Support Agreement and no default existed with respect to the Tranche One Secured Notes, Tranche Two Secured Notes, and Tranche Three Secured Notes.

For the three and nine months ended September 30, 2023, interest expense of $Nil and $Nil, respectively (September 30, 2022 – $Nil and $0.8 million, respectively), was recorded in relation to the Exit Fee on the unaudited interim condensed consolidated statements of operations. As of June 24, 2022, the aggregate Exit Fee obligation of $16.2 million was satisfied in connection with the closing of the Recapitalization Transaction, which was comprised of an aggregate of $10.3 million in principal amount and $5.9 million in accrued interest.

Tranche Two

On September 30, 2019, the Company issued an additional $20.0 million of secured notes (the “Tranche Two Secured Notes”). The Tranche Two Secured Notes accrued interest at 13.0% per annum and had an original maturity date of May 14, 2021. The principal amount of such notes along with accrued interest at the default rate of 16.0% per annum were extinguished on June 24, 2022 in connection with the closing of the Recapitalization Transaction.

For the three and nine months ended September 30, 2023, interest expense of $Nil and $Nil, respectively (September 30, 2022 - $Nil and $1.6 million, respectively), was recorded on the unaudited interim condensed consolidated statements of operations.

All terms, restrictions and financial covenants applicable to the Tranche One Secured Notes were also applicable to the Tranche Two Secured Notes. As of June 24, 2022, this debt, related accrued interest and fees were fully satisfied pursuant to the terms of the Restructuring Support Agreement and no default existed with respect to the Tranche Two Secured Notes.

Tranche Three

On December 20, 2019, the Company issued an additional $36.2 million of secured notes (the “Tranche Three Secured Notes”). The Tranche Three Secured Notes accrued interest at 13.0% per annum and had an original maturity date of May 14, 2021. The principal amount of such notes along with accrued interest at the default rate of 16.0% per annum were extinguished on June 24, 2022 in connection with the closing of the Recapitalization Transaction.

For the three and nine months ended September 30, 2023, interest expense of $Nil and $Nil, respectively (September 30, 2022 - $Nil and $2.8 million, respectively), was recorded on the unaudited interim condensed consolidated statements of operations.

All terms, restrictions and financial covenants applicable to the Tranche One Secured Notes and Tranche Two Secured Notes were also applicable to Tranche Three Secured Notes. As of June 24, 2022, this debt, related accrued interest and fees were fully satisfied pursuant to the terms of the Restructuring Support Agreement and no default existed with respect to the Tranche Three Secured Notes.

Tranche Four

On July 13, 2020, as part of the Recapitalization Transaction, the Company issued an additional $14.7 million as Tranche Four Secured Notes which accrued interest at 8.0% per annum and had an original maturity date of July 13, 2025. On June 24, 2022, the terms of the Tranche Four Secured Notes were materially modified pursuant to the Restructuring Support Agreement and as such, were considered to be extinguished in connection with the closing of the Recapitalization Transaction.

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

For the three and nine months ended September 30, 2023, interest expense of $Nil and $Nil, respectively (September 30, 2022 - $Nil and $0.7 million, respectively), and accretion expense of $Nil and $Nil, respectively (September 30, 2022 - $Nil and $0.2 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations.

iAnthus New Jersey, LLC Senior Secured Bridge Notes

On February 2, 2021, INJ issued an aggregate of $11.0 million of Senior Secured Bridge Notes which mature on the earlier of (i) February 2, 2023, (ii) the date on which the Company closes a Qualified Financing (as defined below) and (iii) such earlier date that the principal amount may become due and payable pursuant to the terms of such notes. The Senior Secured Bridge Notes initially accrued interest at a rate of 14.0% per annum, decreasing to 8.0% upon the closing of the Recapitalization Transaction (increasing to 25.0% per annum in the event of default). “Qualified Financing” means a transaction or series of related transactions resulting in net proceeds to the Company of not less than $10 million from the subscription of the Company’s securities, including, but not limited to, a private placement or rights offering.

On February 2, 2023, the Company and INJ entered into an amendment (the “Amendment”) to the Senior Secured Bridge Notes with all of the holders of the Senior Secured Bridge Notes. Pursuant to the Amendment, the maturity date of the Senior Secured Bridge Notes was extended until February 2, 2024, the interest on the principal amount outstanding was increased to a rate of 12.0% per annum, and an amendment fee equal to 10.0% of the principal amount outstanding of the Senior Secured Bridge Notes as of February 2, 2023 or $1.4 million in the aggregate, was added to such notes such that it will become due and payable on the extended maturity date. In accordance with debt extinguishment accounting guidance outlined in ASC 470, the terms of the Senior Secured Bridge Notes were materially modified pursuant to the Amendment and as such, the Company recorded a loss on debt extinguishment of $Nil and $1.3 million, respectively on the unaudited interim condensed consolidated statements of operations for the three and nine months ended September 30, 2023.

The amended host debt, classified as a liability using the guidance of ASC 470, was recognized at the fair value of $13.8 million.

Interest is to be paid in kind by adding the interest accrued on the principal amount on the last day of each fiscal quarter (the first such interest payment date being March 31, 2023) and such amount thereafter becoming part of the principal amount, which will accrue additional interest. Interest paid in kind will be payable on the date when all of the principal amount is due and payable.

For the three and nine months ended September 30, 2023, interest expense of $0.4 million and $1.2 million, respectively (September 30, 2022 - $0.3 million and $1.1 million, respectively), and accretion expense of less than $0.1 million and $0.1 million, respectively (September 30, 2022 - $0.1 million and $0.3 million, respectively), was recorded on the unaudited interim condensed consolidated statements of operations.

The Senior Secured Bridge Notes are secured by a security interest in certain assets of INJ. ICH provided a guarantee in respect of all of the obligations of INJ under the Senior Secured Bridge Notes, and the Company is in compliance with the terms of the Senior Secured Bridge Notes as of September 30, 2023. The Senior Secured Bridge Notes are classified as current liabilities on the unaudited interim condensed consolidated balance sheets as they are due on February 2, 2024.

Certain of the Secured Lenders, including Gotham Green Fund II, L.P., Gotham Green Fund II (Q), L.P., Oasis Investments II Master Fund LTD., Senvest Global (KY), LP, Senvest Master Fund, LP and Hadron Healthcare and Consumer Special Opportunities Master Fund, held greater than 5.0% of the outstanding common shares of the Company upon closing of the Recapitalization Transaction. As principal owners of the Company, these lenders are considered to be related parties.

(b) March 2019 Debentures

On March 18, 2019, the Company completed a private placement of $35.0 million of unsecured convertible debentures (the “March 2019 Debentures”) and corresponding warrants to purchase 2,177,291 common shares of the Company at an exercise price of $6.43 per share (“March 2019 Equity Warrants”). All of the March 2019 Equity Warrants expired on March 15, 2022. The March 2019 Debentures accrued interest at a rate of 8.0%, per annum, payable quarterly on the last business day of each fiscal quarter, beginning on March 31, 2019. Interest was to be paid in cash, shares, or a combination of cash and shares, up to 50.0%, at the Company’s election. The March 2019 Debentures would have matured on March 15, 2023; however, on June 24, 2022, the outstanding principal of March 2019 Debentures along with related accrued interest and applicable fees were extinguished as part of the closing of the Recapitalization Transaction.

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

For the three and nine months ended September 30, 2023, interest expense of $Nil and $Nil, respectively (September 30, 2022 - $Nil and $1.4 million, respectively), and accretion expense of $Nil and $Nil, respectively (September 30, 2022 - $Nil and $0.7 million, respectively), was recorded on the unaudited interim condensed consolidated statements of operations.

The terms of the March 2019 Debentures imposed certain restrictions on the Company’s operating and financing activities, including certain restrictions on the Company’s ability to incur certain additional indebtedness at the subsidiary level. As of June 24, 2022, immediately prior to the consummation of the Recapitalization Transaction, the Company was in default on its interest obligations to the holders of the Secured Notes. This default triggered a cross-default on its interest obligations to the holders of the March 2019 Debentures. As a result of this default, the Company classified the debt as a current liability on the unaudited interim condensed consolidated balance sheets as the March 2019 Debentures were due on demand. As of June 24, 2022, this debt, related accrued interest and fees were fully satisfied pursuant to the terms of the Restructuring Support Agreement and no default existed with respect to the March 2019 Debentures.

(c) May 2019 Debentures

On May 2, 2019, the Company completed a private placement of $25.0 million of unsecured convertible debentures (the “May 2019 Debentures”) and corresponding warrants to purchase 1,555,207 common shares of the Company at an exercise price of $6.43 per common share (“May 2019 Equity Warrants”). All of the May 2019 Equity Warrants expired on March 15, 2022. The May 2019 Debentures accrued interest at a rate of 8.0%, per annum, payable quarterly on the last business day of each fiscal quarter, beginning on June 30, 2019. Interest was to be paid in cash, shares, or a combination of cash and shares, up to 50.0%, at the Company’s election. The May 2019 Debentures would have matured on March 15, 2023; however, on June 24, 2022, the outstanding principal of May 2019 Debentures along with related accrued interest and applicable fees were extinguished as part of the closing of the Recapitalization Transaction.

For three and nine months ended September 30, 2023, interest expense of $Nil and $Nil, respectively (September 30, 2022 - $Nil and $1.0 million, respectively), and accretion expense of $Nil and $Nil, respectively (September 30, 2022 - $Nil and $0.4 million, respectively), was recorded on the unaudited interim condensed consolidated statements of operations.

The terms of the May 2019 Debentures imposed certain restrictions on the Company’s operating and financing activities, including certain restrictions on the Company’s ability to incur certain additional indebtedness at the subsidiary level. As of June 24, 2022, immediately prior to the consummation of the Recapitalization Transaction, the Company was in default on its interest obligations to the holders of the Secured Notes. This default triggered a cross-default on its interest obligations to the holders of the May 2019 Debentures. Further, as a result of this default, the Company classified the debt as a current liability on the unaudited interim condensed consolidated balance sheets as the May 2019 Debentures were due on demand. As of June 24, 2022, this debt, related accrued interest and fees were fully satisfied pursuant to the terms of the Restructuring Support Agreement and no default existed with respect to the May 2019 Debentures.

(d) June Secured Debentures

On June 24, 2022 in connection with the closing of the Recapitalization Transaction, the Company entered into the Secured DPA, pursuant to which ICM issued the June Secured Debentures in the aggregate principal amount of $99.7 million which accrue interest at the rate of 8.0% per annum increasing to 11.0% per annum upon the occurrence of an Event of Default (as defined in the Secured DPA), with a maturity date of June 24, 2027. The June Secured Debentures may be prepaid on a pro rata basis from and after the third anniversary of the Closing Date of the Recapitalization Transaction upon prior written notice to the New Secured Lenders without premium or penalty.

The host debt, classified as a liability using the guidance of ASC 470, was recognized at the fair value of $84.5 million.

Interest is to be paid in kind by adding the interest accrued on the principal amount on the last day of each fiscal quarter (the first such interest payment date being June 30, 2022) and such amount thereafter becoming part of the principal amount, which will accrue additional interest. Interest paid in kind will be payable on the date when all of the principal amount is due and payable.

For the three and nine months ended September 30, 2023, interest expense of $2.2 million and $6.4 million, respectively (September 30, 2022 - $2.1 million and $2.2 million, respectively), and accretion expense of $0.7 million and $2.2 million, respectively (September 30, 2022 - $0.7 million and $0.8 million, respectively), was recorded on the unaudited interim condensed consolidated statements of operations.

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iANTHUS CAPITAL HOLDINGS, INC.

NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular U.S. dollar amounts and shares in thousands, unless otherwise stated)
 

The terms of the Secured DPA impose certain restrictions on the Company’s operating and financing activities, including certain restrictions on the Company’s ability to: incur certain additional indebtedness; grant liens; make certain dividends and other payment restrictions affecting the Company’s subsidiaries; issue shares or convertible securities; and sell certain assets. The June Secured Debentures are secured by all current and future assets of the Company and ICM. The terms of the Secured DPAs do not have any financial covenants or market value test and ICM is in compliance with the terms of the June Secured Debentures as of September 30, 2023. The June Secured Debentures are classified as long-term liabilities on the unaudited interim condensed consolidated balance sheets.

Certain of the New Secured Lenders that hold the June Secured Debentures, including Gotham Green Fund 1, L.P., Gotham Green Fund 1 (Q), L.P., Gotham Green Fund II, L.P., Gotham Green Fund II (Q), Gotham Green Credit Partners SPV 1, L.P., Gotham Green Partners SPV V, L.P., L.P., and Parallax Master Fund, LP, held greater than 5.0% of the outstanding common shares of the Company upon the closing of the Recapitalization Transaction. As principal owners of the Company, certain of the New Secured Lenders are considered to be related parties.

(e) June Unsecured Debentures

On June 24, 2022 in connection with the closing of the Recapitalization Transaction, the Company entered into the Unsecured DPA, pursuant to which ICM issued June Unsecured Debentures in the aggregate principal amount of $20.0 million which accrue interest at the rate of 8.0% per annum increasing to