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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
 
FORM 10-Q
 
 
(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, 2021
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.)
   
420 Lexington Avenue, Suite 414
New York, NY
 
10170
(Address of principal executive offices)
 
(Zip Code)
(646)
518-9411
(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 November 8, 2021 was 171,718,192.
 
 
 

Table of Contents
Table of Contents
 
        
Page No.
 
PART I. FINANCIAL INFORMATION
        
     
Item 1.
       1  
     
         2  
     
         3  
     
         4  
     
         5  
     
         6  
     
Item 2.
       28  
     
Item 3.
       38  
     
Item 4.
       38  
   
     39  
     
Item 1.
       39  
     
Item 1A.
       41  
     
Item 2.
       41  
     
Item 3.
       41  
     
Item 4.
       41  
     
Item 5.
       41  
     
Item 6.
       42  
   
     43  

Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form
10-Q
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
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 statement.
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 on Form
10-Q
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 on Form
10-Q
and the documents that we reference 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
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,
and particularly our forward-looking statements, by these cautionary statements.

Table of Contents
ITEM 1. FINANCIAL STATEMENTS
 
1

Table of Contents
 
iANTHUS CAPITAL HOLDINGS, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars or shares)
 
    
September 30,
   
December 31,
 
    
2021
   
2020
 
          
(Revised)
 
Assets
                
Cash
   $ 19,502     $ 11,015  
Restricted cash
     4,138       495  
Accounts receivable, net of allowance for doubtful accounts of $194 (December 31, 2020 - $401)
     3,427       3,351  
Prepaid expenses
     3,150       3,611  
Inventories
     29,984       25,451  
Other assets
     2,627       1,700  
    
 
 
   
 
 
 
Current Assets
  
 
62,828
 
 
 
45,623
 
Investments
     592       512  
Property, plant and equipment
     113,308       106,997  
Right-of-use
assets
     31,268       33,083  
Other long-term assets
     8,442       8,137  
Intangible assets
     147,566       158,781  
    
 
 
   
 
 
 
Total Assets
  
$
364,004
 
 
$
353,133
 
    
 
 
   
 
 
 
Liabilities
                
Accounts payable
   $ 13,033     $ 12,089  
Accrued and other current liabilities
     89,358       55,053  
Current portion of long-term debt, net of issuance costs
     164,793       157,042  
Derivative liabilities
     315       245  
Current portion of lease liabilities
     7,579       7,450  
    
 
 
   
 
 
 
Current Liabilities
  
 
275,078
 
 
 
231,879
 
Long-term debt, net of issuance costs
     27,074       14,133  
Deferred income tax
     32,130       32,122  
Long-term portion of lease liabilities
     28,027       27,670  
    
 
 
   
 
 
 
Total Liabilities
  
 
362,309
 
 
 
305,804
 
    
 
 
   
 
 
 
Commitments and Contingencies
                
Shareholders’ Equity
                
Common shares — no par value. Authorized — unlimited number. 171,718 — issued and outstanding (December 31, 2020 — 171,718 — issued and outstanding)
     —         —    
Shares to be issued
     1,531       1,531  
Additional
paid-in
capital
     774,849       769,940  
Accumulated deficit
     (774,685     (724,142
    
 
 
   
 
 
 
Total Shareholders’ Equity
  
$
1,695
 
 
$
47,329
 
    
 
 
   
 
 
 
Total Liabilities and Shareholders’ Equity
  
$
364,004
 
 
$
353,133
 
    
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
 
2

Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share amounts)
 
    
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
    
2021
   
2020
   
2021
   
2020
 
          
(Revised)
         
(Revised)
 
Revenues, net of discounts
  
$
49,263
 
 
$
40,616
 
 
$
155,296
 
 
$
105,688
 
Costs and expenses applicable to revenues
  
 
(23,206
 
 
(15,513
 
 
(68,207
 
 
(46,243
    
 
 
   
 
 
   
 
 
   
 
 
 
Gross profit
  
 
26,057
 
 
 
25,103
 
 
 
87,089
 
 
 
59,445
 
    
 
 
   
 
 
   
 
 
   
 
 
 
Operating expenses
                                
Selling, general and administrative expenses
     22,581       24,173       67,263       74,521  
Depreciation and amortization
     8,133       7,237       23,266       20,416  
Write-downs, recoveries and other charges, net
              3       186       690  
Impairment loss
     127       4,100       1,823       203,464  
    
 
 
   
 
 
   
 
 
   
 
 
 
Loss from operations
  
 
(4,784
 
 
(10,410
 
 
(5,449
 
 
(239,646
Interest income
     138       96       371       276  
Other income
     350       461       844       756  
Interest expense
     (5,959     (5,476     (17,516     (15,108
Accretion expense
     (767     (4,354     (8,283     (12,471
Provision for debt obligation fee
     (423     (423     (1,255     (13,342
(
Loss
)
gains from change in fair value of financial instruments
     (300     244       10       5,170  
    
 
 
   
 
 
   
 
 
   
 
 
 
Loss before income taxes
  
 
(11,745
 
 
(19,862
 
 
(31,278
 
 
(274,365
Income tax expense
     4,090       5,609       19,265       12,272  
    
 
 
   
 
 
   
 
 
   
 
 
 
Net loss
  
$
(15,835
 
$
(25,471
 
$
(50,543
 
$
(286,637
    
 
 
   
 
 
   
 
 
   
 
 
 
Net loss per share - basic and diluted
  
$
(0.09
 
$
(0.15
 
$
(0.29
 
$
(1.67
Weighted average number of common shares outstanding - basic and diluted
  
 
171,718
 
 
 
171,643
 
 
 
171,718
 
 
 
171,651
 
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
 
3

Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands of U.S. dollars or shares)
 
    
Three Months Ended September 30, 2021
 
    
Number of Common
Shares (‘000)
    
Shares to
be Issued
    
Additional
Paid-in-Capital
    
Accumulated
Deficit
   
Total Shareholders’
Equity
 
Balance – June 30, 2021
  
 
171,718
 
  
$
1,531
 
  
$
773,235
 
  
$
(758,850
 
$
15,916
 
Share-based compensation
     —          —          1,614        —         1,614  
Net loss
     —          —          —          (15,835     (15,835
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Balance – September 30, 2021
  
 
171,718
 
  
$
1,531
 
  
$
774,849
 
  
$
(774,685
 
$
1,695
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
 
    
Nine Months Ended September 30, 2021
 
    
Number of Common
Shares (‘000)
    
Shares to
be Issued
    
Additional
Paid-in-Capital
    
Accumulated
Deficit
   
Total Shareholders’

Equity
 
Balance – January 1, 2021 - Revised
  
 
171,718
 
  
$
1,531
 
  
$
769,940
 
  
$
(724,142
 
$
47,329
 
Share-based compensation
     —          —          4,909        —         4,909  
Net loss
     —          —          —          (50,543     (50,543
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Balance – September 30, 2021
  
 
171,718
 
  
$
1,531
 
  
$
774,849
 
  
$
(774,685
 
$
1,695
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
 
    
Three Months Ended September 30, 2020
 
    
Number of Common
Shares (‘000)
    
Shares to
be Issued
    
Additional
Paid-in-Capital
    
Accumulated
Deficit
   
Total Shareholders’
Equity
 
Balance – June 30, 2020
  
 
171,718
 
  
$
1,531
 
  
$
766,257
 
  
$
(671,946
 
$
95,842
 
Share-based compensation
     —          —          1,745        —         1,745  
Net loss (Revised)
     —          —          —          (25,471     (25,471
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Balance (Revised) – September 30, 2020
  
 
171,718
 
  
$
1,531
 
  
$
768,002
 
  
$
(697,417
 
$
72,116
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
 
    
Nine Months Ended September 30, 2020
 
    
Number of Common
Shares (‘000)
    
Shares to
be Issued
    
Additional
Paid-in-Capital
   
Accumulated
Deficit
   
Total Shareholders’
Equity
 
Balance – January 1, 2020
  
 
171,643
 
  
$
1,531
 
  
$
761,722
 
 
$
(410,780
 
$
352,473
 
Share issuance – Settlement of outstanding obligations
     75        —          193       —         193  
Share-based compensation
     —          —          9,412       —         9,412  
Other - Warrant issuance
     —          —          (3,325     —         (3,325
Net loss (Revised)
     —          —          —         (286,637     (286,637
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Balance (Revised) – September 30, 2020
  
 
171,718
 
  
$
1,531
 
  
$
768,002
 
 
$
(697,417
 
$
72,116
 
    
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
 
4

Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
UNAUDITED INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S dollars)
 
    
Nine Months Ended
September 30,
 
    
2021
   
2020
 
          
(Revised)
 
CASH FLOW FROM OPERATING ACTIVITIES
                
Net loss
   $ (50,543   $ (286,637
Adjustments to reconcile net loss to cashflow from (used in) operations:
                
Interest income
     (371     (276
Interest expense
     17,516       15,108  
Accretion expense
     8,283       12,471  
Debt obligation fees
     1,255       13,342  
Impairment loss
     1,823       203,464  
Depreciation and amortization
     23,266       20,416  
Write-downs, recoveries and other charges, net
     186       690  
Share-based compensation
     4,909       9,605  
Gain from change in fair value of financial instruments
     (10     (5,170
Income from equity-accounted investments
     —         (140
Deferred income taxes
              (3,845
Change in
non-cash
working capital items (Note 12)
     13,531       13,227  
    
 
 
   
 
 
 
NET CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES
  
$
19,845
 
 
$
(7,745
    
 
 
   
 
 
 
CASH FLOW FROM INVESTING ACTIVITIES
                
Purchase of property, plant and equipment
     (16,528     (12,297
Acquisition of other intangible assets
     (463     (459
Proceeds from redemption and sale of investment
     —         1,685  
Issuance of related party promissory note
     (977     (3,016
    
 
 
   
 
 
 
NET CASH USED IN INVESTING ACTIVITIES
  
$
(17,968
 
$
(14,087
    
 
 
   
 
 
 
CASH FLOW FROM FINANCING ACTIVITIES
                
Proceeds from issuance of debt
     11,000       14,737  
Debt issuance costs
     (694     (2,230
Repayment of debt
     (53     (10,838
    
 
 
   
 
 
 
NET CASH PROVIDED BY FINANCING ACTIVITIES
  
$
10,253
 
 
$
1,669
 
    
 
 
   
 
 
 
CASH AND RESTRICTED CASH:
                
NET INCREASE (DECREASE) IN CASH AND RESTRICTED CASH DURING THE PERIOD
     12,130       (20,163
    
 
 
   
 
 
 
CASH AND RESTRICTED CASH, BEGINNING OF PERIOD
     11,510       34,821  
    
 
 
   
 
 
 
CASH AND RESTRICTED CASH, END OF PERIOD
  
$
23,640
 
 
$
14,658
 
    
 
 
   
 
 
 
The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements.
 
5

Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
Note 1 – Overview and Basis of Presentation
 
 
(a)
Description of Business
iAnthus Capital Holdings, Inc. (“ICH” or “iAnthus”), together with its consolidated subsidiaries (collectively, the “Company”) is a vertically-integrated multi-state owner and operator of licensed cannabis cultivation, processing and dispensary facilities, and developer, producer and distributor of innovative branded cannabis and cannabidiol (“CBD”) products 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. Additionally, the Company distributes CBD products online and to retail locations across the United States.
The Company’s business activities, and the business activities of its subsidi
a
ries, 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, 2020 included in the Company’s Annual Report on the Form
10-K
filed with the SEC on April 1, 2021. 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 condensed consolidated financial statements. Actual results could differ from these estimates.
The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2021, or any other period.
Except as otherwise stated, these unaudited interim condensed consolidated financial statements are presented in U.S. dollars.
 
 
(c)
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 in the foreseeable future. For the nine months ended September 30, 2021, the Company reported a net loss of $50.5 million and an accumulated deficit of $774.7 million as of September 30, 2021. These material circumstances cast substantial doubt on the Company’s ability to continue as a going concern for a period of at least 12 months from the date of this report and ultimately on the appropriateness of the use of the accounting principles applicable to a going concern.
During the nine months ended September 30, 2021, due to liquidity constraints, the Company did not make interest payments due to the holders (the “Secured Lenders”) of the 13% senior secured convertible debentures (the “Secured Notes”) issued by iAnthus Capital Management, LLC, the Company’s U.S. wholly-owned subsidiary
,
and the holders (the “Unsecured Debentureholders” and together with the Secured Lenders, the “Lenders”) of the Company’s 8% convertible unsecured debentures (the “Unsecured Debentures”). On March 31, 2020, the Company defaulted with respect to its long-term debt and is currently in default of those obligations, which, as of September 30, 2021 consists of $97.5 million and $60.0 million of principal amount, and $26.9 million and $8.4 million in accrued interest, with respect to the Secured Notes and Unsecured Debentures, respectively. In addition, as a result of the default, the Company has accrued additional principal and interest of $15.0 million in excess of the aforementioned amounts. Refer to Note 4 and Note 13 for further discussion.
As a result of the March 31, 2020 default, the Board of Directors of the Company (the “Board”) formed a special committee comprising of five independent, non-management directors of the Company (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 the novel coronavirus known as COVID-19 (“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 to and/or stakeholders of the Company and/or its subsidiaries that the Special Committee determines are in the best interest of the Company 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 the Company 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 the Company’s capital structure and liquidity challenges.
 
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
On June 22, 2020, the Company received notice from Gotham Green Admin 1, LLC (the “Collateral Agent”), as collateral agent holding security for the benefit of the holders of the Company’s Secured Notes, 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 (the “BIA Notice”) under section 244 of the Bankruptcy and Insolvency Act (Canada) (the “BIA”).
On July 10, 2020, the Company and certain of its subsidiaries entered into a restructuring support agreement (as amended, the “Restructuring Support Agreement”) with the Secured Lenders and certain of the Unsecured Debentureholders (the “Consenting Unsecured Debentureholders”) to affect a proposed recapitalization transaction (the “Recapitalization Transaction”). Under the Restructuring Support Agreement, certain of the Secured Lenders agreed to provide interim financing
of $14.7 million (the “Tranche Four Secured Notes”).
Subject to compliance with the Restructuring Support Agreement, the Secured Lenders and the Consenting Unsecured Debentureholders will forbear from further exercising any rights or remedies in connection with any events of default of the Company occurring under their respective agreements and will stop any current or pending enforcement actions with respect to the same, including as set forth in the Demand Letter.
Pursuant to the terms of the Restructuring Support Agreement, the Recapitalization Transaction will be implemented pursuant to arrangement proceedings (“Arrangement Proceedings”) commenced under the British Columbia Business Corporations Act, or, only, if necessary, the Companies’ Creditors Arrangement Act (Canada) (“CCAA”). Completion of the Recapitalization Transaction through the Arrangement Proceedings is subject to, among other things, requisite stakeholder approval of the plan of arrangement (the “Plan of Arrangement”). Pursuant to the terms of the Restructuring Support Agreement, if the Recapitalization Transaction is completed through CCAA proceedings, then the existing holders of the Company’s common shares (the “Existing Shareholders”) will not receive any recovery.
On September 14, 2020, the Company held meetings at which the stakeholders approved the Plan of Arrangement. Following the stakeholder vote, on September 25, 2020, the Company attended a court hearing before the Supreme Court of British Columbia (the “Court”) to receive approval of the Plan of Arrangement. On October 6, 2020, the Company received final approval from the Court for the Plan of Arrangement. On November 5, 2020, the Company received a notice of appeal with respect to the final approval for the Plan of Arrangement by the Court, and on January 29, 2021, the appeal was dismissed by the British Columbia Court of Appeal. The Company may be required to obtain other necessary approvals with respect to the Plan of Arrangement, including approvals by state-level regulators and the Canadian Securities Exchange (collectively, the “Requisite Approvals”). Specifically, certain of the transactions contemplated by the Recapitalization Transaction have triggered the requirement for an approval by state-level regulators in certain U.S. states with jurisdiction over the licensed cannabis operations of entities owned, in whole or in part, or controlled, directly or indirectly, by the Company in such states. On February 23, 2021, the Nevada Cannabis Compliance Board approved the proposed change of ownership and control of the Company’s wholly-owned subsidiary, GreenMart of Nevada NLV, LLC (“GMNV”), contemplated by the Recapitalization Transaction. On June 17, 2021, the Massachusetts Cannabis Control Commission (the “CCC”) also approved the proposed change of ownership and control of the current licenses held by the Company’s wholly-owned subsidiaries, Mayflower Medicinals, Inc. (“Mayflower”) and Cannatech Medicinals, Inc. (“Cannatech”), contemplated by the Recapitalization Transaction (the “June 17 Approval”). On June 15, 2021, the Company and the Lenders agreed to amend the date by which the Recapitalization Transaction pursuant to the Plan of Arrangement is required to be implemented by from June 30, 2021 to August 31, 2021.
On August 12, 2021, Mayflower’s pending application for a Marijuana Establishment retail license for its Allston, Massachusetts retail location (the “Allston Retail License”) was approved by the CCC at its August public meeting. As a result of this August 12, 2021 approval, Mayflower must submit a new change of ownership and control application to the CCC in connection with the Recapitalization Transaction with respect to the Allston Retail License (the “New COC Application”). The New COC Application must be submitted by Mayflower and approved by the CCC before the June 17 Approval can be effectuated. The New COC Application has not yet been submitted.
On August 20, 2021, Gotham Green Partners, LLC and Gotham Green Admin 1, LLC (the “Applicants”) filed a Notice of Application (the “Application”) with the Ontario Superior Court of Justice Commercial List (“OSCJ”), which sought, among other things, a declaration that the “Outside Date”, as that term is defined in the Restructuring Support Agreement, be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. On August 24, 2021, the Company and Applicants appeared for a case conference before the OSCJ. At this conference, the OSCJ issued an endorsement (the “Stay Order”) that required the parties to the Restructuring Support Agreement to maintain the status quo until the hearing on September 23, 2021. Specifically, the Stay Order provided that the parties shall remain bound by the Restructuring Support Agreement and not take any steps to advance or impede the regulatory approval process for the closing of the Recapitalization Transaction or otherwise have any communication with the applicable state-level regulators concerning the Recapitalization Transaction or the other counterparties to the Restructuring Support Agreement. On September 23, 2021, the parties appeared before the OSCJ for a hearing on the Application. Following this hearing, the OSCJ issued an endorsement that extended the Stay Order from September 23, 2021 until 48 hours after the release of the OSCJ’s decision on the merits of the Application. On October 12, 2021, the OSCJ issued its decision granting the Applicant’s relief sought in the Application (the “Decision”). Specifically, the OSCJ granted the declaration sought by the Applicants and ordered that the Outside Date in the Restructuring Support Agreement be extended to the date on which any regulatory approval or consent condition to implementation of the Plan of Arrangement is satisfied or waived. The Company is reviewing the Decision carefully and considering the merits of an appeal. The Company has the right to appeal the Decision to the Ontario Court of Appeal on or before 30 days from the release of the Decision.
On August 20, 2021, the Vermont Department of Public Safety (the “DPS”) confirmed that DPS does not require prior approval of the Recapitalization Transaction, except for background checks of the prospective new directors and Interim Chief Executive Officer of the Company to be appointed upon the closing of the Recapitalization Transaction.
On October 29, 2021, the Florida Department of Health, Office of Medical Marijuana Use (the “OMMU”) approved the proposed change of ownership and control of the Company’s wholly-owned subsidiary, McCrory’s Sunny Hill Nursery, LLC (“McCrory’s”) contemplated by the Recapitalization Transaction.
 
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
State-level regulatory approvals remain outstanding in Massachusetts, Maryland, and New York. In New Jersey, a change of ownership and control approval is not required at the present time because the Company is awaiting approval by the New Jersey Cannabis Regulatory Commission (“CRC”) for the Company to close its acquisition of 100% of the equity interest in New Jersey license holder MPX New Jersey, LLC (“MPX NJ”) pursuant to certain contractual agreements (the “Agreements”, and the approval application before the CRC, the “Amended Permit Application”). Upon approval of the Amended Permit Application by the CRC and the closing of the acquisition within five business days thereafter, as set forth in the Agreements, prior regulatory approval for the change of beneficial own
e
rship of MPX NJ that would result from the Recapitalization Transaction will be required as a condition to closing under the Restructuring Support Agreement.
The Company believes that the financing transactions discussed above should provide the necessary funding for the Company to continue as a going concern. However, there can be no assurance that such capital will be available in the future. As discussed above, these material circumstances 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.
 
 
(d)
Basis of Consolidation
The unaudited interim condensed consolidated financial statements include the accounts of the Company together with its consolidated subsidiaries, except for subsidiaries which the Company has identified as variable interest entities where the Company is not the primary beneficiary.
 
 
(e)
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 judgements 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.
Significant estimates made by management include, but are not limited to: economic lives of leased assets; allowances for potential uncollectability of accounts and notes 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.
 
 
(f)
Change in Estimates
In January 2021, the Company completed an assessment of the yield per gram that is used as an input to value the Company’s inventory. The timing of this review was based on a combination of factors accumulating over time that provided the Company with updated information to make a better estimate on the yield of its products. These factors included enhanced data gathering of crop production and yields into inventory. The assessment resulted in a revision of the Company’s production yield estimates that are used to value ending inventory. The effect of this change was an increase in costs and expenses applicable to revenues of approximately $2.9 million in the first quarter of 2021.
 
 
(g)
Coronavirus Pandemic
In March 2020, the World Health Organization declared the global emergence of the
COVID-19
pandemic. The impact of
COVID-19
on the Company’s business is currently unknown. The Company continues to monitor guidance and orders issued by federal, state, and local authorities with respect to
COVID-19.
As a result, the Company may take actions that alter its business operations as may be required by such 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.
 
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
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, and could include temporary closures of one or more of the Company’s facilities; temporary or long-term labor shortages; temporary or long-term adverse impacts on the Company’s supply chain and distribution channels; and the potential of 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,
COVID-19
could negatively impact capital expenditures and overall economic activity globally which could impact the demand for the Company’s products and services.
It is unknown to what extent the Company may be impacted by the continuing
COVID-19
pandemic, including as a result of the waiver of regulatory requirements or the implementation of emergency regulations to which the Company is subject. The
COVID-19
pandemic poses a risk that the Company or its employees, contractors, suppliers, and other partners may be hindered from conducting business activities for an unknown period of time.
Although the Company has been deemed essential and/or has been permitted to continue operating its facilities in the states in which it cultivates, processes, manufactures, and sells cannabis during the pendency of the
COVID-19
pandemic, subject to the implementation of certain restrictions on
adult-use
cannabis sales in both Massachusetts and Nevada, which have since been lifted, there is no assurance that the Company’s operations will continue to be deemed essential and/or will continue to be permitted to operate. 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.
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 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 assumed 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 previous 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 1 year to 15 years.
Maturities of lease liabilities for operating leases as of September 30, 2021, were as follows:
 
    
Operating
Leases
 
2022
   $ 7,579  
2023
     7,328  
2024
     7,463  
2025
     7,629  
2026
     7,538  
Thereafter
     59,301  
    
 
 
 
Total lease payments
   $ 96,838  
Less: interest expense
     (61,232
    
 
 
 
Present value of lease liabilities
   $ 35,606  
Weighted-average remaining lease term (years)
     11.5  
Weighted-average discount rate
     19
    
 
 
 
 
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
For the three and nine months ended September 30, 2021, the Company recorded operating lease expenses of $2.1 million and $6.5 million, respectively, (September 30, 2020 - $2.3 million and $6.4 million, respectively), which are included in selling, general and administrative expenses and depreciation and amortization lines on the unaudited interim condensed consolidated statements of operations.
The Company entered into multiple sublease agreements during the nine months ended September 30, 2021 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 balance sheets. For the three and nine months ended September 30, 2021, the Company recorded sublease income of $0.2 million and $0.3 million, respectively, which is included in the other income line on the unaudited interim condensed consolidated statements of operations. The sublease income to be earned over the remaining sublease term was determined to be less than the costs associated with the primary lease held by the Company. As a result, the Company tested its
right-of-use
assets of related subleased facilities for impairment and recorded impairment expense of $0.1 million and $1.8 million for the three and nine months ended September 30, 2021
, respectiv
ely
 (September 30, 2020 - $Nil and $Nil, respectively).
Supplemental balance sheet information related to leases are as follows:
 
Balance Sheet Information
  
Classification
    
September 30,
2021
    
December 31,
2020
 
Right-of-use
assets
     Operating leases      $ 31,268      $ 33,083  
             
 
 
    
 
 
 
Lease Liabilities
                          
Current portion of lease liabilities
     Operating leases      $ 7,579      $ 7,450  
Long-term lease liabilities
     Operating leases        28,027        27,670  
             
 
 
    
 
 
 
Total
           
$
35,606
 
  
$
35,120
 
             
 
 
    
 
 
 
Note 3 - Inventories
Inventories is comprised of the following items:
 
    
September 30,
2021
    
December 31,
2020
 
           
(Revised)
 
Supplies
   $ 6,383      $ 5,010  
Raw materials
     3,536        7,047  
Work in process
     10,532        5,710  
Finished goods
     9,533        7,684  
    
 
 
    
 
 
 
Total
  
$
29,984
 
  
$
25,451
 
    
 
 
    
 
 
 
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, 2021, the Company recorded $Nil and $0.4 million, respectively (September 30, 2020 – $Nil and $0.9 million, respectively), related to spoiled inventory in costs and expenses applicable to revenues on the unaudited interim condensed consolidated statements of operations.
Note 4 - Long-Term Debt
 
    
Secured Notes
(1)
    
May 2019
Debentures
    
March 2019
Debentures
    
Other
   
Total
 
As of January 1, 2021
  
$
115,350
 
  
$
23,240
 
  
$
31,665
 
  
$
920
 
 
$
171,175
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
Fair value of financial liabilities issued
     12,302        —          —          160       12,462  
Accretion of balance
     6,302        591        1,095        295       8,283  
Repayment
     —          —          —          (53     (53
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
As of September 30, 2021
  
$
133,954
 
  
$
23,831
 
  
$
32,760
 
  
$
1,322
 
 
$
191,867
 
    
 
 
    
 
 
    
 
 
    
 
 
   
 
 
 
 
(1)
This amount includes the Company’s obligation to pay an exit fee of $10.0 million that accrues interest at a rate of 13% per annum (the “Exit Fee”) under the Secured Notes.
 
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
As of September 30, 2021, the total and unamortized discount costs were $30.3 million and $3.6 million, respectively (December 31, 2020 - $30.3 million and $9.5 million, respectively). As of September 30, 2021, the total and unamortized debt issuance costs were $7.7 million and $2.8 million, respectively (December 31, 2020 - $7.0 million and $3.5 million, respectively).
As of September 30, 2021, the total interest accrued on both current and long-term debt was $40.0 million (December 31, 2020 - $23.3 million).
 
 
(a)
Secured Notes
Tranche One
On May 14, 2018, the Company issued $40.0 million Secured Notes (the “Tranche One Secured Notes”) with an original maturity date of May 14, 2021. The principal amount of such notes will remain outstanding until the closing of the Recapitalization Transaction. Interest on the Tranche One Secured Notes will continue to accrue at the default rate of 16.0% per annum until such time. Because the conversion price of $3.08 was less than the Company’s closing stock price on the date of issuance, this gave rise to a beneficial conversion feature valued at $7.9 million. The Company recognized this beneficial conversion feature as a debt discount and additional paid in capital on the closing date. The discount to the Tranche One Secured Notes is being amortized to interest expense until maturity or its earlier repayment or conversion. For the three and nine months ended September 30, 2021, the amount of amortization recorded in accretion expense was $Nil and $1.0 million, respectively (September 30, 2020 – $0.7 million and $2.0 million, respectively). The terms also contain a financial covenant requiring the Company’s asset value to be 1.75 times the total net debt at each quarter end and maintain a minimum cash balance of $1.0 million while the Tranche One Secured Notes remain outstanding (the “market value test”).
For the three and nine months ended September 30, 2021, interest expense of $1.7 million and $5.0 million, respectively, (September 30, 2020 – $1.7 million and $4.7 million, respectively), and accretion expense of $Nil and $2.4 million, respectively (September 30, 2020 – $1.5 million and $4.4 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations.
As of March 31, 2020, the Company was not in compliance with the market value test and therefore in breach of a financial covenant for 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 September 30, 2021, consisted of $97.5 million and $60.0 million of principal amount and $26.9 million and $8.4 million in accrued interest with respect to the Secured Notes and Unsecured Debentures, respectively. As a result of the default, the Company is classifying 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 September 30, 2021, the Company is still in default on the Tranche One Secured Notes, Tranche Two Secured Notes, and Tranche Three Secured Notes. Further details on the default are disclosed in Note 13.
For the three and nine months ended September 30, 2021, interest expense of $0.4 million and $1.3 million, respectively (September 30, 2020 – $0.4 million and $1.2 million, respectively), was recorded in relation to the Exit Fee on the unaudited interim condensed consolidated statements of operations. As of September 30, 2021, the Company accrued $15.0 million (September 30, 2020—$13.3 million) related to the Exit Fee, comprised of an aggregate principal amount of $10.3 million and $4.7 million in accrued interest (September 30, 2020 – an aggregate principal amount of $10.3 million and $3.0 million in accrued interest). Furthermore, as a result of this default, the Company is classifying the Exit Fee as a current liability on the unaudited interim condensed consolidated balance sheets as of September 30, 2021.
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 accrue interest at 13.0% per annum and had an original maturity date of May 14, 2021. The principal amount of such notes will remain outstanding until the closing of the Recapitalization Transaction. Interest on the Tranche Two Secured Notes will continue to accrue at the default rate of 16.0% per annum until such time.
For the three and nine months ended September 30, 2021, interest expense of $0.8 million and $2.4 million, respectively (September 30, 2020 – $0.8 million and $2.3 million, respectively), and accretion expense of $Nil and $0.7 million, respectively (September 30, 2020 – $0.5 million and $1.4 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations.
 
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
All terms, restrictions and financial covenants applicable to the Tranche One Secured Notes are also applicable 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 accrue interest at 13.0% per annum and had an original maturity date of May 14, 2021. The principal amount of such notes will remain outstanding until the closing of the Recapitalization Transaction. Interest on the Tranche Three Secured Notes will continue to accrue at default rate of 16.0% per annum until such time.
For the three and nine months ended September 30, 2021, interest expense of $1.5 million and $4.4 million, respectively (September 30, 2020 – $1.5 million and $4.1 million, respectively), and accretion expense of $Nil and $1.6 million, respectively (September 30, 2020 – $1.0 million and $3.0 million, respectively), were 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 are also applicable 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 the Tranche Four Secured Notes. The Tranche Four Secured Notes accrue interest at 8.0% per annum and mature on July 13, 2025.
For the three and nine months ended September 30, 2021, interest expense of $0.3 million and $0.9 million, respectively (September 30, 2020 - $0.3 million and $0.3 million, respectively), and accretion expense of $0.1 million and $0.3 million, respectively (September 30, 2020 - $0.1 million and $0.1 million, respectively), were recognized on the unaudited interim condensed consolidated statements of operations. As of September 30, 2021, the Company no longer had restricted cash in escrow (December 31, 2020 - $0.4 million) from the Tranche Four Secured Notes.
All terms, restrictions, and financial covenants applicable to the Tranche One Secured Notes, Tranche Two Secured Notes, and Tranche Three Secured Notes, are also applicable to the Tranche Four Secured Notes. The Company remains in default with respect to the Tranche One Secured Notes, Tranche Two Secured Notes and Tranche Three Secured Notes, due to failure to remit applicable interest payments between March 2020 and September 2021. Thus, all amounts owing on the Tranche One Secured Notes, Tranche Two Secured Notes and Tranche Three Secured Notes are classified as current liabilities on the unaudited interim condensed consolidated balance sheets. The Company has not defaulted on the Tranche Four Secured Notes as of September 30, 2021. Therefore, the Tranche Four Secured Notes are classified as long-term liabilities on the unaudited interim condensed consolidated balance sheets.
iAnthus New Jersey, LLC Senior Secured Bridge Notes
On February 2, 2021, iAnthus New Jersey, LLC (“INJ”) issued an aggregate of $11.0 million of senior secured bridge notes (“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 accrue interest at a rate of 14.0% per annum (increasing to 25.0% per annum in the event of default and decreasing to 8.0% per annum upon the completion of the Company’s Recapitalization Transaction). “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.
The host debt, classified as a liability, was recognized at the fair value of $10.3 million, net of issuance costs of $0.7 million.
 
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
Interest is to be paid in kind by adding the interest accrued on the principal amount on the last day of each fiscal quarter and such amount thereafter becoming part of the principal amount and will accrue interest. Interest paid in kind will be payable on the date that all of the principal amount is due and payable.
For the three and nine months ended September 30, 2021, interest expense of $0.4 million and $1.0 million, respectively (September 30, 2020 - $Nil and $Nil, respectively), and accretion expense of $0.1 million and $0.2 million, respectively (September 30, 2020 - $Nil and $Nil, respectively), were recognized on the unaudited interim condensed consolidated statements of operations. As of September 30, 2021, the Company held $4.1 million (December 31, 2020 - $Nil) of restricted cash in escrow from the Senior Secured Bridge Notes. Refer to Note 12(e) for further discussion.
The Senior Secured Bridge Notes are secured by a security interest in certain assets of INJ. The Company provided a guarantee in respect of all of the obligations of INJ under the Senior Secured Bridge Notes. The Company has not defaulted on the Senior Secured Bridge Notes as of September 30, 2021. Therefore, the Senior Secured Bridge Notes are classified as long-term liabilities on the unaudited interim condensed consolidated balance sheets.
 
 
(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 which expire on March 15, 2022. The March 2019 Debentures accrue 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 is paid in cash, shares, or a combination of cash and shares, up to 50%, at the Company’s election. The March 2019 Debentures mature on March 15, 2023.
For the three and nine months ended September 30, 2021, interest expense of $0.7 million and $2.1 million, respectively (September 30, 2020 – $0.7 million and $2.1 million, respectively), and accretion expense of $0.4 million and $1.1 million, respectively (September 30, 2020 – $0.4 million and $1.1 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations.
As of September 30, 2021, the Company is 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. Further, as a result of this default, the Company is classifying the debt as a current liability as the March 2019 Debentures are due on demand. The event of default is applicable to all amounts outstanding under 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 which expire on March 15, 2022. The May 2019 Debentures accrue 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 is paid in cash, shares, or a combination of cash and shares, up to 50%, at the Company’s election. The May 2019 Debentures mature on March 15, 2023.
For the three and nine months ended September 30, 2021, interest expense of $0.5 million and $1.5 million, respectively (September 30, 2020 – $0.5 million and $1.5 million, respectively), and accretion expense of $0.2 million and $0.6 million, respectively (September 30, 2020 – $0.2 million and $0.6 million, respectively), were recorded on the unaudited interim condensed consolidated statements of operations.
The terms of the May 2019 Debentures impose 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 September 30, 2021, the Company is 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 is classifying the debt as a current liability as the May 2019 Debentures are due on demand. The event of default is applicable to all amounts outstanding under the May 2019 Debentures.
 
 
(d)
Stavola Trust Note
As part of the acquisition of MPX Bioceutical Corporation (“MPX”) on February 5, 2019 (the “MPX Acquisition”) (Note 5(b)), the Company assumed a long-term note (the “Stavola Trust Note”) of $10.8 million, payable to the Elizabeth Stavola 2016 NV Irrevocable Trust. This trust is for the benefit of a former director and officer of the Company, Elizabeth Stavola, and is therefore a related party balance. The note had a maturity date of January 19, 2020, and an interest rate of 8.0% per annum. Repayment of the note was secured by the assets of certain subsidiaries of the Company. On January 10, 2020, the Stavola Trust Note was paid in full.
 
13

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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
Note 5 - Share Capital
 
 
(a)
Share Capital
Authorized: Unlimited common shares. The shares have no par value.
The Company’s common shares are voting and dividend-paying. There were no common share issuances for the three and nine months ended September 30, 2021.
The following is a summary of the common share issuances for the three and nine months ended September 30, 2020:
 
   
75 common shares of the Company were issued to settle outstanding obligations, with share issuance costs of $0.2 million.
 
 
(b)
Warrants
The following table summarizes certain information in respect of the Company’s warrants:
 
    
September 30, 2021
 
    
Units
    
Weighted Average

Exercise Price (C$)
 
Warrants outstanding as of December 31, 2020
     49,236      $ 4.06  
Granted
               —    
Exercised
               —    
Expired
     (26,577      4.21  
    
 
 
    
 
 
 
Warrants outstanding as of September 30, 2021
  
 
22,659
 
  
$
3.57
 
    
 
 
    
 
 
 
As of September 30, 2021 and December 31, 2020, warrants classified as derivative liabilities on the unaudited interim condensed consolidated balance sheets were revalued with the following inputs:
 
    
September 30, 2021
   
December 31, 2020
 
Risk-free interest rate
     0.5     0.2
Expected dividend yield
     0.0     0.0
Expected volatility
    
67.4 - 186.1
   
148.0 - 251.1
The revaluation of the warrants classified as derivative liabilities resulted in a fair value of $0.3 million for these instruments as of September 30, 2021 (December 31, 2020 - $0.2 million). As a result of the revaluation, the Company recognized a loss of $0.2 million and $0.1 million for the three and nine months ended September 30, 2021, respectively (September 30, 2020 – $0.1 million and $4.9 million, respectively), on the unaudited interim condensed consolidated statements of operations.
Full share equivalent warrants outstanding and exercisable are as follows:
 
    
September 30, 2021
    
December 31, 2020
 
Year of expiration
  
Number
Outstanding
    
Weighted Average
Exercise Price (C$)
    
Number
Outstanding
    
Weighted Average
Exercise Price (C$)
 
2021
     19      $ 6.87        26,596      $ 4.37  
2022
     20,855        3.49        20,855        3.62  
2023
     1,785        4.57        1,785        4.57  
    
 
 
    
 
 
    
 
 
    
 
 
 
Warrants outstanding
  
 
22,659
 
  
$
3.57
 
  
 
49,236
 
  
$
4.06
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
 
(c)
Potentially Dilutive Securities
The following table summarizes potentially dilutive securities, and the resulting common share equivalents outstanding as of September 30, 2021:
 
    
September 30, 2021
    
December 31, 2020
 
Common share options
     10,543        11,510  
Warrants
     22,659        49,236  
Secured notes
     46,458        46,458  
Debentures
     10,135        10,135  
MPX dilutive instruments
(1)
     408        408  
    
 
 
    
 
 
 
Total
  
 
90,203
 
  
 
117,747
 
    
 
 
    
 
 
 
 
(1)
Prior to the MPX Acquisition, MPX had instruments outstanding that were potentially dilutive and as a result of the MPX Acquisition, the Company assumed certain of these instruments.
Total potentially dilutive securities does not include the shares that would potentially be issued upon conversion of the accrued interest on the Company’s long-term debt. As of September 30, 2021, this would amount to 14.2 million common shares (December 31, 2020 – 8.0 million common shares).
 
15

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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
 
(d)
Stock Options
The following table summarizes certain information in respect of option activity under the Company’s stock option plan:
 
    
September 30, 2021
    
December 31, 2020
 
    
Units
   
Weighted
Average
Exercise
Price
(C$)
    
Weighted
Average
Contractual
Life
    
Units
   
Weighted
Average
Exercise
Price
(C$)
    
Weighted
Average
Contractual
Life
 
Options outstanding, beginning
     11,510     $ 4.86        —          19,578     $ 4.80        —    
Granted
              —          —          135       0.82        —    
Exercised
              —          —                   —          —    
Forfeited/Expired
     (967     3.99        —          (8,203     4.99        —    
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
Options outstanding, ending
  
 
10,543
 
 
$
4.94
 
  
 
6.22
 
  
 
11,510
 
 
$
4.86
 
  
 
7.34
 
    
 
 
   
 
 
    
 
 
    
 
 
   
 
 
    
 
 
 
The related share-based compensation expense for the three and nine months ended September 30, 2021 was $1.6 million and $4.9 million, respectively (September 30, 2020 - $1.7 million and $9.4 million, respectively), and is presented in the selling, general and administrative expenses line on the unaudited interim condensed consolidated statements of operations.
As of September 30, 2021, the weighted average period over which compensation cost on
non-vested
stock options is expected to be recognized is 0.6 years and the unrecognized expense is $3.5 million.
Note 6 - Income Taxes
The following table summarizes the Company’s income tax expense and effective tax rates for the three and nine months ended September 30, 2021, and 2020:
 
    
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
    
2021
   
2020 (Revised)
   
2021
   
2020 (Revised)
 
Loss before income taxes
   $ (11,745   $ (19,862   $ (31,278   $ (274,365
Income tax expense
     4,090       5,609       19,265       12,272  
    
 
 
   
 
 
   
 
 
   
 
 
 
Effective tax rate
     (34.8 )%      (28.2 )%      (61.6 )%      (4.5 )% 
    
 
 
   
 
 
   
 
 
   
 
 
 
The effective tax rate may vary significantly from period to period and can be influenced by many factors. These factors include, but are not limited to, changes to the statutory rates in the jurisdictions where the Company has operations and changes in the valuation of deferred tax assets and liabilities. The difference between the effective tax rate and the federal statutory rate of 21% primarily relates to certain
non-deductible
items, state and local income taxes and the valuation allowance for deferred tax assets of
non-cultivator
entities.
 
16

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iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
Note 7 - Segment Information
The below table presents revenues by segment for the three and nine months ended September 30, 2021, and 2020:
Reportable Segments
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2021
    
2020 (Revised)
    
2021
    
2020 (Revised)
 
Revenues
                                   
Eastern Region
   $ 31,518      $ 23,759      $ 99,298      $ 61,397  
Western Region
     17,361        16,216        54,767        41,945  
Other
(1)
     384        641        1,231        2,346  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
49,263
 
  
$
40,616
 
  
$
155,296
 
  
$
105,688
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Gross profit
                                   
Eastern Region
   $ 19,460      $ 16,716      $ 65,025      $ 39,676  
Western Region
     6,231        7,944        21,814        18,996  
Other
     366        443        250        773  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
26,057
 
  
$
25,103
 
  
$
87,089
 
  
$
59,445
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Depreciation and amortization
                                   
Eastern Region
   $ 5,056      $ 3,506      $ 13,379      $ 10,755  
Western Region
     2,702        3,280        8,755        8,551  
Other
     375        451        1,132        1,110  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
8,133
 
  
$
7,237
 
  
$
23,266
 
  
$
20,416
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Asset impairments and write-downs
                                   
Eastern Region
   $ 127      $         $ 386      $ 45,385  
Western Region
     —          4,100        —          155,875  
Other
     —          3        1,624        2,894  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
127
 
  
$
4,103
 
  
$
2,010
 
  
$
204,154
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Net loss
                                   
Eastern Region
   $ 581      $ (5,291    $ 8,911      $ (52,302
Western Region
     (637      (13,864      (1,679      (165,340
Other
     (15,779      (6,316      (57,775      (68,995
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
(15,835
  
$
(25,471
  
$
(50,543
  
$
(286,637
    
 
 
    
 
 
    
 
 
    
 
 
 
Purchase of property, plant and equipment
                                   
Eastern Region
   $ 5,255      $ 1,237      $ 14,778      $ 11,663  
Western Region
     1,635        80        1,703        408  
Other
     26        128        47        226  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
6,916
 
  
$
1,445
 
  
$
16,528
 
  
$
12,297
 
    
 
 
    
 
 
    
 
 
    
 
 
 
Purchase of intangibles
                                   
Eastern Region
   $ —        $ 86      $ 31      $ 385  
Western Region
     —          —          —              
Other
     432        —          432        74  
    
 
 
    
 
 
    
 
 
    
 
 
 
Total
  
$
432
 
  
$
86
 
  
$
463
 
  
$
459
 
    
 
 
    
 
 
    
 
 
    
 
 
 
 
(1)
Revenues from segments below the quantitative thresholds are attributable to an operating segment of the Company that includes revenue from the sale of CBD products throughout the United States. This segment has never met any of the quantitative thresholds for determining reportable segments nor does it meet the qualitative criteria for aggregation with the Company’s reportable segments.
 
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Table of Contents
iANTHUS CAPITAL HOLDINGS, INC.
NOTES TO THE UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of U.S. dollars, except share amounts)
 
    
September 30,
2021
    
December 31,
2020
 
           
(Revised)
 
Assets
                 
Eastern Region
   $ 226,362      $ 227,237  
Western Region
     109,580        109,039  
Other
     28,062        16,857  
    
 
 
    
 
 
 
Total
  
$
364,004
 
  
$
353,133
 
    
 
 
    
 
 
 
Major Customers
Major customers are defined as customers that each individually accounted for greater than 10% of the Company’s annual revenues. For the three and nine months ended September 30, 2021 and 2020, no sales were made to any one customer that represented in excess of 10% of the Company’s total revenues.
Geographic Information
As of September 30, 2021 and December 31, 2020, substantially all of the Company’s assets were located in the United States and all of the Company’s revenues were earned in the United States.
Disaggregated Revenues
The Company disaggregates revenues into categories that depict how the nature, amount, timing and uncertainty of the revenues and cashflows are affected by economic factors. For the three and nine months ended September 30, 2021 and 2020, the Company disaggregated its revenues as follows:
 
    
Three Months Ended
September 30,
    
Nine Months Ended
September 30,
 
    
2021
    
2020
    
2021
    
2020
 
Revenue
                                   
iAnthus branded products
   $ 25,925      $ 20,911      $ 89,404      $ 52,369  
Third party branded products
     15,692</