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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020

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 000-56021

ACREAGE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
British Columbia, Canada
 
98-1463868
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
366 Madison Avenue, 11th Floor
New York
New York
10017
(Address of Principal Executive Offices)
 
(Zip Code)
(646) 600-9181
Registrant’s telephone number, including area code

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

Securities registered pursuant to section 12(g) of the Act: Class A Subordinate Voting Shares, no par value.

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  x    No  o 

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  x   No  o 

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
o
Accelerated filer
o
Non-accelerated filer
x
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 Act).    Yes    No  x

As of August 11, 2020, there were 99,860,761 Subordinate Voting Shares, as converted, issued and outstanding.


 



























TABLE OF CONTENTS
Acreage Holdings, Inc.
Form 10-Q
For the Three and Six Months Ended June 30, 2020
PART I
Financial Information.
 
 
 
 
Item 1.
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
PART II
Other Information.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 
 
 
 
 
 
 
 
 





ACREAGE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

PART I
Item 1. Financial Statements and Supplementary Data.
(in thousands)
June 30, 2020
 
December 31, 2019
 
(unaudited)
 
(audited)
ASSETS
 
 
 
Cash and cash equivalents
$
13,979

 
$
26,505

Restricted cash
22,095

 
95

Inventory
21,344

 
18,083

Notes receivable, current
2,094

 
2,146

Assets held-for-sale
68,040

 

Other current assets
11,811

 
8,506

Total current assets
139,363

 
55,335

Long-term investments
4,711

 
4,499

Notes receivable, non-current
94,302

 
79,479

Capital assets, net
96,819

 
106,047

Operating lease right-of-use assets
36,280

 
51,950

Intangible assets, net
145,660

 
285,972

Goodwill
26,675

 
105,757

Other non-current assets
3,401

 
2,638

Total non-current assets
407,848

 
636,342

TOTAL ASSETS
$
547,211

 
$
691,677

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Accounts payable and accrued liabilities
$
27,593

 
$
32,459

Taxes payable
10,365

 
4,740

Interest payable
1,020

 
291

Operating lease liability, current
2,283

 
2,759

Debt, current
47,009

 
15,300

Liabilities related to assets held-for-sale
26,352

 

Other current liabilities
6,643

 
1,604

Total current liabilities
121,265

 
57,153

Debt, non-current
43,859

 
28,186

Operating lease liability, non-current
35,058

 
47,522

Deferred tax liability
35,472

 
63,997

Other liabilities
2

 
25

Total non-current liabilities
114,391

 
139,730

TOTAL LIABILITIES
235,656

 
196,883

Commitments and contingencies (Note 13)
 
 
 
Common stock, no par value (Note 11) - unlimited authorized, 98,566 and 90,646 issued and outstanding, respectively

 

Additional paid-in capital
693,425

 
615,678

Treasury stock, 842 SVS held in treasury
(21,054
)
 
(21,054
)
Accumulated deficit
(397,763
)
 
(188,617
)
Total Acreage Shareholders' equity
274,608

 
406,007

Non-controlling interests
36,947

 
88,787

TOTAL EQUITY
311,555

 
494,794

 
 
 
 
TOTAL LIABILITIES AND EQUITY
$
547,211

 
$
691,677


See accompanying notes to Unaudited Condensed Consolidated Financial Statements
3

ACREAGE HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
(in thousands, except per share amounts)
 
2020

2019
 
2020

2019
REVENUE
 
 
 
 
 
 
 
 
Retail revenue, net
 
$
19,875

 
$
13,351

 
$
37,448

 
$
23,260

Wholesale revenue, net
 
7,167

 
4,128

 
13,715

 
6,943

Other revenue, net
 
30

 
266

 
134

 
439

Total revenues, net
 
27,072

 
17,745

 
51,297

 
30,642

Cost of goods sold, retail
 
(11,981
)
 
(8,193
)
 
(22,870
)
 
(14,074
)
Cost of goods sold, wholesale
 
(3,880
)
 
(1,939
)
 
(7,262
)
 
(3,635
)
Total cost of goods sold
 
(15,861
)
 
(10,132
)
 
(30,132
)
 
(17,709
)
Gross profit
 
11,211

 
7,613

 
21,165

 
12,933

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 
 
 
 
 
 
 
General and administrative
 
12,386

 
17,904

 
25,418

 
28,062

Compensation expense
 
7,957

 
11,252

 
22,434

 
17,741

Equity-based compensation expense
 
20,187

 
20,693

 
54,924

 
39,670

Marketing
 
481

 
1,201

 
1,468

 
2,002

Loss on impairment
 

 

 
187,775

 

Loss on notes receivable
 

 

 
8,161

 

Write down of assets held-for-sale
 
8,110

 

 
8,110

 

Depreciation and amortization
 
1,425

 
2,223

 
3,492

 
3,131

Total operating expenses
 
50,546

 
53,273

 
311,782

 
90,606

 
 
 
 
 
 
 
 
 
Net operating loss
 
$
(39,335
)
 
$
(45,660
)
 
$
(290,617
)
 
$
(77,673
)
 
 
 
 
 
 
 
 
 
Income (loss) from investments, net
 
4

 
(499
)
 
238

 
2,228

Interest income from loans receivable
 
1,830

 
1,001

 
3,477

 
1,731

Interest expense
 
(3,733
)
 
(131
)
 
(4,959
)
 
(249
)
Other loss, net
 
(23
)
 
(2,400
)
 
(197
)
 
(2,308
)
Total other (loss) income
 
(1,922
)
 
(2,029
)
 
(1,441
)
 
1,402

 
 
 
 
 
 
 
 
 
Loss before income taxes
 
$
(41,257
)
 
$
(47,689
)
 
$
(292,058
)
 
$
(76,271
)
 
 
 
 
 
 
 
 
 
Income tax (expense) benefit
 
(3,113
)
 
(1,576
)
 
25,459

 
(3,798
)
 
 
 
 
 
 
 
 
 
Net loss
 
$
(44,370
)
 
$
(49,265
)
 
$
(266,599
)
 
$
(80,069
)
 
 
 
 
 
 
 
 
 
Less: net loss attributable to non-controlling interests
 
(7,178
)
 
(11,724
)
 
(57,453
)
 
(19,151
)
 
 
 
 
 
 
 
 
 
Net loss attributable to Acreage Holdings, Inc.
 
$
(37,192
)
 
$
(37,541
)
 
$
(209,146
)
 
$
(60,918
)
 
 
 
 
 
 
 
 
 
Net loss per share attributable to Acreage Holdings, Inc. - basic and diluted:
 
$
(0.38
)
 
$
(0.44
)
 
$
(2.19
)
 
$
(0.74
)
 
 
 
 
 
 
 
 
 
Weighted average shares outstanding - basic and diluted
 
98,444

 
85,640

 
95,688

 
82,557



See accompanying notes to Unaudited Condensed Consolidated Financial Statements
4

ACREAGE HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY







Attributable to shareholders of the parent




(in thousands)

LLC Membership Units

Pubco Shares (as converted)

Share Capital

Treasury Stock

Accumulated Deficit

Shareholders’ Equity

Non-controlling Interests

Total Equity
December 31, 2018



79,164


$
414,757


$
(21,054
)

$
(38,349
)

$
355,354


$
130,922


$
486,276

Issuances for business acquisitions/purchases of intangible assets



211


3,948






3,948


4,000


7,948

NCI adjustments for changes in ownership



643


3,640






3,640


(3,640
)


Other equity transactions



12


264






264




264

Equity-based compensation expense and related issuances



190


16,187






16,187




16,187

Net loss









(23,377
)

(23,377
)

(7,427
)

(30,804
)
March 31, 2019



80,220


$
438,796


$
(21,054
)

$
(61,726
)

$
356,016


$
123,855


$
479,871

Issuances for business acquisitions/purchases of intangible assets



4,770


95,266






95,266


356


95,622

NCI adjustments for changes in ownership



388


(15,820
)





(15,820
)

15,820



Capital distributions, net













(4,298
)

(4,298
)
Other equity transactions



294


5,201






5,201




5,201

Equity-based compensation expense and related issuances



288


15,574






15,574




15,574

Net loss









(37,541
)

(37,541
)

(11,724
)

(49,265
)
June 30, 2019



85,960


$
539,017


$
(21,054
)

$
(99,267
)

$
418,696


$
124,009


$
542,705


 
 
 
 
 
 
Attributable to shareholders of the parent
 
 
 
 
(in thousands)
 
LLC Membership Units
 
Pubco Shares (as converted)
 
Share Capital
 
Treasury Stock
 
Accumulated Deficit
 
Shareholders’ Equity
 
Non-controlling Interests
 
Total Equity
December 31, 2019
 

 
90,646

 
$
615,678

 
$
(21,054
)
 
$
(188,617
)
 
$
406,007

 
$
88,787

 
$
494,794

Issuances for private placement
 

 
6,085

 
27,887

 

 

 
27,887

 

 
27,887

NCI adjustments for changes in ownership
 

 
113

 
(6,564
)
 

 

 
(6,564
)
 
6,564

 

Capital distributions, net
 

 

 

 

 

 

 
(18
)
 
(18
)
Equity-based compensation expense and related issuances
 

 
586

 
34,737

 

 

 
34,737

 

 
34,737

Net loss
 

 

 

 

 
(171,954
)
 
(171,954
)
 
(50,275
)
 
(222,229
)
March 31, 2020
 

 
97,430

 
$
671,738

 
$
(21,054
)
 
$
(360,571
)
 
$
290,113

 
$
45,058

 
$
335,171

NCI adjustments for changes in ownership
 
3,861

 
272

 
977

 

 

 
977

 
(977
)
 

Beneficial conversion feature on convertible note (See Note 10)
 

 

 
523

 

 

 
523

 

 
523

Other equity transactions
 

 

 

 

 

 

 
44

 
44

Equity-based compensation expense and related issuances
 

 
864

 
20,187

 

 

 
20,187

 

 
20,187

Net loss
 

 

 

 

 
(37,192
)
 
(37,192
)
 
(7,178
)
 
(44,370
)
June 30, 2020
 
3,861

 
98,566

 
$
693,425

 
$
(21,054
)
 
$
(397,763
)
 
$
274,608

 
$
36,947

 
$
311,555


See accompanying notes to Unaudited Condensed Consolidated Financial Statements
5

ACREAGE HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
 
Six Months Ended June 30,
(in thousands)
 
2020
 
2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net loss
 
$
(266,599
)
 
$
(80,069
)
Adjustments for:
 
 
 
 
Depreciation and amortization
 
3,492

 
3,131

Equity-settled expenses, including compensation
 
54,924

 
44,874

Gain on business divestiture
 
(217
)
 

(Gain) loss on disposal of capital assets
 
(187
)
 
84

Loss on impairment
 
187,775

 

Loss on notes receivable
 
8,161

 

Bad debt expense
 
172

 

Non-cash interest expense
 
2,353

 

Non-cash operating lease expense
 
947

 
538

Deferred tax benefit
 
(31,955
)
 
(99
)
Non-cash income from investments, net
 
(238
)
 
(1,436
)
Write-down of assets held-for-sale
 
8,110

 

Change, net of acquisitions in:
 
 
 
 
Inventory
 
(2,913
)
 
(3,901
)
Other assets
 
(1,522
)
 
(2,926
)
Interest receivable
 
(574
)
 
(2,246
)
Accounts payable and accrued liabilities
 
(7,849
)
 
5,899

Taxes payable
 
6,083

 
(111
)
Interest payable
 
729

 
(387
)
Other liabilities
 
(10
)
 
(597
)
Net cash used in operating activities
 
$
(39,318
)
 
$
(37,246
)
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of capital assets
 
$
(7,880
)
 
$
(20,291
)
Investments in notes receivable
 
(13,092
)
 
(14,574
)
Collection of notes receivable
 
192

 
3,024

Cash paid for long-term investments
 

 
(158
)
Proceeds from business divestiture
 
997

 

Proceeds from sale of capital assets
 
1,102

 
162

Business acquisitions, net of cash acquired
 
(9,983
)
 
(20,205
)
Purchases of intangible assets
 

 
(56,497
)
Deferred acquisition costs and deposits
 

 
(215
)
Distributions from investments
 
26

 

Proceeds from purchase of short-term investments
 

 
149,828

Net cash (used in) provided by investing activities
 
$
(28,638
)
 
$
41,074

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from related party debt

5,000



Repayment of related party loan
 
(20,000
)
 

Proceeds from financing
 
46,000

 

Deferred financing costs paid
 
(3,181
)
 

Proceeds from issuance of private placement units, net
 
27,887

 

Collateral received from financing agreement
 
22,000

 

Settlement of taxes withheld
 

 
(7,909
)
Repayment of debt
 
(276
)
 
(12,075
)
Capital distributions, net
 

 
(4,298
)
Net cash provided by (used in) financing activities
 
$
77,430

 
$
(24,282
)
Net increase (decrease) in cash, cash equivalents and restricted cash
 
$
9,474

 
$
(20,454
)
Cash, cash equivalents and restricted cash - Beginning of period
 
26,600

 
105,038

Cash, cash equivalents and restricted cash - End of period
 
$
36,074

 
$
84,584

 
 
Six Months Ended June 30,
(in thousands)
 
2020
 
2019
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 
 
 
Interest paid - non-lease
 
$
176

 
$
588

Income taxes paid
 
525

 
4,006

OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
 
Capital assets not yet paid for
 
$
4,635

 
$
670

Issuance of Class D units for land
 

 
264

Exchange of intangible assets to notes receivable (Note 4)
 
18,800

 

Holdback of Maine HSCP notes receivable (Note 6)
 
917

 

Promissory note conversion to equity (Note 6)
 
10,087

 

Deferred tax liability related to business acquisition (Note 3)
 
3,425

 

Beneficial conversion feature (Note 10)
 
523

 




See accompanying notes to Unaudited Condensed Consolidated Financial Statements
6

ACREAGE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)


1.    NATURE OF OPERATIONS
Acreage Holdings, Inc. (the “Company”, “Pubco” or “Acreage”) was originally incorporated under the Business Corporations Act (Ontario) on July 12, 1989 as Applied Inventions Management Inc. On August 29, 2014, the Company changed its name to Applied Inventions Management Corp. The Company continued into British Columbia and changed its name to Acreage Holdings, Inc. on November 9, 2018. The Company’s Subordinate Voting Shares are listed on the Canadian Securities Exchange under the symbol “ACRG.U”, quoted on the OTCQX under the symbol “ACRGF” and traded on the Frankfurt Stock Exchange under the symbol “0VZ”. The Company owns, operates and has contractual relationships with cannabis cultivation facilities, dispensaries and other cannabis-related companies across the United States (“U.S.”).
High Street Capital Partners, LLC, a Delaware limited liability company doing business as Acreage Holdings (“HSCP”), was formed on April 29, 2014. The Company became the indirect parent of HSCP on November 14, 2018 in connection with a reverse takeover (“RTO”) transaction described below.
The Company’s corporate office and principal place of business is located at 366 Madison Avenue, 11th Floor, New York, New York in the U.S. The Company’s registered and records office address is Suite 2800, Park Place, 666 Burrard Street, Vancouver, British Columbia in Canada.
The RTO transaction

On September 21, 2018, the Company, HSCP, HSCP Merger Corp. (a wholly-owned subsidiary of the Company), Acreage Finco B.C. Ltd. (a special purpose corporation) (“Finco”), Acreage Holdings America, Inc. (“USCo”) and Acreage Holdings WC, Inc. (“USCo2”) entered into a combination agreement (the “Agreement”) whereby the parties agreed to combine their respective businesses, which would result in the RTO of Pubco by the security holders of HSCP, which was deemed to be the accounting acquiror. On November 14, 2018, the parties to the Agreement completed the RTO. The RTO transaction is described in detail in Note 1 to the Consolidated Financial Statements of the Company in the Company’s Annual Report on Form 10-K, filed with the SEC on May 29, 2020.
Canopy Growth Corporation transaction

On June 27, 2019, the Company and Canopy Growth Corporation (“Canopy Growth” or “CGC”) completed the transactions contemplated by the arrangement agreement dated April 18, 2019, as amended May 15, 2019, between Canopy Growth and Acreage. Canopy Growth was granted an option to acquire all outstanding shares of the Company, with a requirement to do so upon the occurrence of the occurrence of changes in U.S. federal law to permit the general cultivation, distribution, and possession of marijuana (the “Arrangement”).
On June 24, 2020, Canopy Growth and the Company entered into an agreement to amend the terms of the Arrangement. Please refer to Note 13 for further discussion.
COVID-19

In December 2019, a novel strain of coronavirus (“COVID-19”) emerged in Wuhan, China. Since then, it has spread to several other countries and infections have been reported around the world. On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic.

In response to the outbreak, governmental authorities in the United States, Canada and internationally have introduced various recommendations and measures to try to limit the pandemic, including travel restrictions, border closures, non-essential business closures, quarantines, self-isolations, shelters-in-place and social distancing. The COVID-19 outbreak and the response of governmental authorities to try to limit it are having a significant impact on the private sector and individuals, including unprecedented business, employment and economic disruptions. Management has been closely monitoring the impact of COVID-19, with a focus in the health and safety of our employees, business continuity and supporting our communities. We have implemented various measures to reduce the spread of the virus, including implementing social distancing measures at our cultivation facilities, manufacturing facilities, and dispensaries, enhancing cleaning protocols at such facilities and dispensaries and encouraging employees to adhere to preventative measures recommended by local, state, and federal health officials.



7

ACREAGE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)

2.    SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and going concern

The Unaudited Condensed Consolidated Financial Statements of Acreage have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair presentation have been reflected in these Unaudited Condensed Consolidated Financial Statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020.

As reflected in the financial statements, the Company had an accumulated deficit as of June 30, 2020, as well as a net loss and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern for at least one year from the issuance of these financial statements.

However, management believes that substantial doubt about the Company’s ability to meet our obligations for the next twelve months from the date these financial statements were issued has been alleviated due to, but not limited to, (i) access to future capital commitments, (ii) continued sales growth from our consolidated operations, (iii) latitude as to the timing and amount of certain operating expenses as well as capital expenditures, (iv) restructuring plans that have already been put in place to improve the Company’s profitability (see Note 3) and (v) the Standby Equity Distribution Agreement described in Note 13 of the Unaudited Condensed Consolidated Financial Statements.

If the Company is unable to raise additional capital whenever necessary, it may be forced to decelerate or curtail its footprint buildout or other operational activities until such time as additional capital becomes available. Such limitation of the Company’s activities would allow it to slow its rate of spending and extend its use of cash until additional capital is raised. However, management cannot provide any assurances that we will be successful in accomplishing any of our plans. Management also cannot provide any assurance as to unforeseen circumstances that could occur at any time within the next twelve months or thereafter which could increase our need to raise additional capital on an immediate basis.

Use of estimates

The preparation of the Company’s Unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts that are reported in the Unaudited Condensed Consolidated Financial Statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may differ from those estimates. Significant estimates inherent in the preparation of the accompanying Unaudited Condensed Consolidated Financial Statements include the fair value of assets acquired and liabilities assumed in business combinations, assumptions relating to equity-based compensation expense, estimated useful lives for property, plant and equipment and intangible assets, the valuation allowance against deferred tax assets and the assessment of potential impairment charges on goodwill, intangible assets and investments in equity and notes receivable.
These interim Unaudited Condensed Consolidated Financial Statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission on May 29, 2020 (the “2019 Form 10-K”).
Emerging growth company

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”). Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies.
Functional and presentation currency

The Unaudited Condensed Consolidated Financial Statements and the accompanying notes are expressed in U.S. dollars. Financial metrics are presented in thousands. Other metrics, such as shares outstanding, are presented in thousands unless otherwise noted.

8

ACREAGE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)

Basis of consolidation

Our Unaudited Condensed Consolidated Financial Statements include the accounts of Acreage, its subsidiaries and variable interest entities (“VIEs”) where we are considered the primary beneficiary, if any, after elimination of intercompany accounts and transactions. Investments in entities in which the Company has significant influence, but less than a controlling financial interest, are accounted for using the equity method. Our proportionate share of net income or loss of the entity is recorded in Income (loss) from investments, net in the Consolidated Statements of Operations.
The unaudited and audited consolidated financial statements are referred to as the “Financial Statements” herein. The unaudited condensed consolidated statements of operations are referred to as the “Statements of Operations” herein. The unaudited and audited condensed consolidated statements of financial position are referred to as the “Statements of Financial Position” herein. The unaudited condensed consolidated statements of cash flows are referred to as the “Statements of Cash Flows” herein.
Restricted cash

Restricted cash represents funds contractually held for specific purposes (Refer to Note 10) and, as such, not available for general corporate purposes. Cash and restricted cash, as presented on the Statements of Cash Flows, consists of $13,979 and $22,095 as of June 30, 2020, respectively, and $26,505 and $95 as of December 31, 2019.

Impairment of long-lived assets

Goodwill and indefinite-lived intangible assets are not subject to amortization and are tested for impairment annually or more frequently if events or changes in circumstances indicate that they might be impaired. Goodwill and indefinite-lived intangible assets are tested at the individual business level. The Company may first assess qualitative factors and, if it determines it is more likely than not that the fair value is less than the carrying value, then proceed to a quantitative test if necessary.
Finite-lived intangible assets and other long-lived assets are tested for impairment based on undiscounted cash flows when events or changes in circumstances indicate that the carrying amount may not be recoverable.

Accounting for warrants and convertible notes

The Company determines the accounting classification of warrants it issues, as either liability or equity classified, by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate the Company to settle the warrants or the underlying shares by paying cash or other assets, or warrants that must or may require settlement by issuing a variable number of shares.

If warrants do not meet the liability classification under ASC 480-10, the Company assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815-40, and in order to conclude equity classification, the Company also assesses whether the warrants are indexed to its common stock and whether the warrants are classified as equity under ASC 815-40 or other applicable GAAP. After all relevant assessments, the Company concludes whether the warrants are classified as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the statements of operations. Equity classified warrants only require fair value accounting at issuance with no changes recognized subsequent to the issuance date.

The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the difference between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The debt discounts under these arrangements are amortized over the earlier of (i) the term of the related debt using the straight line method which approximates the interest rate method or (ii) redemption of the debt. The amortization of debt discounts is included as a component of Interest expense in the accompanying Statements of Operations. Refer to Note 10.

Assets held for sale

9

ACREAGE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)


The Company classifies long-lived assets or disposal groups as held for sale in the period when the following held for sale criteria are met: (i) the Company commits to a plan to sell; (ii) the long-lived asset or disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such long-lived assets or disposal groups; (iii) an active program to locate a buyer and other actions required to complete the plan to sell have been initiated; (iv) the sale is probable within one year; (v) the asset or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. In accordance with ASC 360-10, Property, Plant and Equipment, long-lived assets and disposal groups classified as held for sale are measured at the lower of their carrying amount or fair value less costs to sell.

Net loss per share

Net loss per share represents the net loss attributable to shareholders divided by the weighted average number of shares outstanding during the period on an as converted basis. Basic and diluted loss per share are the same as of June 30, 2020 and 2019 as the issuance of shares upon conversion, exercise or vesting of outstanding units would be anti-dilutive in each period. There were 46,739 and 41,953 anti-dilutive shares outstanding as of June 30, 2020 and 2019, respectively. Refer to Note 16 for further details.
Accounting Pronouncements Recently Adopted
As of December 2019, the Company early adopted ASU 2017-04 - Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). The objective of ASU 2017-04 is to simplify how an entity is required to test goodwill for impairment. Under previous GAAP, entities were required to test goodwill for impairment using a two-step approach. Under the amendments in ASU 2017-04, an entity performs its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The adoption of ASU 2017-04 did not have an effect on the Company’s Financial Statements.
Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which was subsequently revised by ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-11, ASU 2020-02 and ASU 2020-03. ASU 2016-13 introduces a new model for assessing impairment on most financial assets. Entities will be required to use a forward-looking expected loss model, which will replace the current incurred loss model, which will result in earlier recognition of allowance for losses. As an emerging growth company, the Company has elected to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Securities and Exchange Act of 1934. Accordingly, ASU 2016-13 will be effective for the Company’s first interim period of fiscal 2023, and the Company is currently evaluating the impact of the new standard.


10

ACREAGE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)

3.    ACQUISITIONS, DIVESTITURES AND ASSETS HELD FOR SALE
Acquisitions

During the three and six months ended June 30, 2020, the Company completed the following business combination below. The preliminary purchase price allocation is as follows:

Purchase Price Allocation
 
CCF (1)
Assets acquired:
 
 
Cash and cash equivalents
 
17

Inventory
 
1,969

Other current assets
 
3,164

Capital assets, net
 
4,173

Operating lease ROU assets
 
4,455

Goodwill
 

Intangible assets - cannabis licenses
 
15,247

Other non-current assets
 
10

Liabilities assumed:
 
 
Accounts payable and accrued liabilities
 
(228
)
Taxes payable
 
(17
)
Other current liabilities
 
(4,248
)
Operating lease liability
 
(4,455
)
Fair value of net assets acquired
 
20,087

 
 
 
Consideration paid:
 
 
Cash
 
10,000

Settlement of pre-existing relationship
 
10,087

Total consideration
 
20,087



(1) On June 26, 2020, the Company acquired 100% of Compassionate Care Foundation, Inc. (“CCF”), a New Jersey vertically integrated medical cannabis nonprofit corporation.

The settlement of pre-existing relationship included in the transaction price includes a $7,952 line of credit as well as interest receivable of $2,135 which were both previously recorded in Notes receivable, non-current in the Statements of Financial Position. The carrying value of these amounts approximated their fair value.

11

ACREAGE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)


During the six months ended June 30, 2019, the Company completed the following business combinations, and has allocated each purchase price as follows:
Purchase Price Allocation

Thames Valley
(1)

NCC
(2)

Form Factory
(3)

Total
Assets acquired:












Cash and cash equivalents

$
106

 
$
696


$
4,276


$
5,078

Inventory

39

 
170


520


729

Other current assets

1

 
36


1,136


1,173

Capital assets, net


 
539


3,988


4,527

Operating lease ROU assets


 


10,477


10,477

Goodwill

3,594

 
4,196


66,127


73,917

Intangible assets - cannabis licenses

14,850

 
2,500


39,469


56,819

Intangible assets - customer relationships


 


4,600


4,600

Intangible assets - developed technology


 


3,100


3,100

Other non-current assets


 
25


406


431

Liabilities assumed:



 








Accounts payable and accrued liabilities

(121
)
 
(24
)

(1,572
)

(1,717
)
Other current liabilities


 
(621
)



(621
)
Debt


 


(494
)

(494
)
Operating lease liability


 


(10,477
)

(10,477
)
Deferred tax liability

(3,397
)
 
(465
)

(14,517
)

(18,379
)
Other liabilities


 
(175
)

(23
)

(198
)
Fair value of net assets acquired

$
15,072

 
$
6,877


$
107,016


$
128,965





 








Consideration paid:



 








Cash

15,072

 


3,711


18,783

Deferred acquisition costs and deposits



100




100

Subordinate Voting Shares



3,948


95,266


99,214

Settlement of pre-existing relationship



830


8,039


8,869

Fair value of previously held interest



1,999




1,999

Total consideration

$
15,072


$
6,877


$
107,016


$
128,965














Subordinate Voting Shares issued



211


4,770


4,981


The operating results of the above acquisitions were not material to the periods presented.
(1) On January 29, 2019, the Company acquired 100% of Thames Valley Apothecary, LLC (“Thames Valley”), a dispensary license holder in Connecticut.
(2) On March 4, 2019, the Company acquired the remaining 70% ownership interest in NCC LLC (“NCC”), a dispensary license holder in Illinois. The market price used in valuing SVS issued was $18.70. As a result of this acquisition, the previously held interest in NCC was re-measured, resulting in a gain of $999, which was recorded in Income from investments, net in the Statements of Operations during the six months ended June 30, 2019.
The settlement of pre-existing relationship included in the transaction price includes a $550 promissory note receivable as well as an amount receivable of $280 which was previously recorded in Other current assets in the Statements of Financial Position. The carrying value of these amounts approximated their fair value.

12

ACREAGE HOLDINGS, INC.
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)

(3) On April 16, 2019, the Company acquired 100% of Form Factory Holdings, LLC (“Form Factory”), a manufacturer and distributor of cannabis-based edibles and beverages. The useful life of the developed technology was determined to be 19 years, and the useful life of the customer relationships was determined to be 5 years.
The market price used in valuing unrestricted SVS issued was $20.45 per share. Certain SVS are subject to clawback should certain indemnity conditions arise and as such, a discount for lack of marketability was applied that correlates to the period of time these shares are subject to restriction.

The Company also recorded an expense of $2,139 in the Statements of Operations for the six months ended June 30, 2019 in connection with the acquisition of Form Factory that represents stock compensation fully vested on the acquisition date. 86 SVS valued at $1,753 were issued and recorded in Other equity transactions on the Statements of Shareholders’ Equity, with the remainder settled in cash.

The settlement of pre-existing relationship included in the transaction price included a $7,924 promissory note receivable and $115 of interest receivable. The carrying value of these amounts approximated their fair value.

Deferred acquisition costs and deposits

The Company makes advance payments to certain acquisition targets for which the transfer is pending certain regulatory approvals prior to the acquisition date.
As of June 30, 2020 and December 31, 2019, the Company had no deferred acquisition costs outstanding.

Divestitures

On May 8, 2020, the Company sold all equity interests in Acreage North Dakota, LLC, a medical cannabis dispensary holder and operator, for $1,000. This resulted in a gain on sale of $217 recorded in Other loss, net on the Statements of Operations for the three and six months ended June 30, 2020.

Assets Held for Sale

On June 30, 2020, the Company determined certain businesses and assets met the held-for-sale criteria. The Company has identified the following businesses as their separate disposal groups: Acreage Florida, Inc., Kanna, Inc., Maryland Medicinal Research & Caring, LLC (“MMRC”) and certain Oregon entities comprising HSCP Oregon, LLC, 22nd & Burn, Inc., The Firestation 23, Inc., East 11th Incorporated. As a further disposal group, the Company has identified certain assets owned in Michigan as held-for-sale.

In accordance to ASC 205-20-45 - Discontinued Operations, a disposal of a component of an entity shall be reported in discontinued operations if the divestiture represents a strategic shift that will have a major effect on the entity’s operations and financial results. Management determined that the expected divestitures will not represent a strategic shift that will have a major effect on the Company’s operations and financial results and thus will not report the expected divestitures of these assets as discontinued operations.

Upon classification of the disposal groups as held for sale, the Company tested each disposal group for impairment and recognized a charge of $