iAnthus Capital Holdings, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Summary of Significant Accounting Policies (Policies)

Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2022

(a) Basis of Presentation

The accompanying 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”). These consolidated financial statements are presented in U.S. dollars.

The Company is an “emerging growth company,” as defined in Rule

12b-2

of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as modified by the Jumpstart Our Business

Start-ups

Act of 2012 (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Exchange Act for complying with new or revised accounting standards applicable to public companies. An emerging growth company may delay the adoption of certain accounting standards until those standards would otherwise apply to

non-public

companies. The Company has elected to take advantage of this extended transition period and as a result, the Company may not adopt new or revised accounting standards on effective dates as they are applicable to public companies.

Consummation of Recapitalization Transaction

(b) Consummation of Recapitalization Transaction

On June 24, 2022 (the “Closing Date”), the Company completed its previously announced recapitalization transaction (the “Recapitalization Transaction”) pursuant to the terms of that certain Restructuring Support Agreement (

as amended,

the “Restructuring Support Agreement”) dated July 10, 2020, as amended on June 15, 2021, by and among the Company, all of the holders (the “Secured Lenders”) of the 13.0% senior secured convertible debentures (the “Secured Notes”) issued by iAnthus Capital Management, LLC (“ICM”), a wholly-owned subsidiary of the Company, and a majority of the holders (the “Consenting Unsecured Lenders”) of the Company’s 8.0%

unsecured convertible debentures (the “Unsecured Debentures”).

Closing

of the Recapitalization Transaction through an amended and restated plan of arrangement (the “Plan of Arrangement”) was subject to certain conditions, including: approval of the Secured Lenders, Unsecured Lenders and existing holders of our common shares, warrants, and options; approval of the Plan of Arrangement by the Supreme Court of British Columbia (the “Court”); and the receipt of all necessary state regulatory approvals in which we operate that require approval and approval by the CSE (collectively, the “Requisite Approvals”). All Requite Approvals required to c

ose

the Recapitalization Transaction were satisfied, conditioned, or waived by us, the Secured Lenders and the Consenting Unsecured Lenders on the Closing Date. The Recapitalization Transaction closed pursuant to the terms of the amended and restated plan of arrangement (the “Plan of Arrangement”) under the Business Corporations Act (British Columbia) approved by the Supreme Court of British Columbia (the “Court”). Pursuant to the terms of the Restructuring Support Agreement, Gotham Green Admin 1, LLC as collateral agent (the “Collateral Agent”), the Secured Lenders and the Consenting Unsecured Lenders agreed to forbear from further exercising any rights or remedies in connection with any events of default that existed or may have existed in the future arising under any of the purchase agreements with respect to the Secured Notes and all other agreements delivered in connection therewith, the purchase agreements with respect to the Unsecured Debentures and all other agreements delivered in connection therewith and any other agreement to which the Collateral Agent, Secured Lenders, or Consenting Unsecured Lenders are a party to (collectively, the “Defaults”). As of the Closing Date, the Collateral Agent, Secured Lenders and Consenting Unsecured Lenders irrevocably waived all Defaults.

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

As of the Closing Date, the outstanding principal amount of the Secured Notes (including the interim financing secured notes in the aggregate principal amount of approximately $14.7 million originally due on July 13, 2025

(the “Interim Financing”))

together with interest accrued and fees thereon were forgiven in part and exchanged for (A) the Secured Lender Shares, (B)

June Secured Debentures (as defined below) in the aggregate principal amount of $99.7 million and (C)

June Unsecured Debentures (as defined below) in the aggregate principal amount of $5.0 million. Also, as of the Closing Date, the outstanding principal amount of the Unsecured Debentures together with interest accrued and fees thereon were forgiven in part and exchanged for (A) the Unsecured Lender Shares and (B)

June Unsecured Debentures in the aggregate principal amount of $15.0 million. Furthermore, all existing options and warrants to purchase common shares of the Company, including certain debenture warrants and exchange warrants previously issued to the Secured Lenders, the warrants previously issued in connection with the Unsecured Debentures and all other Affected Equity (as defined in the Plan of Arrangement), were cancelled, and extinguished for no consideration.

Secured Debenture Purchase Agreement

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

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

Pursuant to the Secured DPA, so long as Gotham Green Partners, LLC or any of its Affiliates (as defined in the Secured DPA) hold at least 50.0% of the outstanding principal amount of June Secured Debentures, the Collateral Agent will have the right to appoint two

non-voting

observers to the Company’s

oard of

Directors (“the Board”),

each of which shall receive up to a maximum amount of $25 in any

12-month

period for reasonable

out-of-pocket

expenses.

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

Unsecured Debenture Purchase Agreement

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

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

Refer to Note 9 for further discussion regarding the Recapitalization Transaction.

Going Concern

These 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 year ended December 31, 2022, the Company reported a net loss of $449.4 million, operating cash outflow of $19.5 million and an accumulated deficit of $1,251.0 million as of December 31, 2022.

This includes an impairment loss of its intangible assets, right-of-use asset, and property, plant and equipment balances of $30.6 million.

The closing of the Recapitalization Transaction resulted in lower interest rates on the June Secured Debentures, June Unsecured Debentures and the $11.0 million senior secured bridge notes issued by iAnthus New Jersey, LLC (“INJ”) on February 2, 2021

(“Senior Secured Bridge Notes”)

allows interest to be

paid-in-kind.

As such, the Company believes it may generate positive cash flows in the near future. Notwithstanding the foregoing, the Company’s substantial losses and working capital deficiency cast substantial doubt on the Company’s ability to continue as a going concern for a period of no less than 12 months from the date of these consolidated financial statements. These consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Basis of Consolidation

(d) Basis of Consolidation

The 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.

The accounts of subsidiaries are prepared for the same reporting period as the parent company using consistent accounting policies. Intercompany accounts and transactions, including all unrealized intercompany gains or losses on transactions have been eliminated. The Company’s subsidiaries and its interests in each are presented below as of December 31, 2022:


Name of Entity	Place of Incorporation	Interest

MPX Bioceutical ULC (“MPX ULC”) (1)	Canada		100	%
MPX Luxembourg SARL (1)	Luxembourg		100	%
ABACA, Inc. (1)	Arizona, USA		100	%
Ambary, LLC (1)	Arizona, USA		100	%
Health For Life, Inc. (1)	Arizona, USA		100	%
iAnthus Arizona, LLC (“iA AZ”)	Arizona, USA		100	%
S8 Management, LLC (1)	Arizona, USA		100	%
S8 Rental Services, LLC (1)	Arizona, USA		100	%
Soothing Options, Inc. (1)	Arizona, USA		100	%
The Healing Center Wellness Center, Inc. (“THCWC”) (1)	Arizona, USA		100	%
Bergamot Properties, LLC	Colorado, USA		100	%
Scarlet Globemallow, LLC	Colorado, USA		100	%
iAnthus Capital Management, LLC (“ICM”)	Delaware, USA		100	%
GHHIA Management, Inc. (“GHHIA”)	Florida, USA		100	%
GrowHealthy Properties, LLC (“GHP”)	Florida, USA		100	%
iAnthus Holdings Florida, LLC (“IHF”)	Florida, USA		100	%
McCrory’s Sunny Hill Nursery, LLC (“McCrory’s”)	Florida, USA		100	%
iA IT, LLC	Illinois, USA		100	%
Budding Rose, Inc. (1)	Maryland, USA		100	%
GreenMart of Maryland, LLC (1)	Maryland, USA		100	%
LMS Wellness, Benefit, LLC (1)	Maryland, USA		100	%
Rosebud Organics, Inc. (1)	Maryland, USA		100	%
Cannatech Medicinals, Inc. (1)	Massachusetts, USA		100	%
Fall River Development Company, LLC (1)	Massachusetts, USA		100	%
IMT, LLC (1)	Massachusetts, USA		100	%
Mayflower Medicinals, Inc.	Massachusetts, USA		100	%
Pilgrim Rock Management, LLC	Massachusetts, USA		100	%
CGX Life Sciences, Inc. (“CGX”) (1)	Nevada, USA		100	%
GreenMart of Nevada NLV, LLC (GMNV) (1)	Nevada, USA		100	%
iAnthus Northern Nevada, LLC	Nevada, USA		100	%
GTL Holdings, LLC	New Jersey, USA		100	%
iA CBD, LLC (“iA CBD”)	New Jersey, USA		100	%
iAnthus New Jersey, LLC	New Jersey, USA		100	%
MPX New Jersey, LLC (1)	New Jersey, USA		100	%
Citiva Medical, LLC (“Citiva”)	New York, USA		100	%
iAnthus Empire Holdings, LLC	New York, USA		100	%
FWR, Inc. (2)	Vermont, USA		100	%
Grassroots Vermont Management Services, LLC (2)	Vermont, USA		100	%
Pakalolo, LLC	Vermont, USA		100	%

(1)	Entities acquired as a part of the MPX Bioceutical Corporation (“MPX”) acquisition on February 5, 2019 (the “MPX Acquisition”).

(2)	Entities in Vermont - the sale agreement for the business in Vermont was executed on February 6, 2023.

Use of Estimates

(e)

Use of Estimates

The preparation of the 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 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; inputs used in the valuation of inventory; allowances for potential uncollectability of accounts receivable, provisions for inventory obsolescence; impairment assessment of long- lived assets; depreciable lives of property, plant and equipment; useful lives of intangible assets; accruals for contingencies including tax contingencies; valuation allowances for deferred income tax assets; estimates of fair value of identifiable assets and liabilities acquired in business combinations; estimates of fair value of derivative instruments; and estimates of the fair value of stock-based payment awards.

Cash and Restricted Cash

(f) Cash and Restricted Cash

For purposes of the consolidated balance sheets and the statements of cash flows, cash includes cash and restricted cash amounts held primarily in U.S. dollars.

Restricted cash balances are those which meet the definition of cash and cash equivalents but are not available for use by the Company. As of December 31, 2022, the Company held less than $0.1 million as restricted cash (December 31, 2021—$3.3 million,

which was mainly related to funds held in escrow from the Senior Secured Bridge Notes.

The following table summarizes a reconciliation of cash and restricted cash reported within the consolidated balance sheets to such amounts presented in the statements of cash flows:


	As of December 31,
	2022		2021

Cash	$	14,336	$	13,244
Restricted cash		70		3,334

Total cash and restricted cash presented in the statements of cash flows	$	14,406	$	16,578

Accounts Receivable

(g) Accounts Receivable

Allowances for doubtful accounts receivable are based on the Company’s assessment of the collectability of specific customer balances, which is based upon a review of the customer’s creditworthiness and past collection history. For trade accounts receivable deemed as uncollectible, and arose from the sale of goods or services, the Company will write off the specific balance against the allowance for doubtful accounts when it is known that a provided amount will not be collected.

Inventories

(h) Inventories

Inventory is comprised of supplies, raw materials, finished goods and

work-in-process

such as harvested cannabis plants and

by-products

to be harvested. Inventory is valued at the lower of cost, determined on a weighted average cost basis, and net realizable value. The direct and indirect costs of inventory initially include the costs to cultivate the harvested plants at the time of harvest. They also include subsequent costs such as materials, labor, and overhead involved in processing, packaging, labeling, and inspection to turn raw materials into finished goods. All direct and indirect costs related to inventory are capitalized as they are incurred and are subsequently recorded within costs and expenses applicable to revenues on the consolidated statements of operations at the time of sale.

Net realizable value is determined as the estimated selling price less a reasonable estimate of the costs of completion, disposal, and transportation. At the end of each reporting period, the Company performs an assessment of inventory obsolescence to measure inventory at the lower of cost or net realizable value. Factors considered in determining obsolescence include, but are not limited to, slow-moving inventory or products that can no longer be marketed. As such, any identified slow moving and/or obsolete inventory is written down to its net realizable value through costs and expenses applicable to revenues on the consolidated statements of operations.

Investments

(i) Investments

The Company currently accounts for its equity-accounted investments using the equity method of accounting in accordance with Accounting Standards Codification (“ASC”) 323. Investments are initially recognized at cost. Subsequent to initial recognition, the carrying value of the Company’s investments are adjusted for the Company’s share of income or loss and distributions each reporting period. The carrying value of the Company’s investments are assessed for indicators or impairment at each balance sheet date.

The Company applies fair value accounting for its other investments recognized as financial assets that are disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received from selling an asset in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets that are required to be recorded at fair value, the Company considers all related factors of the asset by market participants in which the Company would transact and the market-based risk measurements or assumptions of market participants.

Property, Plant and Equipment

(j) Property, Plant and Equipment

Property, plant and equipment are recorded at historical cost net of accumulated depreciation, write-downs and impairment losses. Depreciation is calculated on a straight-line basis over the estimated useful life as follows:


Buildings	—	20 - 25 years

Leasehold improvements	—	over the shorter of the initial term of the underlying lease plus any reasonably assured renewal terms, and the useful life of the asset

Production equipment	—	5 years

Processing equipment	—	5 years

Sales equipment	—	3 - 5 years

Office equipment	—	3 - 5 years

Land	—	not depreciated

When significant parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items or components of property, plant and equipment and each major component is assigned an appropriate useful life. Gains and losses on disposal of an item are determined by comparing the proceeds from disposal with the carrying amount of the item and are recognized in profit or loss. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the respective accounts and any related gain or loss is recognized in the consolidated statements of operations. Maintenance and repairs are charged to expense as incurred. Significant expenditures, which extend the useful lives of assets or increase productivity, are capitalized.

Construction in progress includes construction progress payments, deposits, engineering costs, and other costs directly related to the construction of cultivation, processing or dispensary facilities. Expenditures are capitalized during the construction period and construction in progress is transferred to the appropriate class of property, plant and equipment when the assets are available for use, at which point the depreciation of the asset commences.

The Company reviews the carrying values of its property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group might not be recoverable. Assets are grouped at the lowest level for which identifiable cash flows are largely independent when testing for, and measuring for, impairment. In performing its review of recoverability, the Company estimates the future cash flows expected to result from the use of the asset or asset group and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset or asset group, an impairment loss is recognized in the consolidated statements of operations. Measurement of the impairment loss is based on the excess of the carrying amount of the asset or asset group over the fair value calculated using discounted expected future cash flows.

A liability for the fair value of an asset retirement obligation associated with the retirement of tangible long-lived assets and the associated asset retirement costs are recognized in the period in which the liability and costs are incurred if a reasonable estimate of fair value can be made using a discounted cash flow model. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently amortized over the asset’s useful life. The liability is accreted over the period of expected cash outflows.

As a result of declining performance of GMNV during the year ended December 31, 2022, an impairment test was performed for GMNV’s long-lived assets as of December 31, 2022. The Company calculated the fair value of the asset group using the income approach, which estimates the present value of future cash flows based on management’s forecast of revenue growth and operating margins. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset or asset group, an impairment loss is recognized in the consolidated statements of operations. Measurement of the impairment loss is based on the excess of the carrying amount of the asset or asset group over the fair value calculated using discounted expected future cash flows. The Company concluded that the carrying amount of the long-lived assets exceeded the fair value and recorded an impairment loss of

$29.9

million for the year ended December 31, 2022, of which

$2.7

million has been allocated to property, plant and equipment.

On November 1, 2022, the Company entered into a non-binding term sheet to sell its Vermont

business

. Subsequently, on February 6, 2023, the Company through its wholly-owned subsidiary, ICM, entered into a Membership Interest Purchase Agreement (the “MIPA”), pursuant to which the Company agreed to sell its Vermont business for proceeds of less than the carrying amount of the asset group (refer to Note 18). As of December 31, 2022, the Company concluded that the asset group met the criteria for assets held for sale. In accordance with ASC Subtopic 360-10, the Company performed an impairment assessment prior to reclassifying the asset group as held for sale. During the year ended December 31, 2022, the Company recorded an impairment

loss of

0.7

million, of which less

than $

0.1

mil

lion was allocated to property, plant and equipment for the year ended December 31, 2022.

As a result, the Company recorded a total impairment loss of $30.6 million for the year ended December 31, 2022, of which impairment loss of $2.7 million has been allocated to property, plant and equipment (December 31, 2021—$5.5 million and impairment loss of less than $0.1 million was allocated to property, plant and equipment related to the Company’s CBD business).

Leases

(k) Leases

The Company leases some items of property, plant and equipment, office, cultivation, processing and dispensary space. On the lease commencement date, a lease is classified as a capital lease or an operating lease based on the classification criteria of the lease guidance under U.S. GAAP. As of January 1, 2019, the Company adopted Financial Accounting Standard Board (“FASB”) ASC Topic 842

Leases

(“ASC 842”) and applied the lease classification criteria contained therein for any new leases

Upon adoption of ASC 842, the Company recorded

right-of-use

(“ROU”) assets for all of its leased assets classified as operating leases. The ROU assets were computed as the present value of future minimum lease payments, including additional payments resulting from a change in an index such as a consumer price index or an interest rate, plus any prepaid lease payments minus any lease incentives received.

A lease liability was also recorded at the same time. No ROU asset is recorded for leases with a lease term, including any reasonably assured renewal terms, of 12 months or less.

Upon adoption of ASC 842, the Company also recorded lease liabilities computed as the present value of future minimum lease payments, including additional payments resulting from a change in an index or an interest rate. Lease liabilities are amortized using the effective interest method.

Depreciation on the ROU asset is calculated as the difference between the expected straight-line rent expense over the lease term less the accretion on the lease liability.

As a result of declining performance of GMNV during the year ended December 31, 2022, an impairment test was performed for GMNV’s long-lived assets as of December 31, 2022 (Refer to Note 2(j)). The Company concluded that the carrying amount of the long-lived assets exceeded the fair value and recorded an impairment

loss of

$29.9

million for the year ended December 31, 2022, of which

$3.0

million has been allocated to its ROU assets.

On November 1, 2022, the Company entered into a non-binding term sheet to sell its Vermont

business

. Subsequently, on February 6, 2023, the Company through its wholly-owned subsidiary, ICM, entered into the MIPA, pursuant to which the Company agreed to complete the sale of its Vermont

business

(refer to Note 18). As of December 31, 2022, the Company concluded that the asset group met the criteria for assets held for sale. In accordance with ASC Subtopic 360-10, the Company performed an impairment assessment prior to reclassifying the asset group as held for sale. During the year ended December 31, 2022, the Company recorded an impairment loss of $0.7 million, of which less than $0.1 million was allocated to ROU assets for the year ended December 31, 2022.

As a result, the Company recorded an impairment loss of $

30.6

million for the year ended December 31, 2022, of which impairment loss of $

3.0

million has been allocated to the ROU assets (December 31, 2021—$

5.5

million and impairment loss of less than $

0.3

million was allocated to the ROU assets related to the Company’s CBD business).

Intangible Assets

(l) Intangible Assets

Intangible assets with a finite life are recorded at cost and are amortized on a straight-line basis over estimated useful lives. Intangible assets with an indefinite life are not amortized and are assessed annually for impairment, or more frequently if indicators of impairment arise. The estimated useful life and amortization method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

The Company capitalizes certain

internal-use

software development costs, consisting primarily of contractor costs and employee salaries and benefits allocated to the software. Capitalization of costs incurred in connection with internally developed software commences when both the preliminary project stage is completed and management has authorized further funding for the project, based on a determination that it is probable the project will be completed and used to perform the function intended. Capitalization of costs ceases no later than the point at which the project is substantially complete and ready for its intended use. All other costs are expensed as incurred. Amortization is calculated on a straight-line basis over three years. Costs incurred for enhancements that are expected to result in additional functionalities are capitalized.

Intangible assets mainly comprise of licenses acquired in business combinations. Licenses are amortized over 15 years, which better reflects the useful lives of the assets. Trademarks are amortized over 7 to 15 years, and all other intangible assets with a finite life are amortized over 1 to 5 years.

The Company reviews the carrying values of its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group might not be recoverable. Assets are grouped at the lowest level for which identifiable cash flows are largely independent when testing for, and measuring for, impairment. In performing its review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset or asset group and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset or asset group, an impairment loss is recognized in the consolidated statements of operations. Measurement of the impairment loss is based on the excess of the carrying amount of the asset or asset group over the fair value calculated using discounted expected future cash flows.

$29.9

million for the year ended December 31, 2022, of which

$24.1

million has been allocated to intangible assets.

On November 1, 2022, the Company entered into a non-binding term sheet to sell its Vermont

business

. Subsequently, on February 6, 2023, the Company through its wholly-owned subsidiary, ICM, entered into the MIPA, pursuant to which the Company agreed to complete the sale of its Vermont

business

$0.7 million, of which $0.6 million was allocated to intangible assets for the year ended December 31, 2022.

As a result, the Company recorded total impairment loss of $30.6 million for the year ended December 31, 2022, of which $24.8 million has been allocated to intangible assets (December 31, 2021—

$5.5

million

and

impairment loss of less than $5.2

million was allocated to intangible assets related to the Company’s CBD business).

Assets Held For Sale

(m) Assets Held For Sale

The Company classifies assets held for sale in accordance with ASC Topic 360. When the Company makes the decision to sell an asset, the Company assesses if such asset should be classified as an asset held for sale. To classify as an asset held for sale, the asset or disposal group must meet all of the following conditions: i) management, having the authority to approve the action, commits to a plan to sell the asset, ii) the asset is available for immediate sale in its present condition, subject to certain customary terms, iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated, iv) the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale, within one year, subject to certain exceptions, v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current value, and vi) actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn. Assets held for sale are measured at the lower of their carrying amount or fair value less cost to sell (“FVLCTS”). FVLCTS is the amount obtainable from the sale of the asset in an arm’s length transaction, less the costs of disposal. Once classified as held for sale, any depreciation and amortization on an asset cease to be recorded. As of December 31, 2022, the Company had

$0.2 million in net assets held for sale which is recorded in property, plant and equipment, right-of-use assets, and intangible assets on the consolidated balance sheets. There were no assets held for sale as of December 31, 2021.

Goodwill

(n) Goodwill

Goodwill represents the

excess

of purchase price paid over the fair value of net identifiable assets (tangible and intangible assets) acquired in business combination transactions. Goodwill is not subject to amortization and is tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. The Company performs a qualitative assessment of its reporting units and certain select quantitative calculations against its current long-range plan to determine whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. The Company considers persistent and lasting decline in revenue, negative operating cash flows, changes in internal

strategic

expansion plans, negative developments in the U.S. cannabis regulatory environment at the federal, state and local levels, and a significant continued decline in stock price, among other factors, as part of the qualitative assessment.

The Company first assesses certain qualitative factors to determine whether the existence of events or circumstances leads to determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. After assessing the totality of events or circumstances, the Company determines if it is not more likely than not that the fair value of a reporting unit is less than its carry amount, then performing the

two-step

impairment test is unnecessary. When necessary, impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair value of the reporting unit is estimated using a discounted cash flow approach. If the carrying amount of the reporting unit exceeds its fair value, then a second step is performed to measure the amount of impairment loss, if any, by comparing the fair value of each identifiable asset and liability in the reporting unit to the total fair value of the reporting unit. As of December 31, 2022, the Company has no goodwill (December 31, 2021

—

$Nil).

Derivative Liabilities and Long-term Debt

(

) Derivative Liabilities and Long-term Debt

The Company’s debt instruments contain a host liability, freestanding warrants and in some instances, an embedded conversion feature. The Company uses the guidance under FASB ASC Topic 815

Derivatives and Hedging

(“ASC 815”) to determine if the embedded conversion feature must be bifurcated and separately accounted for as a derivative under ASC 815. It also determines whether any embedded conversion features requiring bifurcation and/or freestanding warrants qualify for any scope exceptions contained within ASC 815. Generally, contracts issued or held by a reporting entity that are both (i) indexed to its own stock; and (ii) classified in shareholders’ equity, would not be considered a derivative for the purposes of applying ASC 815. Any embedded conversion features and/or freestanding warrants that do not meet the scope exception noted above are classified as derivative liabilities, initially measured at fair value and remeasured at fair value each reporting period with changes in fair value recognized in the consolidated statements of operations. Any embedded conversion feature and/or freestanding warrants that meet the scope exception under ASC 815 are initially recorded at their relative fair value in

paid-in-capital

and are not remeasured at fair value in future periods.

The host debt instrument is initially recorded at its relative fair value in long-term debt. The host debt instrument is accounted for in accordance with guidance applicable to

non-convertible

debt under FASB ASC Topic 470

Debt

(“ASC 470”) and is accreted to its face value over the term of the debt with accretion expense and periodic interest expense recorded in the consolidated statements of operations.

Issuance costs are allocated to each instrument (the debt host, embedded conversion feature and/or freestanding warrants) in the same proportion as the proceeds that are allocated to each instrument other than issuance costs directly related to an instrument are allocated to that instrument only. Issuance costs allocated to the debt host instrument are netted against the proceeds allocated to the debt host. Issuance costs allocated to an instrument classified as derivative liability are expensed in the period that they are incurred in the consolidated statements of operations. Issuance costs allocated to freestanding warrants classified in equity are recorded in

paid-in-capital.

Upon settlement of convertible debt instruments, ASC

470-20

requires the issuer to allocate total settlement consideration, inclusive of transaction costs, amongst the liability and equity components of the instrument based on the fair value of the liability component immediately prior to repurchase. The difference between the settlement consideration allocated to the liability component and the net carrying value of the liability component, including unamortized debt issuance costs, is recognized as gain (loss) on extinguishment of debt in the consolidated statements of operations. The remaining settlement consideration allocated to the equity component is recognized as a reduction of additional

paid-in

capital in the consolidated balance sheets.

Income Taxes

(

) Income Taxes

Income taxes are accounted for under the asset and liability method whereby deferred income tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the accounting and tax bases of assets and liabilities and net operating loss carryforwards. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates or laws is recognized in the consolidated statements of operations in the period in which the change is enacted.

The Company assesses realization of deferred income tax assets and, based on all available evidence, concludes whether it is more likely than not that the net deferred income tax assets will be realized. A valuation allowance is provided for the amount of deferred income tax assets not considered to be realizable.

The Company has elected to classify interest and penalties related to income tax liabilities, when applicable, as part of the selling, general and administrative expenses in its consolidated statements of operations.

The Company is subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, the Company may incur additional tax expense based upon the outcomes of such matters. The Company follows the provisions of ASC Topic 740,

Accounting for Income Taxes.

ASC Topic 740 clarifies the accounting for uncertainties in income taxes recognized in a Company’s consolidated financial statements. ASC Topic 740 also prescribes a recognition threshold and measurement attribute for the consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC Topic 740 provides guidance on derecognition, classification, interest and penalties, disclosures and transition. As required by the uncertain tax position guidance in ASC Topic 740, the Company recognized the benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the

more-likely-than-not

threshold, the amount recognized in the financial statements is the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company does not expect any significant changes in the unrecognized tax benefits within 12 months of the reporting date.

Revenue Recognition

(

) Revenue Recognition

The Company recognizes revenue under the provision of ASC 606—

Revenue from Contracts with Customers

. The Company generates revenue primarily from the sale of cannabis, cannabis related products and provision of services. The Company uses the following five-step contract-based analysis of transactions to determine if, when and how much revenue can be recognized:

Identify the contract with a customer;

Identify the performance obligation(s) in the contract;

Determine the transaction price;

Allocate the transaction price to the performance obligation(s) in the contract; and

Recognize revenue when or as the Company satisfies the performance obligation(s).

Revenue from the sale of cannabis is generally recognized when control over the goods has been transferred to the customer. Payment for medical sales is typically due prior to shipment for wholesale orders and at

point-of-sale

for retail orders. Payment for wholesale transactions is due within a specified time period as permitted by the underlying agreement and the Company’s credit policy upon the transfer of goods to the customer. The Company generally satisfies its performance obligation and transfers control to the customer upon delivery and acceptance by the customer. Revenue is recorded at the estimated amount of consideration to which the Company expects to be entitled. Substantially all of the Company’s sales are single performance obligations arrangements for which the transaction price is equivalent to the stated price of the products net of any stated discounts applicable at point of sale.

Revenue is recognized net of sales incentives and returns, after discounts.

Costs and Expenses Applicable to Revenues

(

) Costs and Expenses Applicable to Revenues

Costs and expenses applicable to revenues represents costs directly related to processing and distribution of the Company’s products. Primary costs include raw materials, packaging, direct labor, overhead, and shipping and handling. Manufacturing overhead and related expenses include salaries, wages, employee benefits, utilities, maintenance and property taxes. The Company recognizes the costs and expenses applicable to revenues at the time the related revenues are recognized.

Foreign Currency Translation

(

) Foreign Currency Translation

The functional and reporting currency of the Company is the U.S. dollar. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at the foreign exchange rates prevailing at the end of the period.

Non-monetary

assets and liabilities measured at historical cost are translated using the exchange rate at the date of the transaction. Realized and unrealized foreign exchange gains and losses are included in the determination of earnings in the period in which they arise.

Share-based Compensation

(

) Share-based Compensation

The Company has a share-based compensation plan which includes options and restricted stock units (“RSUs”). Share-based awards are measured at the fair value of the awards at the grant date and recognized as expense over the requisite service periods in the Company’s consolidated statements of operations. The fair value of options is determined using the Black-Scholes option pricing model which incorporates all market vesting conditions. The number of options expected to vest is reviewed and adjusted at the end of each reporting period such that the amount recognized for services received as consideration for the share-based awards granted shall be based on the number of awards that eventually vest. Amounts recorded for forfeited or expired unexercised options are accounted for in the year of forfeiture. Upon the exercise of stock options, consideration received on the exercise of share-based awards is recorded as

paid-in-capital.

The fair value of RSUs is determined using the Company’s closing stock price on the grant date.

Share-based compensation expense includes compensation cost for employee awards granted and all modified or cancelled awards. In addition, compensation expense includes the compensation cost, based on the grant-date fair value calculated under FASB ASC Topic 718

Share-based payments

(“ASC

718-10-55”).

Share-based compensation expense is not adjusted for estimated forfeitures, but instead adjusted upon an actual forfeiture of a stock option. The Company utilizes the risk free rate determined by the market yield on United States Treasury marketable bonds over the contractual term of the instrument being issued.

The critical assumptions and estimates used in determining the fair value of share-based compensation include: expected life of options, volatility of the Company’s future share price, risk free rate, future dividend yields and estimated forfeitures at the initial grant date. Changes in assumptions used to estimate fair value could result in materially different results.

The Company’s policy is to issue new common shares from treasury to satisfy stock options which are exercised.

The Company recognizes compensation expense for RSUs and options on a straight-line basis over the requisite service period for awards that vest solely based on a service condition. Compensation expense for awards that vest based on both service and performance conditions are recognized over the requisite service period of the award using the graded vesting method.

Non-market

vesting conditions are included in the assumptions about the number of options that are expected to become exercisable. Any cumulative adjustment prior to vesting is recognized in the current period. No adjustment is made to any expense recognized in prior period if share options ultimately exercised are different to that estimated on vesting.

Contingent Liabilities

(

) Contingent Liabilities

In accordance with the FASB ASC Topic 450

Contingencies

, the Company will make a provision for a liability when it is both probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The Company reviews these provisions in conjunction with any related provisions on assets related to the claims at least quarterly and adjusts these provisions to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other pertinent information related to the case.

The Company expenses legal costs relating to its lawsuits, claims and proceedings as incurred.

Business Combinations

(

) Business Combinations

In accordance with the FASB ASC Topic 805

Business Combinations

(“ASC 805”), the Company allocates the fair value of purchase consideration to the tangible and intangible asset purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets acquired and liabilities assumed requires estimates and the use of valuation techniques when a market value is not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. If the Company obtains new information about the facts and circumstances that existed as of the acquisition date during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustment to the assets acquired and liabilities assumed.

Revision of Prior Period Financial Statements

(w) Revision of Prior Period Financial Statements

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

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

The effect of the adjustments on the line items within the Company’s consolidated balance sheet as of December 31, 2021 is as follows:


	December 31, 2021
	As previously reported			Adjustment			As adjusted
Inventories	$	30,447		$	(1,755	)	$	28,692
Current assets		55,401			(1,755	)		53,646
Total assets		346,744			(1,755	)		344,989
Accrued and other current liabilities		99,446			(513	)		98,933
Current liabilities		285,821			(513	)		285,308
Total liabilities		369,141			(513	)		368,628
Accumulated deficit		(800,390	)		(1,242	)		(801,632	)
Total shareholders’ deficit		(22,397	)		(1,242	)		(23,639	)
Total liabilities and shareholders’ deficit		346,744			(1,755	)		344,989

The effect of the adjustments on the line items within the Company’s consolidated statements of operations as of December 31, 2021 is as follows:


	Year Ended December 31, 2021
	As previously reported			Adjustment			As adjusted
Costs and expenses applicable to revenues (exclusive of depreciation and amortization expense)	$	(91,735	)	$	(1,755	)	$	(93,490	)
Gross profit		111,283			(1,755	)		109,528
Loss from operations		(22,025	)		(1,755	)		(23,780	)
Loss from operations before income tax		(53,999	)		(1,755	)		(55,754	)
Income tax expense		22,249			(513	)		21,736
Net loss		(76,248	)		(1,242	)		(77,490	)
Earnings per share		(0.44	)		(0.01	)		(0.45	)

The effect of the adjustments on the line items on the Company’s consolidated statement of cash flow for the year ended December 31, 2021 is as follows:


	Year Ended December 31, 2021
	As previously reported			Adjustment			As adjusted
Net loss	$	(76,248	)	$	(1,242	)	$	(77,490	)
Change in operating assets and liabilities		16,594			1,242			17,836

The effect of the adjustment on the line items within the Company’s inventories as of December 31, 2021 is as follows:


	Year Ended December 31, 2021
	As previously reported		Adjustment			As adjusted
Supplies	$	6,188	$	—		$	6,188
Raw materials		5,641		215			5,856
Work in process		11,219		(1,970	)		9,249
Finished goods		7,399		—			7,399

Total	$	30,447	$	(1,755	)	$	28,692

The effect of the adjustments on the line items within the Company’s consolidated statements of changes in shareholders’ (deficit) equity for the year ended December 31, 2022 is as follows:


	December 31, 2022
	As reported			Adjustment			As adjusted
Accumulated deficit – Balance January 1, 2022	$	(800,390	)	$	(1,242	)	$	(801,632	)
Total shareholders’ deficit – Balance January 1, 2022		(22,397	)		(1,242	)		(23,639	)

Coronavirus Pandemic

(x) Coronavirus Pandemic

The Company may be impacted by business interruptions from pandemics and public health emergencies, including those related to the novel coronavirus, known as

COVID-19

(“COVID-19”).

An outbreak of infectious disease, a pandemic, or a similar public health threat, such as the outbreak of COVID-19, or a fear of any of the foregoing, is highly uncertain and subject to change. As a result, the Company may take actions that alter its business operations as may be required by federal, state or local authorities’ guidance and orders or take other steps that the Company determines are in the best interest of its employees, customers, partners, suppliers, shareholders, and stakeholders.

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

COVID-19,

could negatively impact capital expenditures and overall economic activity in the impacted regions, which could impact the demand for the Company’s products and services.

It is unknown whether and how the Company continue to be impacted if the

COVID-19

pandemic continues to persist or if there are increases in its breadth or in its severity, including as a result of the waiver of regulatory requirements or the implementation of emergency regulations to which the Company is subject.

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