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, 2022

☐ 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 001-39217

THE GREENROSE HOLDING COMPANY INC.

(Exact name of registrant as specified in its charter)

Delaware

84-2845696

(State or Other Jurisdiction

of Incorporation)

(I.R.S. Employer

Identification No.)

111 Broadway

Amityville, NY

11701

(Address of principal executive offices)

(zip code)

(516) 346-5270

(Issuer’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Units, each consisting of one share of common stock and one redeemable warrant		OTC Pink
Common stock, par value $0.0001 per share		OTCQX
Redeemable warrants, exercisable for shares of common stock at an exercise price of $11.50 per share		OTCQB

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐ No ☒

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

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

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☒

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒

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

As of August 22, 2022, there were 17,649,561 shares of common stock, par value $0.0001 per share issued and outstanding.

THE GREENROSE HOLDING COMPANY INC.

FORM 10-Q

TABLE OF CONTENTS

Part I. Financial Information	1
Item 1. Financial Statements	1
Condensed Consolidated Balance Sheets	2
Condensed Consolidated Statements of Operations (Unaudited)	3
Condensed Consolidated Statements of Changes in Stockholders’ Equity/Members Equity (Unaudited)	4
Condensed Consolidated Statement of Cash Flows (Unaudited)	5
Notes to Condensed Consolidated Financial Statements (Unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk	49
Item 4. Controls and Procedures	49
Part II. Other Information	50
Item 1. Legal Proceedings	50
Item 1A. Risk Factors	50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3. Defaults Upon Senior Securities	53
Item 4. Mine Safety Disclosures	53
Item 5. Other Information	53
Item 6. Exhibits	53
Part III. Signatures	54

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

The accompanying interim consolidated financial statements of The Greenrose Holding Company Inc. (the “Company”) should be read in conjunction with the 10-K that was filed with the United States Securities and Exchange Commission (the “SEC”). The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, since they are interim statements, the accompanying consolidated financial statements do not include all the information and notes required by GAAP for complete financial statement presentation. In the opinion of management, the interim consolidated financial statements reflect all adjustments (consisting of normal, recurring adjustments) that are necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods presented. Interim results are not necessarily indicative of results for a full year.

In the opinion of management, the consolidated financial statements contain all material adjustments, consisting only of normal adjustments considered necessary to present fairly the financial condition, results of operations, and cash flows of the Company for the interim periods presented.

The Greenrose Holding Company Inc.

Condensed Consolidated Balance Sheets

As of June 30, 2022 and December 31, 2021

(in thousands, except share amounts)

	June 30,			December 31,
	2022			2021
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	981		$	7,240
Restricted Cash		1,743			1,817
Marketable Security		633			1,694
Accounts Receivable, net		2,604			1,197
Inventories		11,121			12,513
Prepaid expenses and other current assets		1,289			3,031
Total current assets		18,371			27,492
Intangible assets, net		105,784			113,684
Property and equipment, net		25,215			25,209
Goodwill		65,791			71,658
Other assets		1,199			1,050
Total assets	$	216,360		$	239,093
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	11,633		$	18,916
Current Tax Payable		1,210			38
Current Portion of Note Payable		110,083			106,015
Convertible Promissory Note - Related Parties		-			2,000
Promissory Notes - Related Parties		-			641
Due to Related Parties		870			846
Due to Prior Members		599			1,130
Other Current Liabilities		168			1,340
Total current liabilities		124,563			130,926
Contingent Consideration		14,215			20,880
Note Payable, Net of Current Portion		9,723			-
Private Warrants Liabilities		556			436
Warrant Liabilities		16,958			16,601
Derivative Liability		-			1,167
Total liabilities		166,015			170,010
Commitments and contingencies

Stockholders’ Equity
Common stock, $0.0001 par value; 150,000,000 shares authorized; 17,649,561 and 16,061,190 shares issued and outstanding at June 30, 2022 December 31, 2021, respectively.		2			2
Preferred stock, $0.0001 par value; 1,000,000 shares authorized; none issued and outstanding		-			-
Additional paid-in capital		77,025			70,859
Accumulated deficit		(26,682	)		(1,778	)
Total Stockholders’ Equity		50,345			69,083
Total liabilities and Stockholders’ Equity	$	216,360		$	239,093

The accompanying notes are an integral part of these financial statements.

The Greenrose Holding Company Inc.

Condensed Consolidated Statements of Operations (Unaudited)

For the three and six months ended June 30, 2022 and 2021

(in thousands, except share and per share amounts)

	For the Three Months Ended						For the Six Months Ended
	Successor			Predecessor			Successor			Predecessor
	June 30,			June 30,			June 30,			June 30,
	2022			2021			2022			2021
Revenue	$	9,191		$	6,570		$	17,380		$	13,720
Cost of Goods Sold		6,297			2,127			12,650			4,825
Gross Profit		2,894			4,443			4,730			8,895
Expenses from Operations
Selling and Marketing		27			183			53			187
General, and Administrative		3,296			634			8,272			1,995
Depreciation and Amortization		3,984			15			7,945			26
Total Expenses from Operations		7,307			832			16,270			2,208
Income From Operation		(4,413	)		3,611			(11,540	)		6,687
Other income (expense):
Other income (expense), net		1,046			-			235			-
Interest Expense, net		(6,910	)		(44	)		(13,529	)		(77	)
Change in Fair Value in Financial Instruments		694			-			1,164			-
Total other income (expense), net		(5,170	)		(44	)		(12,130	)		(77	)

Income Before Provision for Income Taxes		(9,583	)		3,567			(23,670	)		6,610

Provision for Income Taxes		(753	)		(299	)		(1,234	)		(550	)
Net Income	$	(10,336	)	$	3,268		$	(24,904	)	$	6,060

Successor earnings per share
Earnings per common share
Basic and diluted	$	(0.63	)				$	(1.54	)

Weighted average shares outstanding
Basic and diluted		16,523,208						16,210,535

Predecessor earnings per share
Net Income per share – basic and diluted – attributable to:
Angel Founder Units				$	15.77					$	29.31
Series A Units				$	15.77					$	29.31
Series R Units				$	15.77					$	29.31

Weighted average shares – basic and diluted – attributable to:
Angel Founder Units					110,000						110,000
Series A Units					42,761						42,761
Series R Units					54,000						54,000

The accompanying notes are an integral part of these financial statements.

The Greenrose Holding Company Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity/Members’ Equity (Unaudited)

For the three and six months ended June 30, 2022 and 2021

	Successor
(in thousands except share amounts)	Common Stock		Amount		Additional Paid In Capital		Accumulated (Deficit)			Total Stockholder’s Equity
Balance at December 31, 2021		16,061,190	$	2	$	70,859	$	(1,778	)	$	69,083
Issuance of stock options		-		-		225		-			225
Settlement of Investor Shares released from lockup		-		-		1,390		-			1,390
Issuance of shares in settlement of promissory note		685,289		-		2,864		-			2,864
Issuance of shares to board members		73,700		-		387		-			387
Issuance of shares to Investor		753,165		-		1,000		-			1,000
Issuance of shares to vender		11,905		-		50		-			50
Net Loss		-		-		-		(14,568	)		(14,568	)
Balance at March 31, 2022		17,585,249	$	2	$	76,775	$	(16,346	)	$	60,431
Share repayment of Imperial Note		64,312		-		250		-			250
Net Loss		-		-		-		(10,336	)		(10,336	)
Balance at June 30, 2022		17,649,561	$	2	$	77,025	$	(26,682	)	$	50,345

	Predecessor
(in thousands)	Total Members’ Equity
Balance, December 31, 2020	$	12,245
Distributions to Members		-
Net Income		2,792
Balance at March 31, 2021	$	15,037
Distributions to Members		(4,000	)
Net Income		3,268
Balance at June 30, 2021	$	14,305

The accompanying notes are an integral part of these financial statements.

The Greenrose Holding Company Inc.

Condensed Consolidated Statement of Cash Flows (Unaudited)

For the six months ended June 30, 2022 and 2021

(in thousands)

		Successor			Predecessor
		June 30,			June 30,
		2022			2021
Cash flows from operating activities:
Net income (loss)		$	(24,904	)	$	6,060
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			9,197			408
Change in fair value in financial instruments			1,454			-
Gain on contingent consideration			(1,045	)		-
Share based compensation			662			-
Amortization of debt discount & issuance fees			2,935			-
Interest Expense - PIK			4,541			-

Change in operating assets and liabilities:
Accounts receivable			(1,407	)		(40	)
Prepaid expenses and other assets			1,593			(108	)
Inventories			1,392			(46	)
Accounts payable and accrued liabilities			3,222			607
Deferred tax liabilities			1,172			1
Net Cash Provided by (Used in) Operating Activities			(1,188	)		6,882

Cash flows from investing activities:
Purchases of property and equipment			(1,287	)		(3,276	)
Net cash used in investing activities			(1,287	)		(3,276	)

Cash flows from financing activities:
Proceeds from notes payable			-			1,780
Principal repayments of notes payable			(3,858	)		(34	)
Distributions to members			-			(3,856	)
Net Cash Used in Financing Activities			(3,858	)		(2,110	)

Net increase (decrease) in cash, cash equivalents and restricted cash			(6,333	)		1,496
Cash, cash equivalents and restricted cash, beginning of period			9,057			2,263
Cash, cash equivalents and restricted cash, end of period			2,724			3,759

Reconciliation of cash, cash equivalents and restricted cash
Cash and cash equivalents			981			3,759
Restricted cash			1,743			-
Total cash, cash equivalents and restricted cash, end of period		$	2,724		$	3,759

Supplemental disclosure of cash flow information
Cash paid for interest (net of interest capitalized)	$		2,870
Cash paid for income taxes	$		62

Supplemental disclosure of non-cash investing and financing activities
Investor shares released from lockup	$		1,390
Investor share settled liabilities	$		1,250
Settlement of Sponsor Notes	$		2,641
Reclass of accrued liability to note payable	$		10,423
Goodwill measurement period adjustment	$		5,867
Capital expenditures payable	$		16

The accompanying notes are an integral part of these financial statements.

The Greenrose Holding Company Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Nature of Operations and Summary of Significant Accounting Policies

The Company was originally incorporated in Delaware on August 26, 2019 as a special purpose acquisition company. The Company was formed for the purpose of entering into a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or similar business combination with one or more businesses or entities as completed on the Closing Date

On November 26, 2021 (the “Closing Date”) The Greenrose Holding Company Inc. (“Greenrose”, the “Company”, or “Successor”), formerly known as Greenrose Acquisition Corp., consummated its business combination (the “Theraplant Merger” or “Theraplant Business Combination”) with Theraplant, LLC, a Connecticut limited liability company (“Theraplant” or “Predecessor”), a private operating company. The Theraplant Business Combination was consummated pursuant to the Agreement and Plan of Merger dated March 12, 2021 (as amended pursuant to that certain Amendment No. 1, dated as of August 10, 2021, to the Agreement and Plan of Merger (“Amendment No. 1”), and that certain Amendment No. 2, dated as of November 26, 2021, to the Agreement and Plan of Merger (“Amendment No. 2”), collectively, the “Theraplant Merger Agreement”), pursuant to which GNRS CT Merger Sub, a Connecticut limited liability company and a wholly-owned subsidiary of Greenrose (“TPT Merger Sub”) was merged with and into Theraplant, with Theraplant surviving the Merger as a wholly owned subsidiary of Greenrose. The financial results described herein for the dates and periods prior to the Theraplant Business Combination relate to the operations of the Predecessor prior to the consummation of the Theraplant Business Combination. The Consolidated Financial Statements after the Closing Date include the accounts of the Company and its wholly owned subsidiaries including Theraplant.

On December 31, 2021, the Company and True Harvest Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“TH Buyer”), and True Harvest, LLC, an Arizona limited liability company (“True Harvest”), consummated the acquisition of substantially all of True Harvest’s assets and the assumption of certain of True Harvest’s liabilities (the “True Harvest Acquisition”), pursuant to that certain Asset Purchase Agreement dated March 12, 2021, as amended by that Amendment No. 1 to the Asset Purchase Agreement dated July 2, 2021, that certain Amendment No. 2 to the Asset Purchase Agreement dated October 28, 2021, and that certain Amendment No. 3 to the Asset Purchase Agreement dated December 31, 2021 (as it may be amended from time to time, the “Asset Purchase Agreement”).

The Company, through its wholly owned subsidiaries (Theraplant and True Harvest) is a multi-state grower and producer of cannabis products dedicated to providing patients options to improve their wellbeing. Theraplant is a Connecticut State licensed marijuana producer that hand selects premium cannabis genetics grown in a controlled, clean environment, under the watch of an award-winning cultivation team, and tested by a third-party laboratory for pesticides and microbiologics. True Harvest cultivates, manufactures, and sells medical marijuana in the State of Arizona, under a cultivation agreement with a third-party licensor, and holder of a medical marijuana dispensary registration certificate from Arizona Department of Health Services and is authorized to operate an off-site cultivation facility.

Following the transactions stated above, the Company has authorized; 150,000,000 shares of common stock with a par value of $0.001 per share, Preferred stock, $0.0001 par value; 1,000,000 shares authorized. See Note 13- Stockholders’ Equity/Members’ Equity, for additional details.

COVID-19

In March 2020, the World Health Organization declared the coronavirus (COVID-19) a global pandemic. The COVID-19 outbreak and the response of governmental authorities to try to limit it are having a significant impact on the private sector and individuals, including unprecedented business, employment and economic disruptions. Management has been closely monitoring the impact of COVID-19, with a focus on the health and safety of the Company’s employees, business continuity and supporting the communities where the Company operates. The Company has implemented various measures to reduce the spread of the virus, including implementing social distancing measures at its cultivation facilities, manufacturing facilities, and dispensaries, enhancing cleaning protocols at such facilities and dispensaries and encouraging employees to adhere to preventative measures recommended by local, state, and federal health officials.

It is not possible for the Company to predict the duration or magnitude of the adverse results of the outbreak and its effects on its business or results of operations at this time.

Liquidity and Going Concern

The Company’s primary sources of liquidity are cash from operations, cash and cash equivalents on hand. The Company’s primary requirements for liquidity are to fund its working capital needs, debt service, operating lease obligations, capital expenditures and general corporate needs. Theraplant is generating cash from sales and is deploying its capital reserves to acquire and develop assets capable of producing additional revenues and earnings over both the immediate and near term to support its business growth and expansion. With the True Harvest Acquisition, on December 31, 2021, we expect to be further generating cash from sales over the next 12 months. As of June 30, 2022, we maintained a cash and cash equivalents balance of $981 thousand, and $1,743 thousand of restricted cash with $106,192 thousand working capital deficit.

Based on forecasted expenditures related to the Company’s debt service and following the completion of the True Harvest Acquisition on December 31, 2021, after taking into account the Company’s cash flow projections, the Company does not believe it will have sufficient cash on hand or available liquidity to meet its obligations through the twelve months from the date of issuance of these consolidated financial statements. The Company expects cash flows to increase over time, but not in sufficient quantities in the short term to pay for expenses, without additional capital, or Connecticut adult use legalization. As a result, these conditions raise substantial doubt about our ability to continue as a going concern.

As a result of the substantial doubt about our ability to continue as a going concern, the Company has violated a debt covenant with one of its lenders. Further, the Company is required to comply with quantitative ratios including adjusted EBITDA, net leverage ratio and secured net leverage ratios. As of June 30, 2022, the Company is not in compliance with its financial covenants with its Term Loan facility. While no event of default has been declared nor has acceleration of indebtedness been triggered by our senior lender pursuant to the Credit Facility, the potential for such eventualities and potential cross defaults requires us to classify our long-term obligations as current liabilities. Upon the occurrence of such an event of default, if not timely cured, all amounts outstanding under our Credit Facility could be declared to be immediately due and payable, which is how our financial statements are presented. If indebtedness under our Credit Facility is accelerated, there can be no assurance that we will have sufficient assets to repay the indebtedness. The Company is actively working with the lender to cure the default; however, no assurances can be given as to the success of these actions. As reflected in more detail in Note 8, all debt with covenant violations and cross default clauses have been classified as current given the event of default. The only debt not considered current is the Imperial debt not due within the next twelve months which does not have a cross default clause.

The Company has certain debt obligations to sellers, our lender, and vendors which will require cash to meet their requirements. The Company’s ability to continue meeting these contractual obligations will be reliant upon its ability to secure significant additional capital funding or revise the contracts.

In 2022, the Company intends to revise its agreements with the Theraplant and True Harvest sellers to defer additional debt obligations and seek significant additional capital funding to stabilize its cash flow. However, there can be no assurance that such efforts will be successful or that, in the event that they are successful, the terms and conditions of such financing will be favorable.

Emerging Growth Company

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

Further, Section 102(b)(l) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, and (ii) the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of our management, our unaudited consolidated financial statements and accompanying notes (the “Consolidated Financial Statements”) include all normal recurring adjustments that are necessary for the fair statement of the interim periods presented. Interim results of operations are not necessarily indicative of results for the full year, or any other period. The Financial Statements should be read in conjunction with our audited consolidated financial statements (and notes thereto) in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”), as filed with the United States Securities and Exchange Commission (“SEC”).

As a result of the Theraplant Business Combination, the Company is the acquirer for accounting purposes and Theraplant is the acquiree and accounting predecessor. Theraplant was determined to be the accounting predecessor as the activity and operations of Theraplant will constitute substantially all the activity of the consolidated company in the period following the Theraplant Business Combination. The Company’s financial statement presentation distinguishes the Company’s financial performance into two distinct periods, the period up to the Closing Date/(labelled “Predecessor”) and the period after that date (labelled “Successor”).

The Theraplant Business Combination was accounted for using the acquisition method of accounting, and the Successor financial statements reflect a new basis of accounting that is based on the fair value of the net assets acquired.

Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions. See Note 2 - Business Combinations for a discussion of the estimated fair values of assets and liabilities recorded in connection with the Company’s acquisition of Theraplant.

As a result of the application of the acquisition method of accounting as of the Closing Date of the Theraplant Business Combination, the accompanying Consolidated Financial Statements include a black line division which indicates that the Predecessor and Successor reporting entities shown are presented on a different basis and are therefore, not comparable.

The historical financial information of Greenrose Acquisition Corp. (a special purpose acquisition company, or “SPAC”) prior to the Theraplant Business Combination has not been reflected in the Predecessor financial statements which are the only reflective of the financial position and operating results of Theraplant. Accordingly, no other activity of the SPAC was reported for any period prior to November 26, 2021. We round amounts in the Financial Statements to thousands, except per unit or per share amounts or as otherwise stated. We calculate all percentages, per-unit, and per-share data from the underlying whole-dollar amounts. Thus, certain amounts may not foot, cross foot, or recalculate based on reported numbers due to rounding. Unless otherwise indicated, all references to years are to our fiscal year, which ends on December 31.

Basis of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries, Theraplant and True Harvest as well as their wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and cash equivalents include cash deposits in financial institutions, other deposits that are readily convertible into cash, with original maturities of three months or less, and cash held at retail locations. The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. At June 30, 2022 and December 31, 2021 the Company had balances of cash totaling approximately $981 thousand and $7,240 thousand, respectively. As of June 30, 2022 and December 31, 2021, we did not hold any cash equivalents.

Restricted Cash

The Company is required to maintain cash collateral for two months of payments of the deferred cash payment incurred in connection with the Theraplant Business Combination discussed in Note 2. Accordingly, this balance contains restrictions as to the availability and usage and is classified as restricted cash in the consolidated balance sheet.

Marketable Securities

As of June 30, 2022, the Company designated its only marketable security as equity securities and classified it as trading. The Company determines the appropriate classification of marketable securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

The Company’s marketable securities are classified as trading and reported at fair value, with changes in fair value recognized through the Change in Fair Value of Financial Instruments on the Condensed Consolidated Statements of Operations. Fair value is based on quoted prices for identical assets in active markets. Realized gains and losses are determined on the basis for the actual cost of the securities sold. Dividends on equity securities are recognized in income when declared. No dividends from Marketable Securities were received during the period.

Accounts Receivable and Allowance for doubtful accounts

Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Allowances for doubtful accounts reflect the Company’s estimate of amounts in its existing accounts receivable that may not be collected due to customer claims or customer inability or unwillingness to pay. The allowance is determined based on a combination of factors, including the Company’s risk assessment regarding the credit worthiness of its customers, historical collection experience and length of time the receivables are past due. Though infrequent, if ever, account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered. No allowance for doubtful accounts was required as of June 30, 2022 or December 31, 2021.

Prepaid and Other Current Assets

Prepaid and other current assets consist of prepaid insurance premiums, other receivables, and packaging supplies. The Company pays for packaging and other similar products used to finish inventory well in advance of receipt of the goods.

Inventories

The Company’s inventories include the direct costs of seeds, labor, and growing materials, indirect costs such as utilities, labor, depreciation and overhead costs, and subsequent costs to prepare the products for ultimate sale, which include direct costs such as materials and direct labor, and indirect costs such as utilities and indirect labor. All direct and indirect costs related to inventory are capitalized when they are incurred, and they are subsequently classified to Cost of goods sold in the Condensed Consolidated Statements of Operations. Inventories purchased from third parties, which include work in process, finished goods, and packaging and supplies, are valued at the lower of cost and net realizable value. Costs incurred during the growing and production process are capitalized as incurred to the extent that cost is less than net realizable value. Cost is determined using the weighted average costing method. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated costs to sell. The Company reviews inventories for obsolete, redundant, and slow-moving goods and any such inventories identified are written down to net realizable value. As of June 30, 2022 and December 31, 2021 no reserve for inventories was required.

On February 8, 2020, one of the Theraplant’s grow rooms had a fire, destroying the plants housed within that room. The inventory was immediately adjusted down to account for the loss of plants. The insurance company paid for the repairs to the room, and a claim is still pending for lost revenues of $1,000 thousand the policy limit.

Property and Equipment, net

Property and equipment is stated at cost, net of accumulated depreciation and impairment losses, if any. Expenditures that materially increase the life of the assets are capitalized. Ordinary repairs and maintenance are expensed as incurred. Land and construction in process are not depreciated Depreciation is calculated on a straight-line basis over the estimated useful life of the asset using the following terms and methods:

Land Improvements		5 Years
Buildings and Improvements		10 – 39 Years
Furniture and Fixtures		1 – 7 Years
Computer Equipment and Software		2 – 3 Years
Vehicles		3 – 8 Years
Production and Processing Equipment		1 – 7 Years
Controls		3 – 14 Years
Leasehold Improvements		Shorter of 10 Years or Lease term

Income Taxes

Deferred taxes are provided using an asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is recorded to reduce the carrying amount of a deferred tax asset to its realizable value unless it is more likely than not that such asset will be realized. We recognize interest and penalties associated with tax matters as part of the income tax provision, if any, and include accrued interest and penalties with the related tax liability in the Condensed Consolidated Balance Sheet, if applicable.

Deferred tax assets and liabilities are measured using the enacted taxes rates. The effect on deferred tax assets and liabilities of a change in tax law or tax rates is recognized in income in the period that enactment occurs. As discussed further in Note 11—Income Taxes, the Company is subject to the limitations of Internal Revenue Code of 1986, as amended (“IRC”) Section 280E. Prior to the Theraplant Business Combination, the Predecessor’s members had elected to have the Predecessor treated as a partnership for income tax purposes. As such, the items of income, loss, deduction, and credit are passed through to, and taken into account by, the Predecessor’s members in computing their own taxable income.

The Predecessor is subject to the limits of IRC Section 280E under which it is only allowed to deduct expenses directly related to sales of product. This results in permanent differences between ordinary and necessary business expenses deemed non-allowable under IRC Section 280E.

The deferred tax amounts contained within Condensed Consolidated Balance Sheets arise from timing differences between federal and state depreciation regulations. There are no deferred tax liabilities on the Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021.

Revenue Recognition

For the periods ended June 30, 2022 and the periods ended June 30, 2021, the Company has adopted Financial Accounting Standards Board (“FASB”) Audit Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” and all the related amendments, which are also codified into Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”.

Through application of this standard, the Company recognizes revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.

In order to recognize revenue under ASC 606, the Company applies the following five (5) steps:

●

Identify a customer along with a corresponding contract;

●

Identify the performance obligation(s) in the contract to transfer goods or provide distinct services to a customer;

●

Determine the transaction price the Company expects to be entitled to in exchange for transferring promised goods or services to a customer;

●

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

●

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

Under Topic 606, revenue from the sale of cannabis products is a single performance obligation and revenue is recognized at the point in time when control of the product transfers and the Company’s obligations have been fulfilled. This generally occurs upon delivery and acceptance by the customer. Amounts disclosed as revenue are net of allowances, discounts, and rebates. Payment is typically due upon transferring the goods to the customer or within a specified time period permitted under the Company’s policy. Sales discounts were not material during the three and six month periods ended June 30, 2022 and the three and six month periods ended June 30, 2021.

A significant customer is defined to be those that individually comprise 10% or more of the Company’s revenues or accounts receivable. The following table reflects the revenues and accounts receivable for customers determined to be significant for the three months and six months ended June 30, 2022 and June 30, 2021 and as of June 30, 2022 and December 31, 2021, respectively.

	Accounts Receivable						Revenue						Revenue
	As of						For the Six Months Ended						For the Three Months Ended
	June 30, 2022			December 31, 2021			June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Customer A		12	%		25	%		15	%		27	%		13	%		27	%
Customer B		26	%		20	%		15	%		17	%		14	%		18	%
Customer C		*			16	%		*			*			*			*
Customer D		*			*			*			10	%		*			14	%
Customer F		18	%		17	%		*			14	%		12	%		15	%

Fair Value of Financial Instruments

The carrying amounts of financial instruments, including accounts receivable, marketable securities, accounts payable, accrued liabilities, and short-term borrowings, approximate fair value due to the short maturity of these instruments.

It is the Company’s policy, in general, to measure nonfinancial assets and liabilities at fair value on a nonrecurring basis. These items are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (such as evidence of impairment) which, if material, are disclosed in the accompanying notes to these consolidated financial statements.

Financial instruments recorded at fair value are classified using a fair value hierarchy that reflects the significance of the inputs to fair value measurements. The three levels of hierarchy are:

	Level 1:	Unadjusted quoted prices in active markets for identical assets or liabilities;

	Level 2:	Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; and

	Level 3:	Inputs for the asset or liability that are not based on observable market data.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes and related disclosures. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results ultimately may differ from the estimates.

The Company is subject to a number of risks similar to those of other companies of similar size and having a focus on serving the cannabis industry, including limited number of suppliers, acquisitions and integration, and government regulations.

Impairment of Long-Lived Assets

The Company accounts for its long-lived assets such as property and equipment in accordance with FASB ASC Topic No. 360, “Accounting for the Impairment or Disposal of Long-lived Assets” (“ASC 360”).

Management reviews long-lived assets for impairment whenever changes in events or circumstances indicate the assets may be impaired, but no less frequently than annually. Pursuant to ASC 360, an impairment loss is to be recorded when the net book value of an asset exceeds the undiscounted cash flows expected to be generated from the use of the asset. If an asset is determined to be impaired, the asset is written down to its realizable value, and the loss is recognized in the consolidated statement of operations in the period when the determination is made. No impairment charges for long-lived assets have been recorded for the three and six months ended June 30, 2022 and 2021.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution, which, at times may exceed the Federal Depository Insurance Coverage of $250 thousand. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.

Advertising

Advertising amounts are expensed as incurred. Advertising expense for the three and six months ended June 30, 2022 totaled $27 thousand $53 thousand, respectively. Advertising expense for the three and six month period ended June 30, 2021, totaled $183 thousand and $187 thousand, respectively.

Earnings Per Share

Basic and diluted earnings per share (“EPS”) are calculated in accordance with ASC 260, Earnings Per Share (“ASC 260”). Basic EPS is calculated by dividing net income (loss) attributable to the Company by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated, if applicable, by adjusting net income (loss) attributable to the Company and the weighted average number of common shares, taking into effect all potential dilutive common shares. Shares of restricted stock granted by us are considered to be legally issued and outstanding as of the date of grant, notwithstanding that the shares remain subject to the risk of forfeiture if the vesting conditions for such shares are not met, and are included in the number of shares outstanding disclosed on the cover page of this Quarterly Report on Form 10-Q. Weighted-average common shares outstanding excludes time-based and performance-based unvested shares of restricted Class A common stock, as restricted shares are treated as issued and outstanding for financial statement presentation purposes only after such shares have vested and, therefore, have ceased to be subject to a risk of forfeiture.

Segment Reporting

Operating segments are identified as components of an enterprise where separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions on how to allocate resources and assess performance. The Company operates in a single segment which is its only reportable segment: the production and sale of cannabis products. The Company has determined that its Chief Operating Decision Maker (“CODM”) is its Chief Executive Officer, and the CODM makes decisions based on the Company as a whole. In determining the Company’s segment, Management considered differences in products, geographic regions for which it operates in, and the differing regulatory environments.

Goodwill and Indefinite Life Intangible Assets

Goodwill, represents the excess of purchase price over the fair value of net assets acquired, is carried at cost in a transaction accounted for as a business combination in accordance with ASC 805. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. The Company is organized in one reporting unit and evaluates the goodwill for the Company as a whole. Goodwill is assessed for impairment on an annual basis as of November 1st of each year or more frequently if events or changes in circumstances indicate that the asset might be impaired. Under the authoritative guidance issued by the FASB, the Company has the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the goodwill impairment test is performed. The goodwill impairment test requires the Company to estimate the fair value of the reporting unit and to compare the fair value of the reporting unit with its carrying amount. If the fair value exceeds the carrying amount, then no impairment is recognized. If the carrying amount recorded exceeds the fair value calculated, then an impairment charge is recognized for the difference. There was no impairment of goodwill for the period ended June 30, 2022.

Indefinite life intangible assets are carried at cost less accumulated impairment losses. The Company reviews the classification each reporting period to determine whether the assessment made about the useful life is still appropriate. Any change is accounted for on a prospective basis as a change in estimate. Goodwill is currently the only indefinite lived intangible asset.

Stock-Based Compensation

The Company sponsors an equity incentive plan (the “Plan”) in which certain employees and non-employee directors participate. The Plan is administered by the compensation committee of the board of directors of the Company (the “Compensation Committee”). The Company measures the cost of services received in exchange for an award of equity instruments (typically restricted stock unit awards (“RSUs”) and stock options) based on the grant-date fair value of the awards issued under the Plan that are equity classified. Liability classified RSUs are valued based on the fair value of the stock at each reporting period until the date of settlement with changes in fair value recognized as increases or decreases in stock-based compensation expense in the accompanying consolidated statements of comprehensive income (loss) each reporting period over the period during which an employee or non-employee director is required to provide service in exchange for the awards, usually the vesting period. The fair value of the stock options is calculated using the Black-Scholes option-pricing model, and forfeitures are accounted for as they occur. Refer to Note 14 for further details of activity related to the Plan.

Derivative Liabilities

The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the instruments’ specific terms and applicable authoritative guidance in ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the instruments are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the instruments meet all of the requirements for equity classification under ASC 815, including whether the instruments are indexed to the Company’s own common shares and whether the instrument holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period end date while the instruments are outstanding.

For issued or modified instruments that meet all the criteria for equity classification, the instruments are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified instruments that do not meet all the criteria for equity classification, the instruments are required to be recorded at their initial fair value on the date of issuance, and each balance sheet date thereafter. Changes in the estimated fair value of the instruments are recognized as a non-cash gain or loss on the statements of operations.

Acquisitions

The Company accounts for business combinations using the acquisition method of accounting. On the date of the acquisition, we allocate the purchase price to the assets acquired and liabilities assumed at their estimated fair values. Goodwill on the acquisition date is measured as the excess of the purchase price over the fair values of assets acquired and liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date as well as contingent consideration, where applicable, our estimates are subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with corresponding adjustments to goodwill. We recognize subsequent changes in the estimate of the amount to be paid under contingent consideration arrangements in the accompanying Consolidated Statements of Operations. We expense acquisition-related costs as incurred.

For acquisitions that are not deemed to be businesses, the assets acquired are recognized based on their cost to the Company as the acquirer and no gain or loss is recognized. The cost of assets acquired in a group is allocated to the individual assets within the group based on their relative fair values and does not give rise to goodwill. Transaction costs related to acquisitions of assets are included in the cost basis of the assets acquired.

Contingencies and Litigation

The Company may be subject to lawsuits, investigations, and other claims related to employment, commercial, and other matters that arise out of operations in the normal course of business. We accrue for loss contingencies when losses become probable and are reasonably estimable. If the reasonable estimate of the loss is a range and no amount within the range is a better estimate, the minimum amount of the range is recorded as a liability. We recognize legal costs as an expense in the period incurred.

Recently Adopted Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, and also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023 for private companies, including interim periods within those fiscal years, with early adoption permitted. The Company has elected to early adopt ASU 2020-06 as of the Closing Date. The adoption of the standard did not have a material impact on the Company’s financial position, results of operations or cash flows.

New Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (“ASC 842”), which will replace ASC 840, “Leases”. This standard requires a lessee to recognize assets and liabilities for all leases with a term of more than twelve months unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. For emerging growth companies adopting under the private company timeline, the standard will be effective for annual periods beginning on or after December 15, 2021, with earlier application permitted. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Management is currently evaluating the impact of this pronouncement and expects to record additional lease liabilities and corresponding right-of-use assets related to the leased facility at True Harvest. However, management does not believe adoption of the standard would have a material effect on the Company’s operating results.

In June 2016, the FASB issued ASC 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to measure all expected credit losses for most financial assets held at the reporting date based on an expected loss model which includes historical experience, current conditions, and reasonable and supportable forecasts. Companies will now use forward-looking information to better form their credit loss estimates. ASU 2016-13 also requires enhanced disclosures to help financial statement users better understand significant estimates and judgements used in estimating credit losses, as well as the credit quality and underwriting standards of a company’s portfolio. For emerging growth companies, ASU 2016-13 is effective for annual periods beginning after December 15, 2022. Management does not believe that this pronouncement, if currently adopted, would have a material effect on the Company’s consolidated financial statements.

In November 2018 and April 2019, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses and ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, respectively. These amendments add clarity to certain areas within ASU 2016-13. In May 2019, the FASB issued ASU 2019-05, Financial Instruments - Credit Losses (Topic 326), Target Transition Relief, which provided transition relief for entities adopting ASU 2016-13 by allowing the election of the fair value option on certain financial instruments. The effective date and the transition methodology for the amendments in these updates are the same as in ASU 2016-13. Management does not believe that this pronouncement, if currently adopted, would have a material effect on the Company’s consolidated financial statements.

In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. This ASU addresses issues raised by stakeholders during the implementation of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as purchased credit-deteriorated (“PCD”) assets). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The ASU includes effective dates and transition requirements that vary depending on whether or not an entity has already adopted ASU 2016-13. Management does not believe that this pronouncement, if currently adopted, would have a material effect on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), which provides companies with optional financial reporting alternatives to reduce the cost and complexity associated with the accounting for contracts and hedging relationships affected by reference rate reform. This guidance is effective as of March 12, 2020 through December 31, 2022. Subsequently in January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which clarifies ASU 2020-04 and provides certain optional expedients that allow derivative instruments impacted by changes in the interest rate used for margining, discounting or contract price alignment to qualify for certain optional relief. ASU 2021-01 is effective in the same timeframe as ASU 2020-04. The relief offered by this guidance, if adopted, is available to companies for the period March 12, 2020 through December 31, 2022. Management does not believe that this pronouncement, if currently adopted, would have a material effect on the Company’s consolidated financial statements.

In May 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40)”. ASU 2021-04 reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. ASU 2021-04 provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. ASU 2021-04 will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. Management does not believe that this pronouncement, if currently adopted, would have a material effect on the Company’s consolidated financial statements.

2. Business Combinations

Theraplant, LLC

On November 26, 2021, the Company consummated the Theraplant Business Combination. Under the terms of the acquisition, the Company paid consideration of $153,040 thousand at close, consisting of $91,196 thousand in cash, $43,500 thousand in fair value of shares issued of the Company’s common stock, $9,616 thousand in the form of a convertible note, paid down $6,754 thousand of outstanding debt and agreed to pay an incremental $1,975 thousand based upon the sale of an investment and certain tax reimbursements on the date of the transaction.

This acquisition qualified as a business combination in accordance with ASC 805, Business Combinations (“ASC 805”). In accordance with the ASC 805, acquisition method of accounting, the purchase price allocation of assets acquired, and liabilities assumed of Theraplant are presented based on their estimated fair values as of the Closing. ASC 805 establishes a measurement period to provide the Company with a reasonable amount of time to obtain the information necessary to identify and measure various items in a business combination and cannot extend beyond one year from the acquisition date. Accordingly, the Company recorded an allocation of the acquisition consideration to Theraplant’s identified tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the Closing Date. The excess of the acquisition consideration over the fair value of the assets acquired and liabilities assumed was recorded as goodwill.

Preliminary Purchase Price Allocation

The following is a summary of the estimated fair values of the assets acquired and liabilities assumed (in thousands) as of the acquisition date on November 26, 2021:

Trade receivables	$	1,425
Inventory		7,965
Other Current Assets		593
Fixed Assets		16,074
Leafline Industries, LLC		2,259
Intangible assets		107,000
Accounts payable and other liabilities		(1,025	)
Accrued Liabilities		(1,173	)
Net identifiable assets acquired		133,118
Goodwill		19,922
Total acquisition consideration	$	153,040

The provisional fair values allocated to identifiable intangible assets and their estimated useful lives are as follows:

	Fair Value		Useful Life
	(In Thousands)		(In Years)
Trade name	$	4,000	3
Customer relationships		23,000	5
Licenses		80,000	10
Total	$	107,000

The assessment of fair value is preliminary and is based on information that was available to management and through the date these financial statements were available to be issued. If additional information of events or circumstances that existed at the acquisition date becomes available to management related to assets acquired or liabilities assumed subsequent to this preliminary assessment of fair value but not later than one year after the date of the acquisition, measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date.

Acquired personal property assets primarily consist of a furniture and fixtures, computer equipment and software, vehicles and production and processing equipment (“Personal Property”), which were valued primarily using a cost approach to estimate the replacement cost of the assets and consideration of depreciation based on the effective age of the asset. Acquired real property assets consist primarily of building and improvements as well as some land and land improvements (“Real Property”), which were valued based on a combination of the cost comparison and sales approaches. The cost approach estimated the replacement cost of the assets and consideration of an appropriate allowance for depreciation based on the effective ages of the assets relative to the expected physical lives and conditions of the assets while the sales comparison approach values similar properties that have been sold within a reasonable period from the valuation date.

Identifiable intangible assets acquired consist of customer relationships, trade names and cannabis licenses. The customer relationships were valued using the lost profits method which applies a with and without key customer scenario to determine the value of such relationships to the Company. The Company determined the useful life of the customer relationships to be 5 years based on similar market participant studies and the length of historical customer relationships. The trade name was valued using the relief-from-royalty method. The Company determined the useful life of the trade name to be 3 years because of the anticipated future use of the trade name and industry norms. The cannabis licenses were valued using the multi-period excess earnings method. The Company determined the useful life of the cannabis licenses to be 10 years as similar to other market participants within the industry. The identifiable intangible assets are amortized using the straight-line method over their respective useful lives.

Goodwill is recognized as the excess of consideration over the net assets acquired of Theraplant and represents the value derived by Theraplant’s market share and expected growth in the market. During the six months ended June 30, 2022, the Company recorded a measurement period purchase accounting adjustment of $247 thousand related to certain fixed assets purchased by the sellers on behalf of the Company, with a related impact to goodwill (see note 5).

True Harvest, LLC

On December 31, 2021, the Company closed its previously announced acquisition of the assets of Arizona-based True Harvest, LLC. Under the terms of the acquisition, The Company paid total consideration of $68,671 thousand, including $12,500 thousand in cash, $20,892 thousand in the form of a convertible note, and $14,399 thousand in fair value of shares issued of the Company’s common stock. In addition, Contingent upon True Harvest achieving a certain price point per pound of cannabis flower relative to total flower production within 36 months of the closing of the transaction, the Company will pay additional consideration of up to $35,000 thousand in the form of an earnout, payable in shares of common stock of the Company. The fair value of such contingent consideration was $20,880 thousand and is included in consideration transferred. Up to 1,100 thousand shares are contingently returnable to Greenrose if the Greenrose common stock price reaches $12.50 per share for 20 consecutive trading days, and the fair value of such contingently returnable shares has been determined to be $0 as of the date of the transaction.

This acquisition qualified as a business combination in accordance with ASC 805. In accordance with the ASC 805, acquisition method of accounting, the purchase price allocation of assets acquired, and liabilities assumed of True Harvest are presented based on their estimated fair values as of the Closing. ASC 805 establishes a measurement period to provide the Company with a reasonable amount of time to obtain the information necessary to identify and measure various items in a business combination and cannot extend beyond one year from the acquisition date. Accordingly, the Company recorded an allocation of the acquisition consideration to True Harvest’s identified tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values as of the Closing Date. The excess of the acquisition consideration over the fair value of the assets acquired and liabilities assumed was recorded as goodwill. During the six months ended June 30, 2022, we recorded a measurement period purchase accounting adjustment of $5,620 thousand related to the True Harvest acquisition, with a related impact to goodwill (see note 5).

Preliminary Purchase Price Allocation

The following is a summary of the estimated fair values of the assets acquired and liabilities assumed as of the acquisition date on December 31, 2021 without consideration of any measurement period adjustments which are reflected in Note 5:

(in thousands)

Inventory	$	4,705
Fixed assets		8,780
Other Assets		50
Intangible assets		8,000
Note Payable		(4,600	)
Net identifiable assets acquired		16,935
Goodwill		51,736
Total acquisition consideration	$	68,671

The provisional fair values allocated to identifiable intangible assets and their estimated useful lives are as follows:

	Fair Value		Useful Life
	(In Thousands)		(In Years)
Trade name	$	2,000		3
Customer relationships		6,000		5
Total	$	8,000

Identifiable intangible assets acquired consist of customer relationships and trade names. The customer relationships were valued using the lost profits method which applies a with and without key customer scenario to determine the value of such relationships to the Company. The Company determined the useful life of the customer relationships to be 5 years based on similar market participant studies and the length of historical customer relationships. The trade name was valued using the relief-from-royalty method. The Company determined the useful life of the trade name to be 3 years because of the anticipated future use of the trade name and industry norms. The identifiable intangible assets are amortized using the straight-line method over their respective useful lives.

Goodwill is recognized as the excess of consideration over the net assets acquired of True Harvest and represents the value derived by True Harvest’s market share and expected growth in the market.

3. Inventories

At June 30, 2022 and December 31, 2021 the Company’s inventories include the following:

	June 30,		December 31,
(in thousands)	2022		2021
Raw Materials	$	1,233	$	776
Work In Process		7,210		9,555
Finished Goods		2,678		2,182
Total Inventories	$	11,121	$	12,513

4. Property and Equipment

At June 30, 2022 and December 31, 2021, the Company’s property and equipment consisted of the following:

	June 30,			December 31,
(in thousands)	2022			2021
Land	$	700		$	700
Land Improvements		370			370
Buildings and Improvements		12,429			12,229
Furniture and Fixtures		323			323
Computer Equipment and Software		51			32
Vehicles		109			68
Production and Processing Equipment		5,525			5,036
Leasehold Improvements		7,063			6,444
Construction in Progress		26			91
Total Property and Equipment, Gross		26,596			25,293
Less accumulated depreciation		(1,381	)		(84	)
Property and Equipment, Net	$	25,215		$	25,209

Depreciation expense for the period three and six months ended June 30, 2022 totaled $721 thousand and $1,297 thousand, respectively, and $687 thousand and $1,252 thousand, was capitalized to inventory, respectively. Depreciation expense for the period three and six months ended June 30, 2021 totaled $201 thousand and $402 thousand and, respectively, and $191 thousand and $382 thousand, was capitalized to inventory, respectively. In conjunction with the Theraplant Business Combination and True Harvest Acquisition, the basis of all property and equipment was recognized at fair value in purchase accounting and therefore, no assets were carried over with accumulated depreciation.

There were no fixed asset impairments for the three or six months ended June 30, 2022 and June 30, 2021.

5. Goodwill and Intangible Assets, Net

During the six months ended 2022, the Company recorded a total measurement period adjustment of $5,867 thousand to decrease the contingent consideration for the True Harvest Acquisition and to reflect property and equipment purchased by the sellers of Theraplant, with a corresponding decrease to goodwill. The adjustment is related to the reduction of the sales and production calculation for the contingent consideration due to facts and circumstances that existed as of the balance sheet date but were not known. A roll forward of goodwill is as follows:

(in thousands)	Successor
Balance as of December 31, 2021	$	71,658
Measurement Period Adjustment		(5,867	)
June 30, 2022	$	65,791

No such adjustments were recorded as of December 31, 2021.

Intangible assets, net, consisted of the following:

	June 30, 2022						December 31, 2021
Intangible assets at June 30, 2022 (in thousands)	Amount		Accumulated Amortization		Net Carrying Value		Amount		Accumulated Amortization		Net Carrying Value
Trade Names	$	6,000	$	1,126	$	4,874	$	6,000	$	126	$	5,874
Customer Relationships		29,000		3,334		25,666		29,000		434		28,566
Licenses		80,000		4,756		75,244		80,000		756		79,244
	$	115,000	$	9,216	$	105,784	$	115,000	$	1,316	$	113,684

Amortizable trade name intangible assets stayed consistent from December 31, 2021. The weighted average amortization period for the trade name, customer relationships and licenses were three years, five years and ten years, respectively. For the Successor period, the balance of the intangible assets was recorded at fair value as a result of the Theraplant Business Combination as described in the Note 1 - Operations and Summary of Significant Accounting Policies and Note 2. - Business Combinations.

Amortization expense is classified in depreciation and amortization on the consolidated statements of operations. Amortization expense of the trade name intangible assets amounted to $500 thousand, customer relationships amortization amounted to $1,450 thousand and license amortization amounted to $2,000 thousand in the three months ended June 30, 2022. Amortization expense of the trade name intangible assets amounted to $1,000 thousand, customer relationships amortization amounted to $2,900 thousand and license amortization amounted to $4,000 thousand in the six months ended June 30, 2022. Estimated future amortization expense is as follows:

	Successor
(in thousands)	As of June 30, 2022
Remaining 2022	$	7,900
2023		15,800
2024		15,674
2025		13,800
2026		13,366
Thereafter		39,244
Total	$	105,784

6. Accounts Payable and Accrued Expenses

Accounts Payable and current accrued expenses and other consisted of the following:

(in thousands)	As of June 30, 2022		As of December 31, 2021
Accounts payable	$	3,447	$	1,530
Accrued payroll liabilities		245		198
Accrued expense		4,638		17,145
Deferred revenue		171		39
Accrued interest		3,132		4
Total accounts payable and accrued expenses	$	11,633	$	18,916

As of June 30, 2022, the accrued expenses primarily consists of $3,860 thousand relates to closing fees owed to the Lender of the Term Loan and Delayed Draw Term Loan as further discussed in Note 8 – Long-term Debt, and other ordinary course business expenses.

7. Due to Prior Members

The Company acquired an investment in Leafline Industries, LLC (“Leafline”) in connection with the Theraplant Business Combination, a Minnesota-based medical cannabis cultivator, processor, and retailer. During negotiations of the final merger consideration for Theraplant, it was announced that Leafline would be acquired by GreenThumb Industries, Inc. (“GreenThumb”). The Company agreed to pay, as consideration for Theraplant, 50% of the proceeds for the investment in Leafline after receipt of the proceeds.

The Company determined the enterprise value of Leafline to be $161,000 thousand. The enterprise value is based on the merger consideration for Leafline. The Company acquired 1.52% of Leafline’s equity through the Theraplant acquisition. In connection with the business combination accounting, the Company recorded the Leafline investment at its fair value of $2,259 thousand. The Company included 50% of the fair value of the Leafline investment as consideration for Theraplant. Additionally, the Company has a $1,130 thousand liability for the portion of proceeds from the Leafline investment owed to the former shareholders of Theraplant.

On December 30, 2021, Leafline shareholders, including the Company, completed a sale to GreenThumb for a combination of cash and share consideration. GreenThumb is a publicly traded cannabis company and therefore, the Company has marked its investment to market based on the publicly traded stock price which resulted $633 thousand and $1,694 thousand of investment in GreenThumb as marketable securities on the Condensed Consolidated Balance Sheet as of June 30, 2022 and December 31, 2021, respectively. The GreenThumb marketable security is included as a level I financial instrument.

The Company revalued the shares in GreenThumb based on the stock price as of June 30, 2022, resulting in a decrease in value of $842 thousand and $1,061 thousand for the three and six months ended, respectively which was included within other income (expense), net on the consolidated statement of operations. The Due to Prior members was reduced by $421 thousand and $531 for the three and six months ended June 30, 2022, respectively, for the former shareholders’ share of the investment. Refer to Note 9 for more information. As of June 30, 2022, the Company had received cash of $523 thousand with deferred cash consideration of $29 thousand still outstanding and included in Other Current Assets. Further, the Company has not remitted the consideration payment owed to the former shareholders of Theraplant including both cash and share consideration which has been included in Due to Prior Members on the consolidated balance sheet as of June 30, 2022.

8. Notes Payable

At June 30, 2022 and December 31, 2021 (Predecessor), note payable consisted of the following:

	June 30,			December 31,
	2022			2021
Term Loan (“Initial Term Loan”) dated November 26, 2021, in the original amount of $88,000,000, which matures November 26, 2024. Principal payments will be required upon the first sale of recreational cannabis in the state of Connecticut. Cash interest payments will be 7.5% for the first 12 months and will be 11% for the remainder of the loan. Additionally, the Company will pay PIK interest for the first 12 months at 8.5% and the remainder of the PIK will be paid at 5%.	$	88,000		$	88,000

Convertible Promissory note dated December 31, 2021, in the original amount of $23,000,000, which matures December 15, 2024. Interest (8% per annum) payments are due monthly through December 2024. A final balloon payment of all unpaid principal accrued unpaid interest will be due on the maturity date. The holder can elect to convert the unpaid principal and interest into shares of the Company’s common stock at $10 per share.		23,000			23,000

Term Loan (“Delayed Draw Term Loan”) dated December 31, 2021, in the original amount of $17,000,000, which matures November 26, 2024. Principal payments will be required upon the first sale of recreational cannabis in the state of Connecticut. Cash interest payments will be 7.5% for the first 12 months and will be 11% for the remainder of the loan. Additionally, the Company will pay PIK interest for the first 12 months at 8.5% and the remainder of the loan PIK will be paid at 5%		17,000			17,000

Three promissory notes: dated December 30, 2021, in the aggregate original amount of $4,600,000, which mature December 30, 2023: Equal payments of principal and interest are due monthly through December 2023. The loans each incur interest at 12% of the outstanding principal balance.		4,238			4,600

Convertible Promissory (“Deferred Cash Payment”) note dated November 26, 2021, in the original amount of $10,000,000, which matures November 26, 2022. Equal principal and interest (9%) payments are due monthly through November 2022. The holder can elect to convert the unpaid principal and interest into shares of the Company’s common stock at $10 per share.		7,448			9,167

Non-interest bearing promissory note (“Imperial Note”) dated April 13, 2022, in the original amount of $10,422,750, which matures on October 15, 2023. Principal payments, payable in shares of Company stock, are due quarterly through maturity. Any remaining principal balance due at maturity.		10,173			-
Total Notes Payable		149,859			141,767

Add: PIK Interest		5,272			731
Less: deferred finance costs		(6,120	)		(6,788	)
Less: discount on debt		(24,935	)		(27,203	)
Less: fair value adjustments (long term)		(4,270	)		(2,492	)
Less: current portion		(110,083	)		(106,015	)
Notes payable, net of current portion	$	9,723		$	-

Event of default

As discussed further in Note 1, there is substantial doubt about the Company’s ability to continue as a going concern. As a result of the Company not filing its annual financial statements within 90 days from year end as well as the qualified opinion of the auditors with respect to the Company’s ability to continue as a going concern, the Company is in technical default of the Term Loan and Delayed Draw Term Loan. Further, the Company’s Convertible Promissory Note and other Promissory Notes have cross default language which results in default of those notes due in the event of an uncured event of default on the Term Loan and Delayed Draw Term Loan; however, as of June 30, 2022 no event of default has been declared nor has acceleration of indebtedness been triggered by our senior lender pursuant to the Credit Facility. The potential for such eventualities and potential cross defaults require the company to classify long-term obligations as current liabilities. We are currently in active discussions with the lenders under our credit agreements (including certain of our related parties) for additional financing, a waiver of our compliance with covenants in and events of default under the credit agreements. As such, all of the notes payable, except for the Imperial Note have been classified within current liabilities as of June 30, 2022 and December 31, 2021.

The principal payments reflected within this table are based on the contractual terms within the respective agreements. The future principal payments below assume that all debt will be paid based on the contractual repayment terms.

Six Months Ending June 30**
Remaining 2022	$	9,411
2023		12,448
2024*		128,000
2025		—
2026		—
Thereafter		—
	$	149,859

Quarterly principal payments on the Term Loans in the amount of $5,000 thousand are required at the earlier of the second full fiscal quarter following the date of the introduction and implementation of the Adult Use Cannabis market in the state of Connecticut or the ninth fiscal quarter following November 26, 2021. Since the implementation of Adult Use Cannabis in the state of Connecticut has not been completed, the Company has included all such payments assuming the ninth fiscal quarter following the Closing Date. The 2024 principal payments exclude approximately $20,835 thousand in PIK interest accrued over the life of the term loans.

The principal payments reflected within this table are based on the contractual terms within the respective agreements. Effective at the time of issuance of these financial statements, each of the debt instruments issued by the Company are in default which has triggered, each of these instruments to classified as current. The payments above do not assume that all debt will be paid in 2022 but based on the contractual repayment terms.

In connection with the closing of the Theraplant Business Combination, the Company entered into a credit agreement (the “Credit Agreement”) with DXR Finance, LLC (“Lender”). The Lender provided an initial term loan (“Term Loan”) in the amount of $88,000 thousand. The funds from the Term Loan were used to fund the Theraplant Business Combination (see Note 2). Additionally, the Credit Agreement allows for a delayed draw term loan (the “Delay Draw Term Loan”) in amount equal to $17,000 thousand (together with the Term Loan “Term Loans”). The funds of the Delayed Draw Term Loan were used in the True Harvest Acquisition (see Note 2). Quarterly principal payments of $5,000 thousand are required at the earlier of the second full fiscal quarter following the date of the introduction and implementation of the Adult Use Cannabis market in the state of Connecticut or the ninth fiscal quarter following November 26, 2021. The term loans bear interest at fixed 16% with a minimum LIBOR rate of 1%. If the London interbank offered rate, or LIBOR, ceases to be published by the intercontinental exchange, or a statement is published by the Board of Governors of the Federal Reserve of the United State or the Federal Reserve Bank of New York to similar effect, then for the purpose of calculating the interest rate on outstanding borrowings, the new benchmark will be determined by combining the rate of the secured overnight financings for the Federal Reserve Bank of New York with certain applicable adjustments, as determined by DXR Finance, LLC, as agent for the loan. Of the 16% interest the Company will pay cash interest at 7.5% and payment-in-kind (PIK interest) at 8.5% for the first year. Subsequent to the first twelve months, the Company will pay cash interest at 11% and PIK interest at 5% of the outstanding balance. The PIK interest payments will be accrued into the outstanding balance of the loan.

In connection with the Credit Agreement, the Company issued warrants with each of the Term Loans. Contemporaneously with the Term Loan issued on November 26, 2021, the Company issued to the Lender 2,000 thousand warrants (“Lender Warrants”) exercisable in the Company’s non-voting common stock. The warrants have an exercise price of $0.01 and a expire 10 years from the date of issuance. The warrants have a cash election feature that allows the holder to elect cash settlement at the option of the holder.

On December 31, 2021, the Company amended the warrant agreement by adding a price floor to the cash election feature whereas the Lender can elect to net cash settle the warrants for an amount that is the greater of the fair market value of the Company’s share price or the price floor. The price floor starts at $6.00 per share and increases $1.00 in each subsequent year on the initial term loan anniversary date. Additionally, the expiration date of the warrants is now able to be extended by five successive one-year extensions if the sale of cannabis continues to be federally illegal at the expiration date (the fifth anniversary of the issuance date and subject to five 1-year extensions at the election of the holder).

Contemporaneously with the Delayed Draw Term Loan on December 31, 2021, the Company issued to the Lender 550,000 warrants. The terms of the warrants issued on December 31, 2021 are the same as the warrants issued on November 26, 2021, as amended.

In connection with the Theraplant Business Combination, the Company issued a $10,000 thousand deferred cash payment to the former shareholders of Theraplant convertible into shares of Greenrose common stock. The deferred cash payment bears interest at 9% and will mature on November 26, 2022 and has been fully included in current portion of notes payable on the consolidated balance sheet. Equal principal and interest payments are due monthly through November 2022. The holder has the option to convert the outstanding principal into the Company’s common stock at a conversion price is $10.00 and the number of shares to be issued will be based on the conversion price and the outstanding principal at the time of conversion. The deferred cash payment was included in consideration for the Theraplant Business Combination and was recorded at its initial fair value. There was no material change in the fair value at year end.

In connection with the True Harvest Acquisition, the Company issued a $23,000 thousand convertible note to the former shareholders of True Harvest. The note bears interest at 9% and will mature on December 31, 2024. Interest payments of $460 thousand are due monthly through November 2022. On December 31, 2024, the Company will make a final “balloon” payment of all unpaid principal and accrued unpaid interest. The note holder has the option to convert the outstanding principal into the Company’s common stock. The conversion price is $10.00 and the number of shares to be issued will be based on the conversion price and the outstanding principal and accrued and unpaid interest at the time of conversion. The convertible note was included in consideration for the True Harvest Acquisition and was recorded at its initial fair value.

In connection with the True Harvest Acquisition, the Company assumed approximately $4,600 thousand of debt. The debt consisted of three promissory notes (the “Promissory Notes”). The Promissory Notes mature December 2023 and bear interest at 12% of the outstanding loan principal. Equal interest and principal payments are due each month.

Troubled Debt Restructuring

On April 13, 2022, the Company entered into an amended engagement letter with Imperial, whereby the Company has engaged Imperial to serve and act as non-exclusive merger and acquisition advisor in connection with potential (i) mergers or stock or asset acquisitions or (ii) sales or other dispositions of business or assets of the Company involving one or more businesses engaged in the medical and/or adult-use recreational cannabis business. Simultaneously with the entry of the Engagement Letter, Greenrose issued a non-interest bearing promissory note in the face amount of $10,423 thousand and maturing October 15, 2023 (the “Note”) to Imperial. All fees earned and paid to Imperial by the Company under the Engagement Letter shall reduce the principal amount owed and payable to Imperial. The shares of common stock issued in connection with the retainer will be unregistered shares issued in a private placement exempt from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, and be subject to periodic registration rights.

The amended arrangement with Imperial constitutes a troubled debt restructuring (“TDR”) as the Company is experiencing financial difficulties and a concession has been granted by Imperial. When a borrower has a TDR in which the terms of its debt are modified, it should analyze the future undiscounted cash flows to determine the appropriate accounting treatment. The recognition and measurement guidance for a TDR depends on whether the future undiscounted cash flows specified by the new terms are greater or less than the carrying value of the debt. The Company determined that the future undiscounted cash flows under the new terms were equal to the net carrying value of the original debt, therefore, the Company did not recognize a gain on restructuring.

Interest expense, net

The components of interest expense, net (which includes interest expense incurred) recognized in the consolidated statements of comprehensive income (loss) for the periods indicated below consist of the following:

	Three Months Ended				Six Months Ended
	Successor		Predecessor		Successor		Predecessor
	June 30,		June 30,		June 30,		June 30,
(in thousands)	2022		2021		2022		2021
Interest expense incurred in Initial Term Loan	$	4,242	$	-		8,374	$	-
Interest expense incurred on Delayed Draw Term Loan		373		-		734		-
Interest expense incurred on deferred cash payment		133		-		321		-
Interest expense on Assumed Debt		578		-		1,147		-
Misc. interest expense		4		44		18		77
Amortization of deferred financing costs		355		-		667		-
Amortization of original issue discount		1,225		-		2,268		-
Interest expense, net	$	6,910	$	44		13,529	$	77

Deferred Financing Costs and Original Issue Discount

The Company incurred and deferred approximately $6,788 thousand of deferred financing costs and approximately $27,203 thousand of original issue discount in connection with the issuance of the Term Loans in 2021 in connection with the Theraplant Business Combination and True Harvest Acquisition. Unamortized original issue discount and deferred financing costs are included in the carrying value of the Term Loans as of June 30, 2022. The amortization expense related to the deferred financing costs was $356 thousand and $668 thousand and the amortization of the original issue discount was $1,225 thousand and $2,268 thousand for the three and six months ended June 30, 2022, respectively, which has been included within interest expense in the consolidated statement of operations. No deferred financing costs or original issue discount existed for the three and six months ended June 30, 2021.

9. Fair Value Measurement

The Company follows the guidance relating to fair value measurements and disclosures with respect to financial assets and liabilities that are re-measured and reported at fair value each reporting period, and with respect to non-financial assets and liabilities that are not required to be measured at fair value on a recurring basis. The guidance establishes a fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level I) and the lowest priority to unobservable pricing inputs (Level III). A financial asset or liability’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below:

Level I - Valuations are based on unadjusted quoted prices in active markets for identical, unrestricted assets or liabilities;

Level II - Valuations are based on quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active. Financial asset or liabilities which are included in this category are securities where all significant inputs are observable, either directly or indirectly; and

Level III - Prices or valuations that are unobservable and where there is little, if any, market activity for these financial assets or liabilities. The inputs into the determination of fair value inputs for these investments require significant management judgment or estimation. The availability of observable inputs can vary depending on the financial asset or liability and is affected by a wide variety of factors. To the extent that valuation is based on inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment.

The fair values of the Company’s Level II derivative instruments were determined using valuation models that use market observable inputs including interest rate curves and both forward and spot prices for commodities. Derivative assets and liabilities included in Level II primarily represent debt and the Company’s private warrants.

The fair values of the Company’s Level III derivative instruments were determined using valuation models that use inputs not observed in the market including cannabis production and both forward and spot prices for commodities. Derivative assets and liabilities included in Level III primarily represent earnout obligation shares related to the True Harvest acquisition, warrants issued to the Lender as well as the Investor Shares.

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of June 30, 2022:

(in thousands)	Level I		Level II		Level III		Total
Assets:
Marketable Security		633		—		—		633
Total assets	$	633	$	—	$	—	$	633

Liabilities:
True Harvest Convertible Note	$	—	$	—	$	19,040	$	19,040
True Harvest Earnout		—		—		14,215		14,215
Deferred Cash Payment		—		—		7,138		7,138
Lender Warrants		—		—		16,958		16,958
Private Warrants Liability		—		556		—		556
Total liabilities	$	—	$	556	$	57,351	$	57,907

The Company has assessed that the fair value of cash and cash equivalents, trade receivables, related party receivables, trade payables, other current liabilities, and other debt approximates their carrying amounts largely due to the short-term maturities or recent commencement of these instruments.

The following table summarizes financial instruments carried at amortized cost with fair values that are different than their carrying amounts:

	June 30, 2022
Financial Assets (Liabilities) Not Measured at Fair Value	Carrying Amount			Fair Value
Term Loan (see Note 8) - Level 3	$	(92,538	)	$	(93,080	)
Delayed Draw Term Loan (See Note 8) - Level 3	$	(17,734	)	$	(17,840	)
Promissory notes (See Note 8) - Level 3	$	(4,238	)	$	(3,420	)
Imperial Note (See Note 8) – Level 3	$	(10,173	)	$	(5,950	)

In connection with the True Harvest Acquisition, the Company issued contingent consideration with a value of up to $35,000 thousand (the “Earnout”). During the six months ended June 30, 2022, the Company recorded a measurement period adjustment of $5,867 thousand to decrease the contingent consideration for the True Harvest acquisition, with a corresponding decrease to goodwill. The adjustment is related to the reduction of the sales and production calculation for the contingent consideration. The consideration is contingent on the future performance of the acquired business and its associated activities during the three-year period following the transaction. Specifically, the Earnout will be based on the average of the Weighted Average Annual Price Points in each of the three years (the 36 Month Price Point), where Weighted Average Annual Price Point is defined as (i) the total revenue of the Company, divided by (ii) the total weight in pounds of flower product produced. The Earnout will then be satisfied with shares of Greenrose common stock and will be due on the earlier of (i) January 15, 2025 or (ii) the date upon which the Seller provides Greenrose with written notice of its acceptance of the Earnout Statement and the Earnout amount calculated therein.

The fair value of the Earnout was estimated using a Monte Carlo simulation assuming Geometric Brownian Motion (GBM) in a risk-neutral framework and is based on the present value of the average of the simulated Earnout payments across 1,000,000 simulation paths. The primary assumptions used in the Monte Carlo simulation include the company’s forecast of revenue and production, the correlation between these two-underlying metrics, the discount rate, volatility, credit spread, and risk-free rate. Changes to the forecasts for the achievement of the milestones, and the estimates of the borrowing rate can significantly affect the estimated fair value of the contingent consideration. The significant unobservable inputs used in the analysis are detailed in the table below. During the six months ended June 30, 2022, the Company recorded a measurement period adjustment of $5,620 thousand to decrease the contingent consideration for the True Harvest acquisition, with a corresponding decrease to goodwill. The Company also recorded a gain on consideration of $1,045 thousand recognized in Other income (expense) in the Condensed Consolidated Statement of Operations to decrease the consideration during the three and six months ended June 30, 2022. The adjustment is related to the reduction of the sales and production calculation for the contingent consideration. As of June 30, 2022, this contingency was measured as $14,215 thousand.

	June 30,
	2022
Volatility		22.50	%
Discount Rate		16.10	%
Term (in years)		2.50
Probability of Achievement		0 - 100	%

On November 26, 2021, as part of the consideration transferred for Theraplant’s net assets, the Company issued a $10,000 thousand Deferred Cash Payment with a one-year term to the former shareholders of Theraplant. The deferred cash payment incurs 9% interest and equal principal, and interest instalments are payable each month. Additionally, the outstanding principal is convertible into the Company’s common stock at a price per share of $10.00 at the election of the note holder. The fair value of the Deferred Cash Payment was calculated as the sum of (i) the fair value of the contractual cash flows, absent the option to convert estimated using the discounted cash flow analysis and (ii) the fair value of a call option with the same exercise price and term as those of the Deferred Cash Payment Amount estimated using the Black-Scholes-Merton model. The primary assumptions used in the analysis include the price of Greenrose common stock at the Valuation Date, the volatility of Greenrose common stock, the risk-free rate, and the credit spread of Greenrose. The significant unobservable inputs used in the analysis are detailed in the table below.

	June 30,
	2022
Volatility		45.41	%
Credit Spread		12.11	%
Risk-Free Rate		2.20	%
Term (in years)		0.41
Conversion Price	$	10.00

On December 31, 2021, as part of the consideration transferred for True Harvests’ net assets, the Company issued a $23,000 thousand convertible promissory note with a three-year term to the former shareholders of True Harvest. The convertible promissory note incurs 8% interest and starting on March 31, 2022, the Company will make interest payments of accrued interest each quarter. On the maturity date, the Company will make a final balloon payment of all unpaid principal, accrued unpaid interest Additionally, the outstanding principal is convertible into the Company’s common stock at a price per share of $10.00 at the election of the note holder.

The fair value of the Convertible Promissory Note was calculated as the sum of (i) the fair value of the contractual cash flows, absent the option to convert estimated using the discounted cash flow analysis and (ii) the fair value of a call option with the same exercise price and term as those of the Convertible Promissory Note estimated using the Black-Scholes-Merton model. The primary assumptions used in the analysis include the price of Greenrose common stock at the Valuation Date, the volatility of Greenrose common stock, the risk-free rate, and the credit spread of Greenrose. The significant unobservable inputs used in the analysis are detailed in the table below.

	June 30,
	2022
Volatility		45.41	%
Credit Spread		10.85	%
Risk-Free Rate		2.92	%
Term (in years)		2.50
Conversion Price	$	10.00

On November 26, 2021, in connection with the term loan issued for the Theraplant Business combination, the Company issued certain rights to acquire up to 2,000 thousand shares of the Company’s non-voting common stock. Further, on December 31, 2021, in connection with the Delayed Draw Term Loan issued for the True Harvest Acquisition, the Company issued certain rights to acquire up to 600 thousand shares of the Company’s non-voting common stock. These warrants were issued to DXR Holdings, collectively, referred to as the “Lender Warrants”. The Lender Warrants have an exercise price of $0.01 per warrant (i.e., penny warrants) and the holder can exercise the right to purchase the common stock in part or in whole at any time or from time to time. The warrants are immediately exercisable from the date of the agreement and the holder of the warrants is allowed to transfer or assign the rights of the warrants to any person or party as long as the transfer would not violate U.S. federal or state securities law. On December 31, 2021, the Company amended the warrants to include a price floor to the cash election feature whereas the Holder can elect to net cash settle the warrants for an amount that is the greater of the fair market value of the Company’s share price or the price floor. The price floor starts at $6.00 per share and increases $1.00 in each subsequent year on the initial term loan anniversary date. Additionally, the expiration date of the warrants is now able to be extended by five successive one-year extensions if the sale of cannabis continues to be federally illegal at the expiration date (the fifth anniversary of the issuance date and subject to five 1-year extensions at the election of the holder).

The fair value of the Lender Warrants was estimated using a binomial lattice model in a risk-neutral framework. The fair value was estimated by backwards inducting values in the binomial lattice model form the final nodes to the initial node using daily time steps. The holders of the Lender Warrants have the option to extend the life of the warrant up to 5 years. The fair value of the extension option was determined to have de minimis impact on the fair value of the Lender Warrants. The significant unobservable inputs used in the analysis are detailed in the table below.

	June 30,
	2022
Common Stock Price	$	2.52
Risk-Free Rate		2.96	%
Credit Spread		10.41	%
Volatility		45.41	%
Dividend Yield		0	%

Refer to Note 12 – Financial Instruments for a summary of the changes in the fair value of the Company’s Level 3 financial instruments.

During the periods presented, the Company has not changed the manner in which it values liabilities that are measured at fair value using Level 3 inputs. The Company recognizes transfers between levels of the fair value hierarchy as of the end of the reporting period. There were no transfers between the hierarchy levels during the three and six months ended June 30, 2022 and June 30, 2021.

10. Commitments and Contingencies

Contingencies

The Company’s operations are subject to a variety of local and state regulations. Failure to comply with one or more of those regulations could result in fines, restrictions on its operations, or losses of permits that could result in the Company ceasing operations. While management of the Company believes that the Company is in compliance with applicable local and state regulations at June 30, 2022 and June 30, 2021, medical cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company may be subject to regulatory fines, penalties, or restrictions in the future.

On January 6, 2022 (the “Termination Date”), Futureworks LLC (“Futureworks”) notified the Company that it was terminating the Agreement and Plan of Merger (the “Merger Agreement”), dated March 12, 2021, by and between Futureworks, the Company (formerly known as Greenrose Acquisition Corp.) and Futureworks Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of Greenrose (“FW Merger Sub”). Pursuant to the Merger Agreement, Futureworks was expected to be merged with and into FW Merger Sub (the “Futureworks Merger”), with FW Merger Sub surviving the Merger as a wholly owned subsidiary of Greenrose. All related ancillary agreements entered into on March 12, 2021, in connection with the Futureworks Merger and the Purchase Agreement were also terminated on the Termination Date. The material terms and conditions of the Merger Agreement were previously disclosed in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on March 12, 2021 and are incorporated by reference herein.

Claims and Litigation

Reference made to the Agreement and Plan of Merger dated as of March 12, 2021 between the Company and Futureworks LLC, a Delaware limited liability company, which Futureworks terminated on January 6, 2021, as disclosed in the Company’s Report on Form 8-K dated January 12, 2022. In a letter dated April 13, 2022, counsel to Futureworks alleged breach of the Futureworks Agreement and Plan of Merger by the Company and threatened legal action if Futureworks’ purported claims are not settled. The Company believes Futureworks alleged claims lack merit. In the event Futureworks commences an action against the Company in connection with the terminated Futureworks Agreement and Plan of Merger, the Company believes it has meritorious defenses and will defend itself vigorously.

On June 1, 2022, the Company received a Legal Demand Letter from counsel to the Theraplant Selling Stockholders’ Representatives relating to, among other things, the Company’s failure to make certain payments under the Theraplant Merger Agreement. The demand seeks payment of all amounts that were due.

As disclosed in the Company’s Form 8-K of July 5, 2022, the Company, on June 28, 2022, received a complaint filed by Shareholder Representative against the Company in the Connecticut Superior Court (the “Complaint”). In the Complaint, the Shareholder Representative generally alleges breach of contract, breach of the covenant of good faith and fair dealing, and conversion with respect to the Theraplant Merger Agreement between the Plaintiff, as representative of the Selling Securityholders of Theraplant, and the Company.

On August 3, 2022, Shareholder Representative filed in the Connecticut Superior Court (i) an amended complaint against the Company (the “Amended Complaint”) and (ii) an application for prejudgment remedy seeking to attach property of the Company to secure a requested $6,000 thousand judgment. The Amended Complaint, like the Complaint, generally alleges breach of contract, breach of the covenant of good faith and fair dealing, and conversion and included a new allegation that the Company made payments of up to an aggregate of $600 thousand to families of certain Greenrose officers and such payments were either excessive or for services or work not performed. The Company intends to defend itself vigorously.

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. At June 30, 2022 (Successor) and 2021 (Predecessor), other than described above, there were no further pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of the Company’s consolidated operations. There are also no proceedings in which any of the Company’s significant shareholders, officers, or affiliates are an adverse party or have a material interest adverse to the Company’s interest.

Leases

The Company manages and operates a facility located at 4301 W. Buckeye, Phoenix, AZ (the “Facility”) to cultivate and manufacture medical marijuana since the inception of True Harvest, expanding cultivation space within the Facility over time. The Facility is under a ten-year lease since 2017 with a ten-year renewal option.

The Company leases the Facility from a third party since its inception in 2015. The Company entered into a new lease agreement for the Facility in 2017 with a lease term of 10 years and has an option to extend the lease term for a period of 10 years. Lease payments are annually escalated over the lease term and the Company recognizes lease expense on a straight-line basis. The Company recognized lease expense or for the three and six months ended June 30, 2022 of $365 thousand and $715 thousand. $349 thousand and $699 thousand of the lease expense was included in inventory for the three and six months ended June 30, 2022. There was no lease expense for the three and six months ended June 30, 2021, as the lease was part of the True Harvest Acquisition which was completed on December 31, 2021.

The Company operates a corporate office at 111 Broadway, Amityville, NY. The office is the Company’s registered office and headquarters. The office paid for on a month-to-month basis, with no restrictions upon exiting the property. As such, there are no commitments as part of the lease and it is not included in the table, below.

Future minimum payments, to third parties, by year and in the aggregate, consisted of the following as of June 30, 2022:

SEC Form 10-Q filed by Greenrose Acquisition Corp.