Quarterly report pursuant to Section 13 or 15(d)

BUSINESS COMBINATIONS

v3.21.2
BUSINESS COMBINATIONS
9 Months Ended
Sep. 30, 2021
BUSINESS COMBINATIONS  
NOTE 5. BUSINESS COMBINATIONS

NOTE 5 – BUSINESS COMBINATIONS

 

Umbrla, Inc.

 

On July 1, 2021, the Company completed the acquisition of Umbrla, Inc. Pursuant to Articles of Merger filed by the Company with the Nevada Secretary of State, which became effective upon filing on July 1, 2021. UMBRLA became a wholly owned subsidiary of the Company. The acquisition of Umbrla was accounted for in accordance with ASC 805-10, “Business Combinations.” The preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s estimates and assumptions of the assets acquired and liabilities assumed were subject to change within the measurement period pending the finalization of a third-party valuation. The multi-period excess earnings method, an income approach, was utilized to estimate the fair value of UMBRLA customer relationships. The relief-from-royalty method, an income approach, was utilized to estimate the fair value of UMBRLA trade name.

 

Consideration for the merger consisted of 191,772,781shares of common stock issued on the acquisition date, 23,424,674 shares of common stock reserved for issuance in one year, and the assumption of all of UMBRLA’s stock options and warrants outstanding as of July 1, 2021. The fair value of the components of the purchase price is summarized below (in thousands):

 

Purchase Price (in thousands):

 

 

 

 

 

 

 

Stock

 

$ 52,929

 

Liability for holdback shares

 

 

6,465

 

Stock options assumed

 

 

9,695

 

Warrants assumed

 

 

10,733

 

Total consideration

 

$ 79,822

 

The preliminary allocation of the purchase price was based upon a preliminary valuation, and the Company’s estimates and assumptions of the assets acquired and liabilities assumed were subject to change within the measurement period pending finalization of a third-party valuation. The relief-from-royalty method, an income approach, was utilized to estimate the fair value of Umbrla’s trade name. The multi-period excess earnings method was utilized to estimate the fair value of Umbrla’s licenses. The following table summarizes the preliminary allocation of the purchase price (in thousands):

 

 

 

(in thousands)

 

Assets acquired

 

 

 

Cash

 

$ 1,290

 

Accounts receivable

 

 

5,831

 

Inventory

 

 

16,702

 

Prepaid & other current assets

 

 

1,543

 

Fixed assets

 

 

1,450

 

Notes receivable

 

 

750

 

Other long-term assets

 

 

3

 

Right-of-use asset

 

 

460

 

Trade name

 

 

28,980

 

Licenses

 

 

32,950

 

Goodwill

 

 

11,881

 

Total assets acquired

 

$ 101,840

 

 

 

 

 

 

Liabilities assumed

 

 

 

 

Accounts payable/accrued expenses

 

$ 15,350

 

Short-term lease liability

 

 

379

 

Long-term lease liability

 

 

80

 

Short-term debt

 

 

4,796

 

Long-term debt

 

 

624

 

Deferred income

 

 

288

 

Contingent liabilities

 

 

500

 

Total liabilities assumed

 

$ 22,017

 

 

During the three months ended September 30, 2021, the Company recognized $15.9 million of revenue and a net loss of $2.0 million from UMBRLA. In the view of management, goodwill reflects the future cash flow expectations for UMBLRA market position in the cannabis industry, synergies and the assembled workforce. Goodwill recorded for the UMBRLA transaction is non-deductible for tax purposes.

 

People’s California

 

On August 15, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with People’s California, LLC, a California limited liability company (“People’s California”) and People’s First Choice, LLC, a California limited liability company and wholly owned subsidiary of People’s California (the “Target”), which operates cannabis dispensary operations. Upon the terms and subject to the satisfaction of the conditions described in the Purchase Agreement, the Company will acquire 100% of the outstanding equity of the Target in two separate closings (the “Acquisition”), with 80% of the equity of the Target transferred at the first closing and the remaining 20% of the equity transferred at the second closing.

 

At the first closing of the Acquisition, People’s California shall receive from the Company: (a) a cash payment of $24,000,000 less certain outstanding indebtedness and transaction expenses related to the Acquisition; (b) a secured note in an aggregate principal amount of $36,000,000 less certain indebtedness; and (c) 40,000,000 shares of Company common stock valued at $0.40 per share, subject to terms and conditions of a stockholder’s agreement by and between the Company and People’s California, which includes a one-year lockup of the shares. The Purchase Agreement is subject to customary indemnification provisions.

 

On August 4, 2021, in connection with the Acquisition, People’s California issued senior secured indebtedness to the Company, pursuant to the terms of a certain Secured Promissory Note (the “Deposit Note”). The Deposit Note provided for a one-time advance of $6.00 million (the “Loan”) by the Company to People’s California at a flat rate of 3% per annum. The Deposit Note matures on August 4, 2022.

 

The full principal balance and all outstanding but unpaid interest is due and payable at the maturity date of August 4, 2022; provided that, if the Company consummates the first closing, pursuant to the terms of the Purchase Agreement, then the principal amount of the Deposit Note, but not the accrued interest, shall be deemed repaid, satisfied, or otherwise applied to the cash consideration paid for the equity of the Target and the Deposit Note shall be deemed satisfied.

 

On September 1, 2021, in connection with the Acquisition, People’s California issued senior secured indebtedness to the Company, pursuant to the terms of a certain Secured Promissory Note (the “Second Deposit Note”). The Second Deposit Note provided for a one-time advance of $9.00 million (the “Loan”) by the Company to People’s California at a flat rate of 3% per annum. The Second Deposit Note matures on September 1, 2022.

 

The full principal balance and all outstanding but unpaid interest is due and payable at the maturity date of September 1, 2022; provided that, if the Company consummates the first closing, pursuant to the terms of the Purchase Agreement, then the principal amount of the Second Deposit Note, but not the accrued interest, shall be deemed repaid, satisfied, or otherwise applied to the cash consideration paid for the equity of the Target and the Second Deposit Note shall be deemed satisfied.

 

As of November 15, 2021, this transaction has not yet been completed.

On September 1, 2021, the Company entered into a Management Agreement with the Target, which provided the Company with control over the Target’s operation and finances. Management concluded that effective September 1, 2021, the Company became the primary beneficiary of the Target as a result of the Management Agreement, and began consolidating the Target’s financial results. The Company applied acquisition accounting on September 1, 2021 and allocated the fair value of the Target to its assets and liabilities. The preliminary valuation of the Target was based on the purchase price described below (in thousands):

  

Purchase Price (in thousands):

 

 

 

 

 

 

 

Cash

 

$ 24,000

 

Note payable

 

 

33,749

 

Common stock

 

 

16,000

 

Total consideration

 

$ 73,749

 

  

The preliminary allocation was based upon the Company’s estimates and assumptions of the assets acquired and liabilities assumed are subject to change within the measurement period pending the finalization of a third-party valuation. The following table summarizes the preliminary allocation of the purchase price:

 

 

 

(in thousands)

 

Assets acquired

 

 

 

Cash

 

$ 968

 

Inventory

 

 

662

 

Prepaids

 

 

91

 

Fixed Assets

 

 

437

 

Right-of-use asset

 

 

2,105

 

Trade name

 

 

21,630

 

Licenses

 

 

45,990

 

Goodwill

 

 

5,522

 

Total assets acquired

 

$ 77,405

 

 

 

 

 

 

Liabilities assumed

 

 

 

 

Accounts Payable/Accruals

 

$ 1,551

 

Short-term lease liability

 

 

540

 

Long-term lease liability

 

 

1,565

 

Total liabilities assumed

 

$ 3,656

 

 

Supplemental Pro-Forma Information

 

Supplemental information on an unaudited pro-forma basis is reflected as if the Umbrla and People’s California acquisitions had occurred at the beginning of 2020, after giving effect to certain pro forma adjustments primarily related to amortization of acquired intangible assets.

  

The unaudited pro-forma supplemental information is based on estimates and assumptions that the Company believes are reasonable. The supplemental unaudited pro-forma financial information is presented for comparative purposes only and is not necessarily indicative of what the Company’s financial position or results of operations actually would have been had the Company completed the acquisitions at the dates indicated, nor is it intended to project the future financial position or operating results of the Company as a result of the Purchase Agreement.

 

 

 

Three Months Ended,

 

 

 

September 30,

 

 

September 30,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

 

(unaudited)

 

Pro-forma revenues

 

$ 52,413

 

 

$ 23,455

 

Pro-forma net loss from continuing operations

 

$ (17,536 )

 

$ (30,243 )

 

 

 

Nine Months Ended,

 

 

 

September 30,

 

 

September 30,

 

 

 

2021

 

 

2020

 

 

 

(unaudited)

 

 

(unaudited)

 

Pro-forma revenues

 

$ 118,992

 

 

$ 71,658

 

Pro-forma net loss from continuing operations

 

$ (91,343 )

 

$ (79,739 )