SEC Info - Acreage Holdings, Inc. - ‘10-Q’ for 9/30/22

i 3,861

i 106,903

i 756,536

( i 21,054)

( i 538,215)

i 197,267

i 7,003

i 204,270

NCI adjustments for changes in ownership

—

i —

i 5

—

i 5

( i 5)

i —

Equity-based compensation expense and related issuances

—

i 508

i 4,159

—

i 4,159

—

i 4,159

Net loss

—

( i 12,694)

( i 1,217)

( i 13,911)

March 31, 2022

i 3,861

i 107,411

i 760,700

( i 21,054)

( i 550,909)

i 188,737

i 5,781

i 194,518

NCI adjustments for changes in ownership

—

( i 4,524)

—

( i 4,524)

i 4,524

i —

Capital distributions, net

—

( i 5,534)

Equity-based compensation expense and related issuances

—

i 1,778

i 1,655

—

i 1,655

—

i 1,655

Net loss

—

( i 9,929)

( i 674)

( i 10,603)

June 30, 2022

i 3,861

i 109,189

i 757,831

( i 21,054)

( i 560,838)

i 175,939

i 4,097

i 180,036

NCI adjustments for changes in ownership

—

i 697

—

i 697

( i 697)

i —

Other equity transactions

—

i 378

—

i —

Equity-based compensation expense and related issuances

—

i 2,580

i 3,156

—

i 3,156

—

i 3,156

Net loss

—

( i 22,214)

( i 2,784)

( i 24,998)

i 3,861

i 112,147

i 761,684

( i 21,054)

( i 583,052)

i 157,578

i 616

i 158,194

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

F-5


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

Nine Months Ended September 30,

(in thousands)

2022

2021

CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss

( i 49,512)

( i 26,004)

Adjustments for:

Depreciation and amortization

i 6,019

i 9,670

Depreciation and amortization included in COGS

i 4,840

i 1,714

Equity-based compensation expense

i 8,970

i 17,607

Gain on business divestiture

( i 3,490)

( i 11,681)

Loss on disposal of capital assets

i 49

i 1,690

Loss on impairment

2,973

i 9,947

Loss on notes receivable

i 7,219

i 3,726

Recovery on notes receivable

( i 1,107)

i —

Bad debt expense

i 22

( i 1,060)

(1)

Non-cash interest expense

i 2,301

i 3,154

Non-cash operating lease expense

i 223

( i 572)

Loss on lease termination

i 297

i —

Deferred tax (income) expense

( i 889)

( i 8,125)

Non-cash loss from investments, net

i 895

i 778

Other non-cash (income) expense, net

i —

( i 2,500)

Write-down (recovery) of assets held-for-sale

i 874

( i 8,616)

Change, net of acquisitions in:

Accounts receivable, net

( i 2,787)

( i 11,128)

(1)

Inventory

( i 8,715)

( i 11,864)

Other assets

( i 1,240)

i 9,514

(1)

Interest receivable

( i 1,125)

( i 1,031)

Accounts payable and accrued liabilities

( i 279)

i 1,238

Taxes payable

i 4,668

i 12,935

Interest payable

( i 265)

( i 2,060)

Other liabilities

( i 414)

( i 5,644)

Net cash used in operating activities

( i 30,473)

( i 18,312)

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of capital assets

( i 12,582)

( i 27,535)

Investments in notes receivable

i —

( i 3,918)

Collection of notes receivable

i 7,106

i 13,225

Proceeds from business divestiture

i —

i 24,407

Proceeds from sale of capital assets

i —

i 5

Business acquisitions, net of cash acquired

i —

i 541

Purchases of intangible assets

( i 900)

i —

Distributions from investments

i 1,048

i 1,427

Proceeds from sale of promissory notes

i —

i 26,000

Cash paid for short-term investment

( i 3,400)

i —

Proceeds from disposal of short-term investments

i 3,400

i —

Net cash provided by (used in) investing activities

( i 5,328)

i 34,152

CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from financing (refer to Note 14 for related party financing)

i 25,000

i 6,301

Deferred financing costs paid

( i 511)

( i 975)

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

F-6


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

Repayment of debt

( i 1,084)

( i 46,321)

Capital distributions - non-controlling interests

( i 5,534)

i —

Net cash provided by (used in) financing activities

i 17,871

( i 40,995)

Net decrease in cash, cash equivalents, restricted cash, and cash held for sale

( i 17,930)

( i 25,155)

Cash, cash equivalents, restricted cash, and cash held for sale - Beginning of period

i 44,501

i 54,639

Cash, cash equivalents, restricted cash, and cash held for sale - End of period

i 26,571

i 29,484

RECONCILIATION OF CASH FLOW INFORMATION:

Cash and cash equivalents

i 26,476

i 27,868

Restricted cash

i 95

i 1,098

Cash held for sale

i —

i 518

Total cash, cash equivalents, restricted cash, and cash held for sale at end of period

i 26,571

i 29,484

(1) Presentation of September 30, 2021 figures have been revised, refer to Note 2 for further discussion.

Nine Months Ended September 30,

(in thousands)

2022

2021

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Interest paid - non-lease

i 12,730

i 11,444

Income taxes paid

i 21,742

i 6,346

OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES:

Capital assets not yet paid for

i 6,242

i 4,063

Promissory note conversion (Note 6)

i —

i 10,880

Insurance proceeds not yet received

i —

i 6,790

Non-cash proceeds from business divestiture

i 7,850

i 34,475

Non-cash proceeds from finance lease

i 5,785

i —

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements

F-7


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

1. i NATURE OF OPERATIONS

Acreage Holdings, Inc. (the “Company”, “Pubco” or “Acreage”) is a vertically integrated, multi-state operator in the United States (“U.S.”) cannabis industry and has contractual relationships with cannabis cultivation facilities, dispensaries and other cannabis-related companies in the U.S. The Company’s operations include (i) cultivating and processing cannabis plants, (ii) manufacturing branded consumer products, (iii) distributing cannabis flower and manufactured products, and (iv) retailing dosable cannabis products to consumers. The Company’s products appeal to medical and adult recreational use customers through brand strategies intended to build trust and loyalty. The Company’s Class E subordinate voting shares (“Fixed Shares”) and Class D subordinate voting shares (“Floating Shares”) are listed on the Canadian Securities Exchange under the symbols “ACRG.A.U” and “ACRG.B.U”, respectively, quoted on the OTCQX under the symbols “ACRHF” and “ACRDF”, respectively, and traded on the Frankfurt Stock Exchange under the symbols “0VZ1” and “0VZ2”, respectively.

High Street Capital Partners, LLC, a Delaware limited liability company doing business as “Acreage Holdings” (“HSCP”), was formed on April 29, 2014. The Company became the indirect parent of HSCP on November 14, 2018 in connection with the reverse takeover (“RTO”) transaction described below.

The Company’s principal place of business is located at 366 Madison Ave, 14th floor, New York, New York in the U.S. The Company’s registered and records office address is Suite 2800, Park Place, 666 Burrard Street, Vancouver, British Columbia in Canada.

The RTO transaction

On September 21, 2018, the Company, HSCP, HSCP Merger Corp. (a wholly-owned subsidiary of the Company), Acreage Finco B.C. Ltd. (a special purpose corporation) (“Finco”), Acreage Holdings America, Inc. (“USCo”) and Acreage Holdings WC, Inc. (“USCo2”) entered into a business combination agreement (the “Business Combination Agreement”) whereby the parties thereto agreed to combine their respective businesses, which would result in the RTO of Pubco by the security holders of HSCP, which was deemed to be the accounting acquiror. On November 14, 2018, the parties to the Business Combination Agreement completed the RTO.

Canopy Growth Corporation transaction

On June 27, 2019, the Company and Canopy Growth Corporation (“Canopy Growth” or “CGC”) implemented the Prior Plan of Arrangement (as defined in Note 13) contemplated by the Original Arrangement Agreement (as defined in Note 13). Pursuant to the Prior Plan of Arrangement, Canopy Growth was granted an option to acquire all of the issued and outstanding shares of the Company in exchange for the payment of i 0.5818 of a common share in the capital of Canopy Growth for each Class A subordinate voting share (each, a “SVS”) held (with the Class B proportionate voting shares (the “PVS”) and Class C multiple voting shares (the “MVS”) being automatically converted to SVS immediately prior to consummation of the Acquisition (as defined in Note 13), which original exchange ratio was subject to adjustment in accordance with the Original Arrangement Agreement. Canopy Growth was required to exercise the option upon a change in federal laws in the United States to permit the general cultivation, distribution and possession of marijuana (as defined in the relevant legislation) or to remove the regulation of such activities from the federal laws of the United States (the “Triggering Event”) and, subject to the satisfaction or waiver of certain closing conditions set out in the Original Arrangement Agreement, Canopy Growth was required to acquire all of the issued and outstanding SVS (following the mandatory conversion of the PVS and MVS into SVS).

On June 24, 2020, Canopy Growth and the Company entered into an agreement to, among other things, amend the terms of the Original Arrangement Agreement and the terms of the Prior Plan of Arrangement (the “Amended Arrangement”). On September 16, 2020, the Company’s shareholders voted in favor of a special resolution authorizing and approving the terms of, among other things, the Amended Arrangement. Subsequently, on September 18, 2020, the Company obtained a final order from the Supreme Court of British Columbia approving the Amended Arrangement, and on September 23, 2020 the Company and Canopy Growth entered into the Amending Agreement (as defined in Note 13) and implemented the Amended Arrangement. Pursuant to the Amended Arrangement, the Company’s articles were amended to create the Fixed Shares, the Floating Shares and the Class F multiple voting shares (the “Fixed Multiple Shares”), and each outstanding SVS was exchanged for i 0.7 of a Fixed Share and i 0.3 of a Floating Share, each outstanding PVS was exchanged for i 28 Fixed Shares and i 12 Floating Shares; and each outstanding MVS was exchanged for i 0.7 of a Fixed Multiple Share and i 0.3 of a Floating Share. Refer to Note 13 for further discussion.

F-8


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

Pursuant to the implementation of the Amended Arrangement, on September 23, 2020, a subsidiary of Canopy Growth advanced gross proceeds of $ i 50,000 to Universal Hemp, LLC, an affiliate of the Company. The debenture bears interest at a rate of i 6.1% per annum. Refer to Note 10 for further discussion.

Subsequent to the balance sheet date, the Company entered into a new arrangement agreement with Canopy Growth regarding the acquisition of the Company’s Floating Shares. Refer to Note 17 for further discussion.

COVID-19

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

In response to the outbreak, governmental authorities in the United States, Canada and internationally have introduced various recommendations and measures to try to limit the pandemic, including travel restrictions, border closures, non-essential business closures, quarantines, self-isolations, shelters-in-place and social distancing. The COVID-19 outbreak and the response of governmental authorities to try to limit it are having a significant impact on the private sector and individuals, including unprecedented business, employment and economic disruptions. Management has been closely monitoring the impact of COVID-19, with a focus on the health and safety of the Company’s employees, business continuity and supporting the communities where the Company operates. The Company implemented various measures at the height of the pandemic to reduce the spread of the virus, such as implementing social distancing measures at its facilities. Most of these measures are no longer considered to be necessary or required; however, the Company reserves the right to implement similar precautionary measures in the future as circumstances change.

Despite some impact to our day-to-day operations at select locations from time-to-time, COVID-19 has had a minimal impact overall on the Company’s performance.

2. i SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation and going concern

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022, or any other period.

As reflected in the unaudited condensed consolidated financial statements, the Company had an accumulated deficit as of September 30, 2022, as well as a net loss and negative cash flow from operating activities for the nine months ended September 30, 2022. These factors raise substantial doubt about the Company’s ability to continue as a going concern for at least one year from the issuance of these financial statements.

However, management believes that substantial doubt about the Company’s ability to meet its obligations for the next twelve months from the date these financial statements were issued has been alleviated due to, but not limited to, (i) access to future capital commitments, (ii) continued sales growth from the Company’s consolidated operations, (iii) latitude as to the timing and amount of certain operating expenses as well as capital expenditures, (iv) restructuring plans that have already been put in place to improve the Company’s profitability, (v) the AFC-VRT credit facilities (refer to Notes 10 and 17 for further discussion), and (vi) access to the U.S. and Canadian public equity markets.

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

F-9


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

These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, dated March 11, 2022, as filed with the Securities and Exchange Commission (the “2021 Form 10-K”).

Use of estimates

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the dates presented and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from those estimates. Significant estimates inherent in the preparation of the accompanying unaudited condensed consolidated financial statements include the fair value of assets acquired and liabilities assumed in business combinations, assumptions relating to equity-based compensation expense, estimated useful lives for property, plant and equipment and intangible assets, the valuation allowance against deferred tax assets and the assessment of potential charges on goodwill, intangible assets and investments in equity and notes receivable.

Emerging growth company

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

Functional and presentation currency

The unaudited condensed consolidated financial statements and the accompanying notes are expressed in U.S. dollars. Financial metrics are presented in thousands. Other metrics, such as shares outstanding, are presented in thousands unless otherwise noted.

Basis of consolidation

The Company’s unaudited condensed consolidated financial statements include the accounts of Acreage, its subsidiaries and variable interest entities (“VIEs”) where the Company is considered the primary beneficiary, if any, after elimination of intercompany accounts and transactions. Investments in business entities in which Acreage lacks control but is able to exercise significant influence over operating and financial policies are accounted for using the equity method. The Company’s proportionate share of net income or loss of the entity is recorded in Income (loss) from investments, net in the Unaudited Condensed Consolidated Statements of Operations.

VIEs

In determining whether the Company is the primary beneficiary of a VIE, the Company assesses whether it has the power to direct matters that most significantly impact the activities of the VIE and have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. There were no material consolidated VIEs as of September 30, 2022 or December 31, 2021.

Non-controlling interests (“NCI”)

Non-controlling interests represent ownership interests in consolidated subsidiaries by parties that are not shareholders of Pubco. They are shown as a component of Total equity in the Unaudited Condensed Consolidated Statements of Financial Position, and the share of loss attributable to non-controlling interests is shown as a component of Net loss in the Unaudited Condensed Consolidated Statements of Operations. Changes in the parent company’s ownership that do not result in a loss of control are accounted for as equity transactions.

i Restricted cash

Restricted cash represents funds contractually held for specific purposes and, as such, not available for general corporate purposes.

F-10


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

Cash and restricted cash, as presented on the Unaudited Condensed Consolidated Statements of Cash Flows, consists of $ i 26,476 and $ i 95 as of September 30, 2022, respectively, and $ i 27,868 and $ i 1,098 as of September 30, 2021, respectively.

i Accounts receivable valuations and reclassifications

Accounts receivable are stated at their net realizable value. The allowance against gross trade receivables reflects the best estimate of probable losses inherent in the receivables portfolio determined on the basis of historical experience, specific allowances for known troubled accounts and other currently available information. As of September 30, 2022 and December 31, 2021, the Company’s allowance for doubtful accounts was $ i 63 and $ i 445, respectively.

i Income taxes

The Company has unrecognized tax benefits (“UTBs”) of $ i 6,161 and $ i 7,695 as of September 30, 2022 and December 31, 2021, respectively, which are included in Other current liabilities in the Consolidated Statements of Financial Position. UTBs arise as a result of differences existing between a tax position taken or expected to be taken on a tax return and the benefit recognized and measured.

i Net loss per share

Net loss per share represents the net loss attributable to shareholders divided by the weighted average number of shares outstanding during the period on an as converted basis. Basic and diluted loss per share are the same as of September 30, 2022, 2021 and 2020, as the issuance of shares upon conversion, exercise or vesting of outstanding units would be anti-dilutive in each period. There were i 47,999 and i 42,621 anti-dilutive shares outstanding as of September 30, 2022 and 2021, respectively.

Change in presentation

Note that certain items presented on the nine months ended September 30, 2021, Unaudited Condensed Consolidated Statement of Cash Flows, includes a change in presentation to conform to the current year presentation. There was no impact to our Consolidated Financial Statements as a result of this reclassification.

Accounting Pronouncements Recently Adopted

As of January 1, 2022, the Company adopted ASU 2019-12 - Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). ASU 2019-12 attempts to simplify aspects of accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The adoption of ASU 2019-12 did not have a material effect on the Company’s unaudited condensed consolidated financial statements.

As of January 1, 2022, the Company adopted ASU 2020-01 - Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The adoption of ASU 2020-01 did not have a material effect on the Company’s unaudited condensed consolidated financial statements.

As of January 1, 2022, the Company adopted ASU 2021-04 - Earnings Per Share (Topic 260), Debt - Modifications and Extinguishments (Topic 470-50), Compensation - Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40), which clarifies existing guidance for freestanding written call options which are equity classified and remain so after they are modified or exchanged in order to reduce diversity in practice. The standard applies prospectively to modifications or exchanges that occur after it is adopted. The adoption of ASU 2021-04 did not have a material effect on the Company’s unaudited condensed consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which was subsequently revised by ASU 2018-19 and ASU 2020-02. The ASU introduces a new model for assessing impairment on most financial assets. Entities will be required to use a forward-looking expected loss model, which will replace the current incurred loss model, which will result in earlier recognition of allowance for losses. The ASU will be effective for the Company’s first interim period of fiscal 2023. The Company continues to evaluate the impact of this ASU on its unaudited condensed consolidated financial statements.

F-11


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

In October 2021, the FASB issued ASU 2021-08 - Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The new standard improves the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice and inconsistency. The new standard requires an entity to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606 - Revenue from Contracts with Customers. The ASU will be effective for the Company’s first interim period of fiscal 2024. The standard should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company does not anticipate a material impact on the Company’s unaudited condensed consolidated financial statements upon adoption.

3. i ACQUISITIONS, DIVESTITURES AND ASSETS HELD FOR SALE

Acquisitions

During the nine-month period ended September 30, 2022, the Company did not complete any business acquisitions. During the year ended December 31, 2021, the Company completed the following business acquisitions, and has allocated the purchase price as follows:

Purchase Price Allocation

Greenleaf

CWG

Total

Assets acquired:

Cash and cash equivalents

i 1,209

i 828

i 2,037

Inventory

i 2,692

i 1,200

i 3,892

Other current assets

i 1,520

i 347

i 1,867

Capital assets, net

i 22,923

i 3,312

i 26,235

Operating lease right-of-use asset

i 2,819

i 1,584

i 4,403

Goodwill

i 1,819

i 1,482

i 3,301

Intangible assets, net - cannabis licenses

i 16,800

i 3,200

i 20,000

Intangible assets, net - customer relationships

i —

i 1,000

Other non-current assets

i 189

i 40

i 229

Liabilities assumed:

Accounts payable and accrued liabilities

( i 1,829)

( i 464)

( i 2,293)

Taxes payable

( i 33)

( i 68)

( i 101)

Operating lease liability, current

( i 315)

( i 193)

( i 508)

Other current liabilities

( i 294)

i 3

( i 291)

Operating lease liability, non-current

( i 2,504)

( i 1,391)

( i 3,895)

Fair value of net assets acquired

i 44,996

i 10,880

i 55,876

Consideration paid:

Settlement of pre-existing relationship

i 44,996

i 10,880

i 55,876

Total consideration

i 44,996

i 10,880

i 55,876

Greenleaf

On October 1, 2021, a subsidiary of the Company acquired of i 100% of Greenleaf Apothecaries, Greenleaf Gardens, and Greenleaf Therapeutics, collectively known as “Greenleaf.” Greenleaf consists of cannabis cultivation, processing, and dispensary operations in the state of Ohio. The completion of this acquisition established Acreage’s footprint in the Ohio cannabis market.

F-12


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

On July 2, 2018, the Company entered into purchase agreements for Greenleaf for the total purchase price of approximately $ i 8,245 in cash, $ i 6,096 in seller notes payable and i 1.2 million shares of HSCP with an average fair value of $ i 7.73 per share, which are convertible into shares of the Company. In addition, the Company extended a $ i 31,200 line of credit and issued $ i 12,500 in promissory notes to the Greenleaf entities. The consideration paid was made in exchange for: (a) the rights to acquire the Greenleaf entities upon state regulatory approval and; (b) master services agreements (“MSAs”) to operate the entities until such approval was granted and ownership interests were transferred. The purchase consideration paid represents the fair value of the intangible asset related to the MSA that was recorded on the Company’s Statement of Financial Position at the time of the transaction. The intangible asset was amortized over the life of the MSAs.

Upon closing, the Company repaid the remaining $ i 3,300 worth of sellers notes payable and accrued interest and assumed $ i 42,043 in notes and interest receivable owed to the Company by Greenleaf that was eliminated upon consolidation. Total consideration for the asset transfer transaction was $ i 44,996, representing the sum of the $ i 2,953 carrying value of intangible assets from the 2018 transaction and the liabilities assumed. As the Company owns i 100% of Greenleaf, the subsidiary is accounted for on a consolidated basis as of the closing date.

The purchase price allocation is based upon final valuations within the measurement period (generally one year from the acquisition date)

CWG

On April 30, 2021, a subsidiary of the Company acquired i 100% of CWG Botanicals, Inc. (“CWG”), an adult-use cannabis cultivation and processing operations in the state of California.

The consideration paid for CWG consisted of the settlement of a pre-existing relationship, which included a line of credit of $ i 9,321 and the related interest receivable of $ i 1,559, which were both previously recorded in Notes receivable, non-current on the Statements of Financial Position.

The purchase price allocation is based upon final valuations within the measurement period (generally one year from the acquisition date).

NCCRE

On March 19, 2021, a subsidiary of the Company, HSC Solutions, LLC entered into an assignment of membership agreement to acquire the remaining non-controlling interests of its subsidiary, NCC Real Estate, LLC (“NCCRE”), based primarily on the fair value of property held by NCCRE estimated in the amount of $ i 850. The consideration paid to the non-controlling interest sellers of $ i 286 was recorded in Additional paid-in capital and Non-controlling interests on the Statements of Financial Position. Additionally, the Company subsequently repaid the outstanding principal balance of the NCCRE secured loan.

Divestitures

In February 2021, a subsidiary of the Company entered into a definitive agreement and management services agreement to sell an indoor cultivation facility in Medford, Oregon ("Medford"), and a retail dispensary in Powell, Oregon ("Powell"), for total consideration of $ i 3,000. In March 2022, the total consideration was reduced to $ i 2,000. In April 2022, the Company sold all equity interests in Medford for an aggregate sale price of $ i 2,000 and recognized a gain on sale of $ i 290 for the nine months ended September 30, 2022 which was recorded in Other income, net in the Unaudited Condensed Consolidated Statements of Operations. The aggregate sales price consisted of $ i 750 paid to the Company in February 2021 and $ i 1,250 of promissory notes (refer to Note 6 for further discussion). In conjunction with the sale, the Company closed its dispensary in Powell. Further, the Company derecognized deferred tax liabilities of $ i 375 related to Medford.

In September 2021, a subsidiary of the Company entered into a definitive agreement and management services agreements to sell, upon regulatory approval, i four retail dispensaries in Oregon for total consideration of $ i 6,500. In July 2022, the Company executed and closed an amendment to its previously announced asset purchase and services agreement for the sale of its four Oregon retail dispensaries (the “Amended Agreement”). Under the terms of the Amended Agreement, the sale price was reduced to $ i 6,200 and the Company recognized a gain on sale of $ i 3,189 for the nine months ended September 30, 2022 which was recorded in Other income, net in the Unaudited Condensed Consolidated Statements of Operations. The aggregate sales price consisted of a $ i 250 payment previously made at the signing of the Original Agreement, plus an additional $ i 100 in cash at closing. The remaining amount of $ i 5,850 has been satisfied by a i 36-month secured promissory note bearing interest at a rate of i 12% per annum (the “Note”). Under the terms of the Note, quarterly interest payments commence on January 1, 2023, principal payments of $ i 1,000 are due on January 1, 2024 and January 1, 2025, and the remaining principal is due on January 1, 2026.

F-13


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

During the nine months ended September 30, 2021, a subsidiary of the Company sold all equity interests in Acreage Florida, Inc. (“Acreage Florida”), for an aggregate sale price of $ i 60,000. Acreage Florida is licensed to operate medical cannabis dispensaries, a processing facility and a cultivation facility in the state of Florida. The aggregate sales price consisted of approximately $ i 21,500 in cash, $ i 7,000 of the buyer’s common stock, subject to a rolling lock up restriction period ending i one year after the disposition date, with the lock up expiring in monthly 1/6th increments beginning October 27, 2021, and secured promissory notes totaling approximately $ i 31,500. This resulted in a gain on sale of $ i 11,682 recorded in Other income, net on the Consolidated Statements of Operations for the nine months ended September 30, 2021. The Company subsequently sold the promissory notes and recognized a net loss of $ i 2,000 as discussed in Note 6. Further, the Company de-recognized deferred tax liabilities related to indefinite-lived intangible lived assets held by Acreage Florida of $ i 6,044 as a result of the disposition in Other income, net on the Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2021.

Assets Held for Sale

As of September 30, 2022, the Company did not have any business or assets that met the held-for-sale criteria. As of December 31, 2021 the Company determined certain businesses and assets met the held-for-sale criteria. As such, the related assets and liabilities within these disposal groups were transferred into Assets held-for-sale and Liabilities related to assets held for sale on the Unaudited Condensed Consolidated Statements of Financial Position.

During the nine months ended September 30, 2022, the Company tested each disposal group for impairment and recognized charges of $ i 874 within Write down (recovery) of assets held-for-sale on the Unaudited Condensed Consolidated Statements of Operations related to Medford and Powell. During the nine months ended September 30, 2021, the Company recognized a recovery of assets held-for-sale of $ i 8,616 related to the Acreage Florida disposal group within Write down (recovery) of assets held-for-sale on the Unaudited Condensed Consolidated Statements of Operations.

The table below presents the assets and liabilities classified as held for sale on the Unaudited Condensed Consolidated Statements of Financial Position for the year ended December 31, 2021 and is subject to change based on developments during the sales process.

Michigan(1)

Oregon

Total

Cash

i —

i 223

Inventory

i —

i 445

Notes receivable, current

i —

i 31

Other current assets

i —

i 9

Total current assets classified as held-for-sale

i —

i 708

Capital assets, net

i 1,907

i 2,342

i 4,249

Operating lease right-of-use assets

i —

i 1,695

Goodwill

i —

i 2,191

Non-current assets

i —

i 109

Total assets classified as held for sale

i 1,907

i 7,045

i 8,952

Accounts payable and accrued liabilities

i —

( i 639)

Operating lease liability, current

i —

( i 441)

Total current liabilities classified as held-for-sale

i —

( i 1,080)

Operating lease liability, non-current

i —

( i 787)

Total liabilities classified as held-for-sale

i —

( i 1,867)

(1) During the nine months ended September 30, 2022, the Company was unsuccessful in finding a satisfactory buyer for certain of its Michigan locations. As a result, the assets at these specific locations no longer meet the criteria for being classified as held-for-sale (refer to Note 7 for further discussion).

F-14


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

4. i INTANGIBLE ASSETS AND GOODWILL

Intangible assets

The following table details the intangible asset balances by major asset classes:

Intangibles

Finite-lived intangible assets:

Management contracts

i 1,808

i 1,511

Customer relationships

i 1,000

Total finite-lived intangible assets

i 2,808

i 2,511

Accumulated amortization on finite-lived intangible assets:

Management contracts

( i 931)

( i 493)

Customer relationships

( i 850)

i —

Total accumulated amortization on finite-lived intangible assets

( i 1,781)

( i 493)

Finite-lived intangible assets, net

i 1,027

i 2,018

Indefinite-lived intangible assets

Cannabis licenses

i 134,780

i 117,677

Total intangibles, net

i 135,807

i 119,695

The intangible assets balance as of December 31, 2021 excludes intangible assets reclassified to assets held-for-sale (refer to Note 3 for further discussion). The average useful life of finite-lived intangible assets as of September 30, 2022 ranges from i 0.3 to i 1.5 years, with i 0.3 and i 1.5 years being the average useful life for customer relationships and management contracts, respectively.

During the three and nine months ended September 30, 2022, the Company amended the purchase price allocation related to its acquisition of Greenleaf based upon final valuations within the measurement period (refer to Note 3 for further discussion). As a result, $ i i i i 16,800 / / / was re-allocated from Goodwill to Intangible assets, net on the Unaudited Condensed Consolidated Statements of Financial Position.

Impairment of intangible assets

The Company assessed whether any events or changes in circumstances ("triggering events") indicated finite-lived intangible assets to be held-and-used would not be recovered. During the three and nine months ended September 30, 2022, the Company did not identify any triggering events. During the nine months ended September 30, 2021, the Company identified a triggering event for its management contract owned by Prime Alternative Treatment Center Consulting, LLC ("PATCC"). The Company evaluated the recoverability of the asset by comparing the carrying value of the asset to the future net undiscounted cash flows expected to be generated by the asset. The carrying value was determined to not be recoverable and the Company proceeded to test the asset for impairment. The Company recognized an impairment charge of $ i 818 due to changes in expected cash flows pursuant to a revised consulting services agreement. These charges are recognized in Impairments, net on the Unaudited Condensed Consolidated Statements of Operations. The impairment resulted in the recognition of a tax provision benefit and an associated reversal of deferred tax liabilities of $ i 207 during the nine months ended September 30, 2021.

During the three and nine months ended September 30, 2021, the Company de-recognized deferred tax liabilities related to indefinite-lived intangible assets held by Acreage Florida of $ i 6,044 in Other income (loss), net on the Unaudited Condensed Consolidated Statements of Operations. Refer to Note 3 for further discussion.

Amortization expense associated with the Company’s intangible assets was $ i 296 and $ i 1,288 for the three and nine months ended September 30, 2022, respectively, and $ i 3,117 and $ i 7,588 for the three and nine months ended September 30, 2021, respectively.

F-15


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

Expected annual amortization expense for existing intangible assets subject to amortization as of September 30, 2022 is as follows for each of the next five fiscal years:


Amortization of Intangibles	2022		2023		2024		2025		2026
Amortization expense	$	i 297	$	i 584	$	i 146	$	i —	$	i —

Goodwill

The following table details the changes in the carrying amount of goodwill:


Goodwill	Total
December 31, 2021	$	i 43,310
Adjustment to purchase price allocation	( i 16,500)

Other Adjustments(1)	i 3,682
September 30, 2022	$	i 30,492

(1) Represents adjustments related to the remeasurement of certain deferred tax assets and related adjustments within the measurement period.

5. i INVESTMENTS

The carrying values of the Company’s investments in the Unaudited Condensed Consolidated Statements of Financial Position as of September 30, 2022 and December 31, 2021 are as follows:

Investments

Investments held at FV-NI

i 34,328

i 35,226

Total long-term investments

i 34,328

i 35,226

/ i

Income (loss) from investments, net in the Unaudited Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2022 and 2021 is as follows:


Investment income (loss)	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Short-term investments	$	i 1	$	i —	$	i 4	$	i —

Investments held at FV-NI	i 16		i 489		i 150		( i 777)


Income (loss) from investments, net	$	i 17	$	i 489	$	i 154	$	( i 777)

F-16


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

Investments held at FV-NI

The Company has investments in equity of several companies that do not result in significant influence or control. These investments are carried at fair value, with gains and losses recognized in the Unaudited Condensed Consolidated Statements of Operations.

As further described under the “ i 6.10% Secured debenture due September 2030” in Note 10, on September 23, 2020, a subsidiary of the Company, Universal Hemp, LLC ("Universal Hemp") was advanced gross proceeds of $ i 50,000 (less transaction costs) pursuant to the terms of a secured debenture. The Company subsequently engaged an investment advisor, which under the investment advisor's sole discretion, on September 28, 2020 invested $ i 34,019 of these proceeds on behalf of Universal Hemp. As a result, Universal Hemp acquired i 34,019 class B units, at $ i 1 par value per unit, which represented i 100% financial interest in an Investment Partnership, a Canada-based limited partnership. An affiliate of the Institutional Investor holds Class A units of the Investment Partnership. The general partner of the Investment Partnership is also an affiliate of the Institutional Investor. The Class B units are held by the Investment Advisor as an agent for Universal Hemp.

6. i NOTES RECEIVABLE

Notes receivable as of September 30, 2022 and December 31, 2021 consisted of the following:

Promissory notes receivable

i 34,257

i 27,260

Line of credit receivable

i 6,831

i 12,609

Interest receivable

i 3,524

i 2,834

Allowance for notes and interest receivables

( i 14,769)

( i 8,036)

Total notes receivable

i 29,843

i 34,667

Less: Notes receivable, current

i 2,500

i 7,104

Notes receivable, non-current

i 27,343

i 27,563

Interest income on notes receivable during the three and nine months ended September 30, 2022 was $ i 474 and $ i 1,256, respectively, and $ i 1,067 and $ i 4,125 for the three and nine months ended September 30, 2021, respectively.

The Company determined that the collectability of certain notes receivables is doubtful based on information available. As of September 30, 2022 and December 31, 2021, the Company’s allowance for notes receivable of $ i 14,769 and $ i 8,036, respectively, included $ i 12,292 and $ i 6,046 of principal outstanding and $ i 2,477 and $ i 1,990 of accrued interest, respectively, and represents the full value of such loan balances.

Activity during the nine months ended September 30, 2022

In February 2022, the Company received a $ i 5,279 cash payment in full on a line of credit due from Patient Centric Martha’s Vineyard, and subsequently closed the line of credit.

In April 2022, the Company executed and closed its previously announced asset purchase agreement for the sale of Medford and Powell in Oregon. Part of the total consideration was satisfied by a i 12-month $ i 1,250 secured promissory note bearing interest at a rate of i 12.5% per annum, refer to Note 3 for further discussion. In August 2022, the secured promissory note was replaced with a $ i 500 secured promissory note bearing interest at a rate of i 12.5% per annum and a $ i 750 non-interest bearing secured promissory note, with both secured promissory notes due on May 1, 2023.

In July 2022, the Company executed and closed an amendment to its previously announced asset purchase and services agreement for the sale of its i four Oregon retail dispensaries (the “Amended Agreement”). Part of the total consideration was satisfied by a i 36-month $ i 5,850 secured promissory note bearing interest at a rate of i 12% per annum, refer to Note 3 for further discussion.

Activity during the nine months ended September 30, 2021

In March 2021, the Company entered into a revised consulting services and line of credit agreement with PATCC, whereby previously unrecognized management fees were settled for $ i 2,500, which was recognized in Other revenue, net on Unaudited

F-17


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

Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2021. Pursuant to the revised line of credit agreement, the line of credit is non-interest bearing and will be repaid on a payment schedule with i seven payments in the aggregate amount of $ i 7,150 through June 2023.

In April 2021, the Company received i three secured promissory notes in the aggregate amount of $ i 31,500 related to the sale of Acreage Florida. Of the $ i 31,500 in promissory notes, a promissory note for $ i 3,500 was collected during the year ended December 31, 2021. In June 2021, the remaining i two promissory notes totaling $ i 28,000 were sold in a related party transaction to Viridescent Realty Trust, Inc. (“Viridescent”) for cash proceeds of $ i 26,000. This sale resulted in a loss of $ i 2,000 recorded in Other income, net on the Unaudited Condensed Consolidated Statements of Operations. Refer to Notes 3 and 14 for further discussion.

In April 2021, a subsidiary of the Company acquired i 100% of CWG, and the amounts outstanding under the line of credit were converted into equity in CWG. Refer to Note 3 for further discussion.

7. i CAPITAL ASSETS, net

Net property, plant and equipment consisted of:

Land

i 3,828

i 3,777

Building

i 57,935

i 43,921

Right-of-use asset, finance leases

i 10,731

i 5,077

Furniture, fixtures and equipment

i 31,587

i 31,325

Leasehold improvements

i 37,399

i 51,646

Construction in progress

i 17,409

i 7,644

Capital assets, gross

i 158,889

i 143,390

Less: accumulated depreciation

( i 23,527)

( i 16,593)

Capital assets, net

i 135,362

i 126,797

Depreciation of capital assets for the three and nine months ended September 30, 2022 is comprised of $ i 751 and $ i 4,731 of depreciation expense, and $ i 1,963 and $ i 5,679 that was capitalized to inventory, respectively, and $ i 928 and $ i 2,083 of depreciation expense and $ i 876 and $ i 2,567 that was capitalized to inventory for the three and nine months ended September 30, 2021, respectively.

During the nine months ended September 30, 2022, the Company determined that it was unable to find a satisfactory buyer for the held-for-sale assets related to its Michigan operations and, as such, these assets were reclassified as held-and-used. This conclusion was considered a triggering event for capital asset impairment testing. Upon assessment, these specific capital assets were not considered to have future economic value. As such, the fair value of the assets was considered to be i nil and the Company recognized an impairment charge of $ i 1,907 within Impairments, net on the Statements of Operations during the nine months ended September 30, 2022. Refer to Note 3 for further discussion on changes in held-for-sale entities.

In August 2021, the Company’s Sewell facility in New Jersey was negatively impacted by a tornado formation from Hurricane Ida. The unusually severe weather conditions caused widespread damage and resulted in a $ i 9,130 loss to capital assets, which has been offset by insurance proceeds of $ i 7,000. The net loss of $ i 2,130 was recognized in Impairments, net on the Statements of Operations for the three months ended September 30, 2021.

F-18


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

8. i i LEASES /

The Company leases land, buildings, equipment and other capital assets which it plans to use for corporate purposes in addition to the production and sale of cannabis products. Leases with an initial term of 12 months or less are not recorded on the Unaudited Condensed Consolidated Statements of Financial Position and are expensed in the Unaudited Condensed Consolidated Statements of Operations on the straight-line basis over the lease term. The Company does not have any material variable lease payments and accounts for non-lease components separately from leases.

Balance Sheet Information

Classification

Right-of-use assets

Operating

Operating lease right-of-use assets

i 22,730

i 24,598

Finance

Capital assets, net

i 9,986

i 4,522

Total right-of-use assets

i 32,716

i 29,120

Lease liabilities

Current

Operating

Operating lease liability, current

i 2,298

i 2,145

Financing

Debt, current

i 5,635

i —

Non-current

Operating

Operating lease liability, non-current

i 22,324

i 24,255

Financing

Debt, non-current

i 5,290

i 5,245

Total lease liabilities

i 35,547

i 31,645

Three Months Ended September 30,

Nine Months Ended September 30,

Statement of Operations Information

Classification

2022

2021

2022

2021

Short-term lease expense

General and administrative

( i 28)

( i 40)

i 190

i 17

Operating lease expense

General and administrative

i 1,221

i 1,038

i 3,613

i 3,175

Finance lease expense:

Amortization of right of use asset

Depreciation and amortization

i 63

i 190

Interest expense on lease liabilities

Interest expense

i 314

i 190

i 855

i 561

Sublease income

Other income (loss), net

i —

( i 3)

Net operating and finance lease cost

i 1,598

i 1,291

i 4,658

i 3,923

Nine Months Ended September 30,

Statement of Cash Flows Information

Classification

2022

2021

Cash paid for operating leases

Net cash used in operating activities

i 3,390

i 3,747

Cash paid for finance leases - interest

Net cash used in operating activities

i 843

i 508

F-19


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

i i

The following represents the Company’s future minimum payments required under existing leases with initial terms of one year or more as of September 30, 2022:

Maturity of lease liabilities

Operating Leases

Finance Leases

2022

i 1,147

i 5,858

2023

i 4,349

i 722

2024

i 4,310

i 743

2025

i 4,347

i 766

2026

i 4,428

i 789

Thereafter

i 20,285

i 12,487

Total lease payments

i 38,866

i 21,365

Less: interest

i 14,244

i 10,440

Present value of lease liabilities

i 24,622

i 10,925

Weighted average remaining lease term (years)

i 8

i 2

Weighted average discount rate

i 10%

i 12%

/ /

As of September 30, 2022, there have been i no leases entered into that have not yet commenced.

9. i INVENTORY

The Company’s inventory balance consists of the following:

Retail inventory

i 4,116

i 3,331

Wholesale inventory

i 37,143

i 28,643

Cultivation inventory

i 6,492

i 6,367

Supplies & other

i 3,141

i 3,463

Total

i 50,892

i 41,804

Inventory is valued at the lower of cost and net realizable value (“NRV”), defined as estimated selling price in the ordinary course of business, less estimated costs of disposal. During the nine months ended September 30, 2022, the Company analyzed its inventory balances, and recorded wholesale inventory adjustments as a result of (i) having excess inventory and (ii) reducing the carrying value to ensure inventory balances are properly recorded at the lower of cost and NRV. The Company recognized $ i i 6,286 / of wholesale inventory adjustments within Cost of goods sold, wholesale on the Statements of Operations during the three and nine months ended September 30, 2022.

10. i DEBT

The Company’s debt balances consist of the following:


Debt balances	September 30, 2022		December 31, 2021
Financing liability (failed sale-leaseback)	$	i 15,253	$	i 15,253
Finance lease liabilities	i 10,925		i 5,245
i 7.50% Loan due April 2026	i 31,156		i 30,763
i 6.10% Secured debenture due September 2030	i 46,388		i 46,050
Note due December 2024	i 3,958		i 4,750
i 9.75% Credit facilities due January 2026	i 94,412		i 68,673
Total debt	$	i 202,092	$	i 170,734
Less: current portion of debt	i 7,218		i 1,583
Total long-term debt	$	i 194,874	$	i 169,151

F-20


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

Scheduled maturities of debt, excluding amortization of discount and issuance costs, are as follows:


2022	$	i 6,426
2023	i 1,583
2024	i 1,584
2025	i —
2026	i 133,011
Thereafter	i 70,532
Total payments (excluding amortization of discount and issuance costs)	$	i 213,136

During the three and nine months ended September 30, 2022, the Company incurred interest expense of $ i 5,688 and $ i 15,989, respectively, and $ i 3,620 and $ i 14,072 during the three and nine months ended September 30, 2021, respectively, on the Unaudited Condensed Consolidated Statements of Operations. Interest expense for the three and nine months ended September 30, 2022 included debt discount amortization of $ i 381 and $ i 1,132, respectively, and amortization of debt issuance costs of $ i 297 and $ i 849, respectively. Interest expense for the three and nine months ended September 30, 2021 included debt discount amortization of $ i 298 and $ i 821, respectively, and amortization of debt issuance costs of $ i 493 and $ i 2,914, respectively. As of September 30, 2022 and December 31, 2021, the Company had unamortized discount $ i 5,062 and $ i 6,194, respectively, and debt issuance costs of $ i 5,982 and $ i 6,320, respectively, which is netted against the gross carrying value of long-term debt in Debt, non-current on Unaudited Condensed Unaudited Condensed Consolidated Statements of Financial Position. Additionally, as of September 30, 2022 and December 31, 2021, the Company had accrued interest of $ i 1,167 and $ i 1,432, respectively, within Interest payable on the Unaudited Condensed Consolidated Statements of Financial Position.

Financing liability (failed sales leaseback)

In connection with the Company’s failed sale-leaseback transaction in November 2020, a financing liability was recognized equal to the cash proceeds received. The Company will recognize the cash payments made on the lease as interest expense, and the principal will be de-recognized upon expiration of the lease.

i 6.10% Secured debenture due September 2030

On September 23, 2020, pursuant to the implementation of the Amended Arrangement (Refer to Note 13 for further discussion), a subsidiary of Canopy Growth advanced gross proceeds of $ i 50,000 (less transaction costs of approximately $ i 4,025) to Universal Hemp, an affiliate of the Company, pursuant to the terms of a secured debenture (“ i 6.1% Loan”). In accordance with the terms of the debenture, the funds cannot be used, directly or indirectly, in connection with or for any cannabis or cannabis-related operations in the United States, unless and until such operations comply with all applicable laws of the United States. An additional $ i 50,000 may be advanced pursuant to the debenture subject to the satisfaction of certain conditions by Universal Hemp. The debenture bears interest at a rate of i 6.1% per annum, matures i 10 years from the date hereof or such earlier date in accordance with the terms of the debenture and all interest payments made pursuant to the debenture are payable in cash by Universal Hemp. The debenture is secured by substantially all of the assets of Universal Hemp and its subsidiaries and, further, is not convertible and is not guaranteed by Acreage.

With a portion of the proceeds for the i 6.1% Loan received by Universal Hemp, Acreage engaged an Investment Advisor which, under the Investment Advisor’s sole discretion, invested on behalf of Universal Hemp $ i 34,019 on September 28, 2020. As a result, Universal Hemp acquired i 34,019 class B units, at $ i 1.00 par value per unit, which represented i 100% financial interest in the Investment Partnership, a Canada-based limited partnership. An affiliate of the Institutional Investor holds class A units of the Investment Partnership. The general partner of the Investment Partnership is also an affiliate of the Institutional Investor. The class B units are held by the Investment Advisor as an agent for Universal Hemp. Upon execution of the limited partnership agreement, $ i 1,019 was distributed to the class A unit holders of the Investment Partnership.

F-21


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

i 7.50% Loan due April 2026

On September 28, 2020, the Company received gross proceeds of $ i 33,000 (less transaction costs of approximately $ i 959) from an affiliate of the Institutional Investor (the “Lender”) and used a portion of the proceeds of this loan to retire its short-term $ i 11,000 convertible note (as described above) and its short-term note aggregating approximately $ i 18,000 in October 2020, with the remainder being used for working capital purposes. The loan is unsecured, matures in i 3 years and bears interest at a i 7.5% annual interest rate. The Lender is controlled by the Institutional Investor. The Investment Partnership is the investor in the Lender. On December 16, 2021, the Company paid an amendment fee of $ i 413 to extend the maturity date from September 28, 2023 to April 2, 2026. The amendment was treated as a debt extinguishment.

Note due December 2024

In November 2020, the Company issued a promissory note with a third party, which is non-interest bearing and payable based on a payment schedule with i ten payments in the aggregate amount of $ i 7,750 through December 31, 2024, as a result of a settlement described under the “CanWell Dispute” in Note 13.

i 9.75% Credit facilities due January 2026

On December 16, 2021, the Company entered into a $ i 150,000 senior secured credit facility with a syndicate of lenders consisting of a $ i 75,000 initial draw, a $ i i 25,000 / delayed draw that must be advanced within i 12 months and a $ i 50,000 committed accordion facility that is available after December 1, 2022, provided certain financial covenants are met, and with a maturity of January 1, 2026. Upon closing, gross proceeds of $ i 75,000 were drawn (before origination discounts and issuance costs of approximately $ i 4,000 and $ i 1,500, respectively, which were capitalized). In April 2022, the Company drew down on the remaining $ i i 25,000 / under this facility. Refer to Note 14 for further discussion of the syndicated related party lender.

The loan is secured by pledged equity interests and substantially all of the assets of the Company. Advances under the facility bear interest at i 9.75% per annum (plus an additional i 1.0% per annum until certain collateral assignment agreements are delivered) and undrawn amounts (excluding the committed accordion facility until it is available) bear interest at i 3.0% per annum.

The loan is subject to various financial covenants, including a fixed charge coverage ratio and i two leverage ratios. The Company obtained a waiver of these covenants for the three month periods ended March 31, 2022 and June 30, 2022. This waiver included a $ i 500 waiver fee that was paid to the lenders. Subsequent to the balance sheet date, the i 9.75% Credit facilities due January 2026 were amended (refer to Note 17 for further discussion).

Commencing with the receipt of the of the loan, mandatory prepayments are required from net proceeds of certain sale or disposition activities provided these proceeds are not invested in additional capital assets within 12 months of the disposition date, as defined by the Credit Agreement.

11. i SHAREHOLDERS’ EQUITY AND NON-CONTROLLING INTERESTS

The table below details the change in Pubco shares outstanding by class for the three and nine months ended September 30, 2022:

Shareholders’ Equity

Fixed Shares

Floating Shares

Fixed Shares Held in Treasury

Floating Shares Held in Treasury

Fixed Multiple Shares

Total Shares Outstanding

i 74,665

i 32,962

( i 589)

( i 253)

i 118

i 106,903

Issuances

i 3,897

i 969

i —

i 4,866

NCI conversions

i 265

i 113

i —

i 378

i 78,827

i 34,044

( i 589)

( i 253)

i 118

i 112,147

F-22


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

Warrants

A summary of the warrants activity outstanding is as follows:

Warrants

Fixed Shares

Floating Shares

i 5,817

i 2,524

Expired

i —

i 5,817

i 2,524

The exercise price of each Fixed Share warrant ranged from $ i 3.15 to $ i 4.00, respectively, and the exercise price of each Floating Share warrant ranged from $ i 3.01 to $ i 4.00, respectively. The warrants are exercisable for a period of i 4 years. The weighted-average remaining contractual life of the warrants outstanding is approximately i 2.4 years. There was i no aggregate intrinsic value for warrants outstanding as of September 30, 2022.

Non-controlling interests - convertible units

The Company has NCIs in consolidated subsidiaries USCo2 and HSCP. The non-voting shares of USCo2 and HSCP units make up substantially all of the NCI balance as of September 30, 2022 and are convertible for either i 0.7 of a Fixed Share and i 0.3 of a Floating Share of Pubco or cash, as determined by the Company. i Summarized financial information of HSCP is presented below. USCo2 does not have discrete financial information separate from HSCP.

HSCP net asset reconciliation

Current assets

i 93,253

i 113,011

Non-current assets

i 385,138

i 375,807

Current liabilities

( i 18,429)

( i 29,256)

Non-current liabilities

( i 220,299)

( i 195,791)

Other NCI balances

( i 723)

( i 718)

Accumulated equity-settled expenses

( i 239,592)

( i 226,596)

Net assets

( i 652)

i 36,457

HSCP/USCo2 ownership % of HSCP

i 16.36

i 17.24

Net assets allocated to USCo2/HSCP

( i 107)

i 6,285

Net assets attributable to other NCIs

i 723

i 718

Total NCI

i 616

i 7,003


	Three Months Ended September 30,						Nine Months Ended September 30,
HSCP Summarized Statement of Operations	2022			2021			2022			2021
Net loss allocable to HSCP/USCo2	$	( i 16,549)		$	( i 10,052)		$	( i 27,589)		$	( i 18,882)
HSCP/USCo2 weighted average ownership % of HSCP	i 16.84		%	i 17.57		%	i 16.96		%	i 17.80		%
Net loss allocated to HSCP/USCo2	$	( i 2,787)		$	( i 1,766)		$	( i 4,679)		$	( i 3,361)
Net loss allocated to other NCIs	i 3			i 5			i 4			i 14
Net loss attributable to NCIs	$	( i 2,784)		$	( i 1,761)		$	( i 4,675)		$	( i 3,347)

As of September 30, 2022, USCo2’s non-voting shares owned approximately i 0.22% of HSCP units. USCo2’s capital structure is comprised of voting shares, all of which are held by the Company, and of non-voting shares held by certain former HSCP members. Certain executive employees and profits interests holders own approximately i 16.14% of HSCP units. The remaining i 83.64% interest in HSCP is held by USCo and represents the members’ equity attributable to shareholders of the parent.

During the nine months ended September 30, 2022 and 2021, the Company had several transactions with HSCP and USCo2 that changed its ownership interest in the subsidiaries but did not result in loss of control. These transactions included business acquisitions and the redemption of HSCP and USCo2 convertible units for Pubco shares (as shown in the table below), and

F-23


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

resulted in a $ i 55 allocation from shareholders' equity to NCI and $ i 862 allocation from NCI to shareholders' equity for the nine months ended September 30, 2022 and 2021, respectively.

A reconciliation of the beginning and ending amounts of convertible units is as follows:

Convertible Units

Incorporated by Reference

Beginning balance

i 23,076

i 24,142

NCI units converted to Pubco

( i 378)

( i 1,066)

Ending balance

i i i 22,698 / /

i 23,076

12. i EQUITY-BASED COMPENSATION EXPENSE

Amended Arrangement with Canopy Growth

On September 23, 2020, the Company announced the implementation of the Amended Arrangement (as defined in Note 13). Pursuant to the Amended Arrangement, the Company’s articles have been amended to create new Fixed Shares, Floating Shares and Fixed Multiple Shares. Consequently, the Company’s equity-based compensation was modified into new equity awards of the Company. Refer to Note 13 for further discussion.

Equity-based compensation - Plan (Acreage Holdings, Inc. Omnibus Incentive Plan)

In connection with the RTO transaction, the Company’s Board of Directors adopted an Omnibus Incentive Plan, as amended September 23, 2020 (the “Plan”), which permits the issuance of stock options, stock appreciation rights, stock awards, share units, performance shares, performance units and other stock-based awards up to an amount equal to i 15% of the issued and outstanding Subordinate Voting Shares of the Company.

Pursuant to the Amended Arrangement, the Company retained the Plan described above, the upper limit of issuances being up to an amount equal to i 15% of the issued and outstanding Fixed Shares and Floating Shares of the Company. As of September 30, 2022, the Company had i 3,199 shares authorized and available for grant under the Plan.

Restricted Share Units (“RSUs”)

Fixed Shares

Floating Shares

Restricted Share Units

(Fair value information expressed in whole dollars)

RSUs

Weighted Average Grant Date Fair Value

RSUs

Weighted Average Grant Date Fair Value

Unvested, January 1, 2022

i 3,188

i 7.30

i 1,262

i 7.39

Granted

i 7,717

i 0.67

i 95

i 1.19

Forfeited

( i 533)

i 2.07

( i 83)

i 2.54

Vested

( i 3,811)

i 4.08

( i 764)

i 7.90

Unvested, September 30, 2022

i 6,561

i 1.80

i 510

i 6.27

Vested and unreleased(1)

i 225

i 5.80

i 24

i 15.15

Outstanding, September 30, 2022

i i i 6,786 / /

i 1.93

i i i 534 / /

i 6.67

(1) RSUs that are vested and unreleased represent RSUs that are pending delivery.

RSUs of the Company generally vest over a period of i three years and RSUs granted to certain executives vest based on achievement of specific performance conditions. In certain situations for specified individuals, RSUs vest on an accelerated basis on separation. The fair value for RSUs is based on the Company’s share price on the date of the grant. The Company recorded $ i 2,256 and $ i 7,645 as Equity-based compensation expense on Unaudited Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2022, respectively, and $ i 3,092 and $ i 14,044 during the three and nine months ended September 30, 2021, respectively. The fair value of RSUs vested during the three and nine months ended September 30, 2022 was $ i 1,427 and $ i 4,760, respectively, and $ i 718 and $ i 15,045 during the three and nine months ended September 30, 2021, respectively.

F-24


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

The total weighted average remaining contractual life and aggregate intrinsic value of unvested RSUs as of September 30, 2022 was approximately i 2 years and $ i 3,856, respectively. Unrecognized compensation expense related to these awards at September 30, 2022 was $ i 13,005 and is expected to be recognized over a weighted average period of approximately i 1 year.

Stock options

Fixed Shares

Floating Shares

Stock Options
(Exercise price expressed in whole dollars)

Options

Weighted Average Exercise Price

Options

Weighted Average Exercise Price

Options outstanding, January 1, 2022

i 1,529

i 11.07

i 2,414

i 3.06

Granted

i 5,849

i 0.59

i —

Forfeited

( i 41)

i 5.66

( i 91)

i 2.57

Expired

i —

( i 20)

i 2.55

Options outstanding, September 30, 2022

i i i 7,337 / /

i 2.75

i i i 2,303 / /

i 3.09

Options exercisable, September 30, 2022

i 1,229

i 12.85

i 1,925

i 3.14

Stock options of the Company generally vest over a period of i three years and options granted to certain executives vest based on achievement of specific performance conditions. Stock options of the Company have an expiration period of i 5 or i 10 years from the date of grant. The weighted average contractual life remaining for Fixed Share options outstanding and exercisable as of September 30, 2022 was approximately i 5 and i 6 years, respectively. The weighted average contractual life remaining for Floating Share options outstanding and exercisable as of September 30, 2022 was approximately i 4 and i 4 years, respectively. The Company recorded $ i 300 and $ i 725 as Equity-based compensation expense on Unaudited Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2022 and $ i 1,076 and $ i 3,147 during the three and nine months ended September 30, 2021, respectively, in connection with these awards.

As of September 30, 2022, unamortized expense related to stock options totaled $ i 2,182 and is expected to be recognized over a weighted-average period of approximately i 2 years. As of September 30, 2022, the aggregate intrinsic value for unvested options and for vested and exercisable options was i nil, respectively.

Equity-based compensation - other

In May 2022, the Company granted i 301 Fixed Shares and i 127 Floating Shares and recorded $ i 600 as Equity-based compensation expense on Unaudited Condensed Consolidated Statements of Operations during the for the three and nine months ended September 30, 2022 in settlement of post-employment expenses.

13. i COMMITMENTS AND CONTINGENCIES

Commitments

The Company provides revolving lines of credit to several of its portfolio companies. As of September 30, 2022, the maximum obligation under these arrangements was $ i 15,150 (refer to Note 6 for further discussion).

Prior Plan of Arrangement with Canopy Growth

On June 19, 2019, the shareholders of the Company and of Canopy Growth separately approved the proposed plan of arrangement (the “Prior Plan of Arrangement”) involving the i two companies, and on June 21, 2019, the Supreme Court of British Columbia granted a final order approving the Prior Plan of Arrangement. Effective June 27, 2019, the articles of the Company were amended pursuant to the Prior Plan of Arrangement to provide that, upon the occurrence (or waiver by Canopy Growth) of the Triggering Event, subject to the satisfaction of the conditions set out in the arrangement agreement entered into between Acreage and Canopy Growth on April 18, 2019, as amended on May 15, 2019 (the “Original Arrangement Agreement”), Canopy Growth will acquire (the “Acquisition”) all of the issued and outstanding shares in the capital of the Company (each, an “Acreage Share”).

Second Amendment to the Arrangement Agreement with Canopy Growth

F-25


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

On September 23, 2020, Acreage and Canopy Growth entered into an amending agreement (the “Amending Agreement” or “Amended Arrangement”) (and together with the Original Arrangement Agreement and any further amendments thereto, the “Amended Plan of Arrangement”) and the Amended Arrangement became effective at 12:01 a.m. (Vancouver time) (the “Amendment Time”) on September 23, 2020 (the “Amendment Date”). Pursuant to the Amended Plan of Arrangement, Canopy Growth made a cash payment of $ i 37,500 which was delivered to Acreage’s shareholders and certain holders of securities convertible or exchangeable into shares of Acreage. Acreage also completed a capital reorganization (the “Capital Reorganization”) effective as of the Amendment Time whereby: (i) each existing SVS was exchanged for i 0.7 of a Fixed Share and i 0.3 of a Floating Share; (ii) each issued and outstanding PVS was exchanged for i 28 Fixed Shares and i 12 Floating Shares; and (iii) each issued and outstanding MVS was exchanged for i 0.7 of a Fixed Multiple Share and i 0.3 of a Floating Share.

At the Amendment Time, each option, restricted share unit, compensation option, and warrant to acquire existing SVS (each a “Security”) that was outstanding immediately prior to the Amendment Time, was exchanged for a replacement Security to acquire Fixed Shares (a “Fixed Share Replacement Security”) and a replacement Security to acquire Floating Shares (a “Floating Share Replacement Security”) to account for the Capital Reorganization.

Pursuant to the Amended Plan of Arrangement, upon the occurrence or waiver (at the discretion of Canopy Growth) of the Triggering Event (the “Triggering Event Date”), Canopy Growth will, subject to the satisfaction or waiver of certain closing conditions set out in the Arrangement Agreement: (i) acquire all of the issued and outstanding Fixed Shares (following the mandatory conversion of the Fixed Multiple Shares into Fixed Shares) on the basis of i 0.3048 of a common share of Canopy Growth (each whole common share, a “Canopy Growth Share”) for each Fixed Share held (the “Fixed Exchange Ratio”) at the time of the acquisition of the Fixed Shares (the “Acquisition Time”), subject to adjustment in accordance with the terms of the Amended Plan of Arrangement (the “Canopy Call Option”); and (ii) have the right (but not the obligation) (the “Floating Call Option”), exercisable for a period of i 30 days following the Triggering Event Date to acquire all of the issued and outstanding Floating Shares at a price to be determined based upon the i 30 day volume-weighted average trading price of the Floating Shares, subject to a minimum price of $ i 6.41, as may be adjusted in accordance with the terms of the Amended Plan of Arrangement, to be payable, at the option of Canopy Growth, in cash, Canopy Growth Shares or a combination thereof. If any portion is paid in Canopy Growth Shares, the number of Canopy Growth Shares to be exchanged for each Floating Share shall be determined on the basis of a i 30 day volume-weighted average calculation using the Floating Shares (the “Floating Ratio”). The closing of the acquisition of the Floating Shares pursuant to the Floating Call Option, if exercised, will take place concurrently with the closing of the acquisition of the Fixed Shares pursuant to the Canopy Call Option, if exercised. The Canopy Call Option and the Floating Call Option will expire i 10 years from the Amendment Time.

At the Acquisition Time, on the terms and subject to the conditions of the Amended Plan of Arrangement, each Fixed Share Replacement Security will be exchanged for a replacement Security from Canopy Growth equal to: (i) the number of Fixed Shares that were issuable upon exercise of such Fixed Share Replacement Security immediately prior to the Acquisition Time, multiplied by (ii) the Fixed Exchange Ratio in effect immediately prior to the Acquisition Time (provided that if the foregoing would result in the issuance of a fraction of a Canopy Growth Share, then the number of Canopy Growth Shares to be issued will be rounded down to the nearest whole number).

In the event that the Floating Call Option is exercised and Canopy Growth acquires the Floating Shares at the Acquisition Time, on the terms and subject to the conditions of the Amended Plan of Arrangement, each Floating Share Replacement Security will be exchanged for a replacement Security from Canopy Growth equal to: (i) the number of Floating Shares that were issuable upon exercise of such Floating Share Replacement Security immediately prior to the Acquisition Time, multiplied by (ii) the Floating Ratio (if the foregoing would result in the issuance of a fraction of a Canopy Growth Share, then the number of Canopy Growth Shares to be issued will be rounded down to the nearest whole number). In the event that the Floating Call Option is exercised and Canopy Growth acquires the Floating Shares at the Acquisition Time, Acreage will be a wholly-owned subsidiary of Canopy Growth.

The Amended Plan of Arrangement provides for, among other things, Amendments to the definition of Purchaser Approved Share Threshold (as defined therein) to change the number of shares of Acreage available to be issued by Acreage without an adjustment in the Fixed Exchange Ratio such that Acreage may issue a maximum of i 32,700 shares. Furthermore, Acreage generally may not issue any equity securities without Canopy Growth’s prior consent. Additionally, the Amended Plan of Arrangement allows for various Canopy Growth rights that extend beyond the Acquisition Date, including, among others: (i) rights to nominate a majority of Acreage’s Board of Directors following the Acquisition Time; (ii) restrictive covenants in respect of the business conduct in favor of Canopy Growth; (iii) termination of non-competition and exclusivity rights granted to Acreage by Canopy Growth in the event that Acreage does not meet certain specified financial targets; (iv) implementation of further restrictions on Acreage’s ability to operate its business in the event that Acreage does not meet certain specified

F-26


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

financial targets; and (v) termination of the Amended Plan of Arrangement in the event that Acreage does not meet certain specified financial targets in the trailing 12 month period. Each of the financial targets referred to above is specified in the Amending Agreement and related to the performance of Acreage relative to a business plan for Acreage for each fiscal year ended December 31, 2020 through December 31, 2029 set forth in the Proposal Agreement (the “Initial Business Plan”).

Further, the Amended Plan of Arrangement imposes restrictions on Acreage entering into any contracts in respect of Company Debt if: (i) such contract would be materially inconsistent with market standards for companies operating in the United States cannabis industry; (ii) such contract prohibits a prepayment of the principal amount of such Company Debt; and (iii) such contract would provide for interest payments to be paid through the issuance of securities as opposed to cash, among other restrictions. The Amended Plan of Arrangement also provides for the following: (i) certain financial reporting obligations to Canopy Growth; (ii) certain specified criteria related to any new directors or officers of Acreage, and (iii) a limit to Acreage’s operations to the Identified States (as defined therein).

Tax Receivable Agreement and Tax Receivable Bonus Plans

The Company is a party to i) a tax receivable agreement dated November 14, 2018 and subsequently amended (the “Tax Receivable Agreement”) between the Company and certain current and former unit holders of HSCP and ii) tax receivable bonus plans dated November 14, 2018 and subsequently amended (the “Tax Receivable Bonus Plans”) between the Company and certain directors, officers and consultants of the Company (together the “Tax Receivable Recipients”). Under the Tax Receivable Agreement and the Tax Receivable Bonus Plans, the Company is required to make cash payments to the Tax Receivable Recipients equal to 85% of the tax benefits, if any, that the Company actually realizes, or in certain circumstances is deemed to realize, as a result of (i) the increases in its share of the tax basis of assets of HSCP resulting from any redemptions or exchanges of Units from the HSCP Members, and (ii) certain other tax benefits related to the Company making payments under the Tax Receivable Agreement and the Tax Receivable Bonus Plan. Although the actual timing and amount of any payments that the Company makes to the Tax Receivable Recipients can not be estimated, it expects those payments will be significant. Any payments made by the Company to the Tax Receivable Recipients may generally reduce the amount of overall cash flow that might have otherwise been available to it. Payments under the Tax Receivable Agreement are not conditioned on any Tax Receivable Recipient’s continued ownership of Units or our shares after the completion of the RTO. Payments under the Tax Receivable Bonus Plan may, at times, be conditioned on the Tax Receivable Recipient’s continued employment by the Company.

In connection with the Amended Arrangement, the Company amended the terms of the Tax Receivable Agreement and the Tax Receivable Bonus Plans. Additionally, subsequent to the balance sheet date, the Company agreed to further amendments to The Tax Receivable Agreement and the Tax Receivable Bonus Plan. Refer to Note 17 for further discussion.

Debenture

In connection with the implementation of the Amended Arrangement, pursuant to a secured debenture dated September 23, 2020 (the “Debenture”) issued by Universal Hemp, LLC, an affiliate of Acreage that operates solely in the hemp industry in full compliance with all applicable laws (the “Borrower”), to 11065220 Canada Inc., an affiliate of Canopy Growth (the “Lender”), the Lender agreed to provide a loan of up to $ i 100,000 (the “Loan”), $ i 50,000 of which was advanced on the Amendment Date (the “Initial Advance”), and $ i 50,000 of the Loan will be advanced in the event that the following conditions, among others, are satisfied: (a) the Borrower’s EBITDA (as defined in the Debenture) for any i 90 day period is greater than or equal to i 2.0 times the interest costs associated with the Initial Advance; and (b) the Borrower’s business plan for the 12 months following the applicable i 90 day period supports an Interest Coverage Ratio (as defined in the Debenture) of at least i 2.00:1.

The principal amount of the Loan will bear interest from the date of advance, compounded annually, and be payable on each anniversary of the date of the Debenture in cash in U.S. dollars at a rate of i 6.1% per annum. The Loan will mature i 10 years from the date of the Initial Advance.

The Loan must be used exclusively for U.S. hemp-related operations and on the express condition that such amount will not be used, directly or indirectly, in connection with or for the operation or benefit of any of the Borrower’s affiliates other than subsidiaries of the Borrower exclusively engaged in U.S. hemp-related operations and not directly or indirectly, towards the

F-27


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

operation or funding of any activities that are not permissible under applicable law. The Loan proceeds must be segregated in a distinct bank account and detailed records of debits to such distinct bank account will be maintained by the Borrower.

No payment due and payable to the Lender by the Borrower pursuant to the Debenture may be made using funds directly or indirectly derived from any cannabis or cannabis-related operations in the United States, unless and until the Triggering Event Date.

The Debenture includes usual and typical events of default for a financing of this nature, including, without limitation, if: (i) Acreage is in breach or default of any representation or warranty in any material respect pursuant to the Arrangement Agreement; (ii) the Non-Core Divestitures are not completed within i 18 months from the Amendment Date; and (iii) Acreage fails to perform or comply with any covenant or obligation in the Arrangement Agreement which is not remedied within 30 days after written notice is given to the Borrower by the Lender. The Debenture also includes customary representations and warranties, positive covenants and negative covenants of the Borrower.

Advisor fee

In connection with the Prior Plan of Arrangement, the Company entered into an agreement with its financial advisor providing for a fee payment of $ i 7,000 in either cash, Acreage shares or Canopy Growth shares, at the discretion of the Company, upon the successful acquisition of Acreage by Canopy Growth. Subsequent to September 30, 2022, the Company amended the terms of the agreement with its financial advisors providing for a fee payment of $ i 3,000 in cash, less a $ i 500 initial payment, and $ i 2,000 in shares of the Company, upon the successful acquisition of Acreage by Canopy Growth.

Surety bonds

The Company has indemnification obligations with respect to surety bonds primarily used as security against non-performance in the amount of $ i 5,000 as of September 30, 2022, for which no liabilities are recorded on the Unaudited Condensed Consolidated Statements of Financial Position.

The Company is subject to other capital commitments and similar obligations. As of September 30, 2022 and 2021, such amounts were not material.

CanWell Settlement

In November 2020, the Company entered into a final confidential settlement agreement with CanWell, LLC for certain outstanding proceedings. As part of that agreement, the Company accrued for $ i 7,750 in Legal settlements, net on the Statements of Operations for the year ended December 31, 2020. In connection with this settlement agreement, the Company issued a promissory note in the amount of $ i 7,750 to CanWell, which is non-interest bearing and is payable in periodic payments through December 31, 2024. Through September 30, 2022, the Company has paid $ i 3,792 of the promissory note.

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’s applicable subsidiaries ceasing operations. While management of the Company believes that the Company’s subsidiaries are in compliance with applicable local and state regulations as of September 30, 2022, cannabis regulations continue to evolve and are subject to differing interpretations. As a result, the Company’s subsidiaries may be subject to regulatory fines, penalties, or restrictions in the future.

The Company and its subsidiaries may be, from time to time, subject to various administrative, regulatory and other legal proceedings arising in the ordinary course of business. Contingent liabilities associated with legal proceedings are recorded when a liability is probable, and the contingent liability can be reasonably estimated.

New York outstanding litigation

On November 2, 2018, EPMMNY LLC (“EPMMNY”) filed a complaint in the Supreme Court of the State of New York, County of New York, asserting claims against i 16 defendants, including NYCANNA, Impire State Holdings LLC, NY Medicinal Research & Caring, LLC (each, a wholly-owned subsidiary of High Street) and High Street. The Index Number for the action is 655480/2018. EPMMNY alleges that it was wrongfully deprived of a minority equity interest and management

F-28


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

role in NYCANNA by its former partner, New Amsterdam Distributors, LLC, which attempted to directly or indirectly sell or transfer EPMMNY’s alleged interest in NYCANNA to other entities in 2016 and 2017, including Impire, NYMRC and High Street.

EPMMNY alleges that it is entitled to the value of its alleged minority interest in NYCANNA or minority ownership in NYCANNA. EPMMNY also alleges that certain defendants misused its alleged intellectual property and/or services, improperly solicited its employees, and aided and abetted or participated in the transfer of equity and/or business opportunities from EPMMNY.

High Street intends to vigorously defend this action, which the Company firmly believes is without merit. High Street is also entitled to full indemnity from the claims asserted against it by EPMMNY pursuant to the purchase agreement pertaining to its acquisition of NYCANNA and personal guarantee by the largest shareholders of the seller. High Street, along with the other defendants, filed a motion to dismiss on April 1, 2019. The motion was fully briefed and submitted to the Court as of July 18, 2019, and oral argument was heard on September 6, 2019. The motion remains pending before the Court. Following a hearing held the week of April 25-29, 2022, the Court ruled that Plaintiff had the capacity to bring this action on behalf of EPMMNY. The motions to dismiss remain pending on all other grounds.

14. i RELATED PARTY TRANSACTIONS

Transactions with related parties are entered into in the normal course of business and are measured at the amount established and agreed to by the parties.

Related party notes receivable

In May 2021, the Company sold i two secured promissory notes totaling $ i 28,000 received from the sale of Acreage Florida to Viridescent for cash proceeds of approximately $ i 26,000. Viridescent is an entity controlled by Kevin Murphy, the Chairman of the board of directors. Refer to Note 6 for further discussion.

i 6.10% Secured debenture due September 2030

As disclosed in Note 10, “ i 6.10% Secured debenture due September 2030”, on September 23, 2020, pursuant to the implementation of the Amended Arrangement, a subsidiary of Canopy Growth advanced gross proceeds of $ i 50,000 (less transaction costs of approximately $ i 4,025) to Universal Hemp, an affiliate of the Company, pursuant to the terms of a secured debenture. In accordance with the terms of the debenture, the funds cannot be used, directly or indirectly, in connection with or for any cannabis or cannabis-related operations in the United States, unless and until such operations comply with all applicable laws of the United States. Acreage then engaged an investment advisor (the “Investment Advisor”) which, under the Investment Advisor’s sole discretion, invested on behalf of Universal Hemp, $ i 34,019 of the proceeds on September 28, 2020. During the three and nine months ended September 30, 2022, the Company incurred interest expense attributable to the i 6.10% Secured debenture due September 2030 of $ i 624 and $ i 1,851, respectively.

As a result, Universal Hemp, a subsidiary of the Company, acquired i 34,019 class B units, at $ i 1 par value per unit, which represented i 100% financial interest in an Investment Partnership, a Canada-based limited partnership. An affiliate of the Institutional Investor holds Class A Units of the Investment Partnership. The general partner of the Investment Partnership is also an affiliate of the Institutional Investor. The class B units are held by the Institutional Investor as agent for Universal Hemp. On September 28, 2020, the Company received gross proceeds of $ i 33,000 (less transaction costs of approximately $ i 959) from an affiliate of the Institutional Lender (the “Lender”) and used a portion of the proceeds of this loan to retire its short-term $ i 11,000 convertible note and its short-term note aggregating approximately $ i 18,000 in October 2020, with the remainder being used for working capital purposes. The Lender is controlled by the Institutional Lender. The Investment Partnership is the investor in the Lender.

F-29


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

Michigan consulting agreement

Pursuant to the Consulting Services Agreement by and between Kevin Michigan, LLC, a company controlled by Kevin Murphy, and High Street (the “Michigan Consulting Agreement”), High Street provides certain consulting services to Kevin Michigan, LLC, which includes, but is not limited to, services related to application support, provisioning center administration and operation, local and state regulatory filings, human resource matters, and marketing matters. The Michigan Consulting Agreement explicitly states that High Street is not able to direct or control the business of Kevin Michigan, LLC. Additionally, there are certain leases held by and between Kevin Michigan, LLC, as lessee and certain wholly owned subsidiaries of High Street, as lessors. As of September 30, 2022, Kevin Michigan, LLC is not operational, and i no consulting fees or rents have been paid to High Street or its wholly owned subsidiaries. Kevin Michigan, LLC is owned and controlled by the Company’s Chairman, Kevin Murphy.

i 9.75% Credit facilities due January 2026

As disclosed in Note 10, on December 16, 2021, the Company entered into the i 9.75% Credit facilities due January 2026 with a syndicate of lenders, including Viridescent Realty Trust, Inc. (“Viridescent”), an entity controlled by Kevin Murphy. Under the terms of the i 9.75% Credit facilities due January 2026, a $ i 75,000 initial draw was available immediately, an additional $ i i 25,000 / delayed draw is available that must be advanced within 12 months, and a $ i 50,000 committed accordion facility is available after December 1, 2022, provided certain financial covenants are met. Advances under the facilities bear interest at i 9.75% per annum and undrawn amounts (excluding the committed accordion facility until it is available) bear interest at i 3.0% per annum. In April 2022, the Company drew down on the additional $ i i 25,000 / delayed draw under this facility.

Viridescent has committed $ i 30,000 of the $ i 100,000 drawn down under the Credit Facility, with third-party syndicated affiliates committing the additional $ i 70,000. During the three and nine months ended September 30, 2022, the Company incurred interest expense attributable to Viridescent of $ i 824 and $ i 2,215, respectively. The loan is secured by first-lien mortgages on Acreage’s wholly owned real estate and other commercial security interests. A third-party syndicate served as Administrative Agent for the transaction. Subsequent to the balance sheet date, the i 9.75% Credit facilities due January 2026 were amended (refer to Note 17 for further discussion).

15. i REPORTABLE SEGMENTS

The Company prepares its segment reporting on the same basis that its Chief Operating Decision Maker manages the business, and makes operating decisions. The Company operates under i one operating segment, which is its only reportable segment: the production and sale of cannabis products. The Company’s measure of segment performance is net income, and derives its revenue primarily from the sale of cannabis products, as well as related management or consulting services which were not material in all periods presented. All of the Company’s operations are located in the United States.

16. i EARNINGS PER SHARE

Basic earnings per share are computed by dividing net loss attributable to common shareholders of the Company by the weighted average number of outstanding shares for the period. Diluted earnings per share are calculated based on the weighted number of outstanding common shares plus the dilutive effect of stock options and warrants, as if they were exercised, and restricted stock units and profits interests, as if they vested and NCI convertible units, as if they converted.

Basic and diluted loss per share is as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

2022

2021

2022

2021

Net loss attributable to common shareholders of the Company

( i 22,214)

( i 12,296)

( i 44,837)

( i 22,657)

Weighted average shares outstanding - basic

i 111,200

i 106,332

i 108,795

i 104,524

Effect of dilutive securities

i —

Weighted average shares - diluted

i 111,200

i 106,332

i 108,795

i 104,524

Net loss per share attributable to common shareholders of the Company - basic

( i 0.20)

( i 0.12)

( i 0.41)

( i 0.22)

Net loss per share attributable to common shareholders of the Company - diluted

( i 0.20)

( i 0.12)

( i 0.41)

( i 0.22)

F-30


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

During the three and nine months ended September 30, 2022, i i 5,817 / Fixed warrants, i i 2,524 / Floating warrants, i i i 6,786 / / Fixed Share RSUs, i i i 534 / / Floating Share RSUs, i i i 7,337 / / Fixed Share stock options, i i i 2,303 / / Floating Share stock options and i i i 22,698 / / NCI convertible units were excluded from the calculation of net loss per share attributable to common shareholders of the Company - diluted, as they were anti-dilutive. During the three and nine months ended September 30, 2021, i i 7,131 / Fixed warrants, i i 3,087 / Floating warrants, i i 3,621 / Fixed Share RSUs, i i 1,757 / Floating Share RSUs, i i 1,530 / Fixed Share stock options, i i 2,419 / Floating Share stock options and i i 23,076 / NCI convertible units were excluded from the calculation of net loss per share attributable to common shareholders of the Company - diluted, as they were anti-dilutive.

17. i SUBSEQUENT EVENTS

Acreage enters into new strategic arrangement with Canopy Growth

On October 24, 2022, the Company entered into an arrangement agreement (the “Floating Share Agreement”) with Canopy Growth and Canopy USA, LLC (“Canopy USA”), Canopy Growth’s newly-created U.S. domiciled holding company, pursuant to which, subject to approval of the holders of the Class D subordinate voting shares of Acreage (the “Floating Shares”) and the terms and conditions of the Floating Share Agreement, Canopy USA will acquire all of the issued and outstanding Floating Shares by way of court-approved plan of arrangement (the “Floating Share Arrangement”) for consideration of i 0.4500 of a common share of Canopy Growth (each whole share a “Canopy Share”) in exchange for each Floating Share.

Concurrently with entering into of the Floating Share Agreement, Canopy Growth irrevocably waived its option to acquire the Floating Shares pursuant to the Amended Arrangement.

Subject to the provisions of the Floating Share Agreement, Canopy Growth has agreed to exercise the fixed option pursuant to the Amended Agreement to acquire all outstanding Fixed Shares, representing approximately i 70% of the total shares of Acreage as at the date hereof, at a fixed exchange ratio of i 0.3048 of a Canopy Share for each Fixed Share.

Completion of the Floating Share Agreement is subject to the satisfaction or waiver of certain closing conditions, including receipt of applicable regulatory and court approvals, the approval of at least (i) 66⅔% of the votes cast by Floating Shareholders, and (ii) a majority of the votes cast by Floating Shareholders excluding the votes cast by “interested parties” and “related parties” under Multilateral Instrument 61-101 - Protection of Minority Security Holders in Special Transactions (“MI 61-101”) of the Canadian Securities Administrators, at a special meeting of Acreage shareholders (the “Special Meeting”) expected to take place in January 2023.

Canopy Growth and Canopy USA have entered into voting support agreements with certain of the Company’s directors and current and former officers holding approximately i 7.3% of the issued and outstanding Floating Shares pursuant to which they have agreed, among other things, to vote their Floating Shares in favor of the Floating Share Agreement.

Acreage expects the Floating Share Arrangement to close in the second half of 2023, subject to receipt of shareholder, court, and regulatory approvals, as well as the satisfaction or waiver of all conditions under the Floating Share Agreement and the Amended Arrangement. It is anticipated that the acquisition by Canopy USA of the Fixed Shares pursuant to the Fixed Option will be completed immediately following closing of the Floating Share Agreement. Refer to Note 13 for further discussion on the Prior Plan of Arrangement and the Amended Arrangement

Tax Receivable Account and Tax Receivable Bonus Plan Amendments

Concurrently with execution of the Floating Share Agreement, Canopy Growth agreed to issue (i) Canopy Shares with a value of approximately $ i 30,500 to certain current or former unit holders of HSCP to acquire the right to all future payments under HSCP’s existing Tax Receivable Agreement, as amended (the “TRA”) and (ii) a payment with a value of approximately $ i 19,500 in Canopy Shares to certain directors, officers or consultants of Acreage to satisfy obligations under HSCP’s existing Tax Receivable Bonus Plans, under further amendment to each. Canopy Shares with a value of approximately $ i 15,300 will be issued to certain Holders as soon as practicable as the first installment under the amended TRA with a second payment of approximately $ i 15,300 in Canopy Shares to occur on the earlier of (a) the second business day following the date on which the Floating Shareholders approve the Floating Share Arrangement; or (b) April 24, 2023. In addition, a final payment with a value of approximately $ i 19,500 in Canopy Shares will be issued by Canopy Growth to certain eligible participants under the Tax Receivable Bonus Plans immediately prior to the completion of Floating Share Arrangement. Refer to Note 13 for further discussion on the Tax Receivable Agreement.

Credit Facility Amendment

On October 24, 2022, the Company amended its existing $ i 150,000 credit facility (the “Amended Credit Facility”). Under the terms of the Amended Credit Facility, $ i 25,000 is available for immediate draw by Acreage with a further $ i 25,000 available in future periods under a committed accordion option once certain predetermined milestones are achieved. In conjunction with entering into the Amended Credit Facility, all financial debt covenants, except a minimum cash requirement, were waived until

F-31


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

December 31, 2023, and new covenants have been agreed upon in respect of all periods beginning on or after December 31, 2023. Finally, the Amended Credit Facility includes approval for Canopy USA to acquire control of Acreage without requiring repayment of all amounts outstanding under the Amended Credit Facility, provided certain conditions are satisfied. Acreage intends to use the proceeds of the Amended Credit Facility to fund expansion initiatives and provide additional working capital.

The Amended Credit Facility will bear interest at a variable rate of U.S. prime (“Prime”) plus i 5.75% per annum, payable monthly in arrears, with a Prime floor of i 5.50%, and a maturity date of January 1, 2026. Under the terms of the Amended Credit Facility, the Company has the option to extend the maturity date to January 1, 2027, for a fee equal to i 1.0% of the total loan amount. Separately, the Company paid an amendment fee of $ i 1,250 to the syndicate of lenders. Refer to Note 10 for further discussion on the i 9.75% Credit facilities due January 2026.

Management has reviewed all other events subsequent to September 30, 2022 through the date of issuing these financial statements and determined that no further subsequent events require adjustment or disclosure.

F-32

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to assist in the understanding and assessing the trends and significant changes in our results of operations and financial condition. Historical results may not be indicative of future performance. This discussion includes forward-looking statements that reflect our plans, estimates and beliefs. Such statements involve risks and uncertainties. Our actual results may differ materially from those contemplated by these forward-looking statements as a result of various factors, including those set forth in “Risk Factors” in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”), and “Cautionary Statement Regarding Forward-Looking Statements” set forth below.

This MD&A should be read in conjunction with the Company’s unaudited condensed consolidated financial statements for the three month period ended September 30, 2022 and related notes appearing elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report” or “Form 10-Q”) and the 2021 Form 10-K. Financial information presented in this MD&A is presented in thousands of U.S. dollars, unless otherwise indicated.

Cautionary Statement Regarding Forward Looking-Statements

This Quarterly Report of the Company contains statements that include forward-looking information and are forward-looking statements within the meaning of applicable Canadian and United States securities legislation (“forward-looking statements”), including the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. All statements, other than statements of historical fact, included herein are forward-looking statements, including, for greater certainty, the on-going implications of the novel coronavirus (“COVID-19”) and statements regarding the proposed transactions with Canopy Growth Corporation (“Canopy Growth,”) and Canopy USA, LLC (“Canopy USA”), as applicable, including the anticipated benefits and likelihood of completion thereof.

Generally, forward-looking statements may be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “proposed”, “is expected”, “budgets”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or “believes”, or variations of such words and phrases, or by the use of words or phrases which state that certain actions, events or results may, could, would, or might occur or be achieved. There can be no assurance that such forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such forward-looking statements. Forward-looking statements reflect Acreage’s current beliefs and are based on information currently available to Acreage and on assumptions Acreage believes are reasonable. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Acreage to be materially different from those expressed or implied by such forward-looking statements. Such risks and other factors may include, but are not limited to:

•the future implications to the business, financial results and performance of the Company arising, directly or indirectly, from COVID-19;

•the anticipated benefits of the Amended Arrangement;

•the anticipated benefits of the Floating Share Arrangement;

•the ability of Acreage to meets its performance targets and financial thresholds agreed upon with Canopy Growth as part of the Amended Arrangement;

•the likelihood of Canopy Growth completing the acquisition of the Fixed Shares and timing thereof;

•the likelihood of Canopy USA completing the acquisition of the Floating Shares and timing thereof;

•the ability of the parties to the Floating Share Arrangement to receive, in a timely manner and on satisfactory terms, the necessary regulatory, court and shareholder approvals;

•the ability of the parties to satisfy, in a timely manner, the other conditions to the completion of the Floating Share Agreement;

•the ability of the parties to each of the Amending Agreement and the Floating Share Agreement to satisfy, in a timely manner, the conditions to closing of each of the Amended Arrangement and the Floating Share Arrangement, respectively;

•in the event that the Floating Share Arrangement is not adopted, the likelihood of completion of the acquisition of the Floating Shares pursuant to an alternative transaction;

•in the event that the Floating Share Arrangement is not adopted, the likelihood of Canopy Growth completing the acquisition of the Fixed Shares under the Amended Arrangements; risks related to the ability of the Company to finance its business and fund its obligations;

•other expectations and assumptions concerning the transactions contemplated between Canopy Growth and/or Canopy USA and Acreage;

•the available funds of Acreage and the anticipated use of such funds;

•the availability of financing opportunities for Acreage and the risks associated with the completion thereof;

•regulatory and licensing risks;

•changes in general economic, business and political conditions, including changes in the financial and stock markets;

•risks related to infectious diseases, including the impacts of COVID-19;

•legal and regulatory risks inherent in the cannabis industry;

•risks associated with economic conditions, dependence on management and currency risk;

•risks relating to U.S. regulatory landscape and enforcement related to cannabis, including political risks;

•risks relating to anti-money laundering laws and regulation;

•risks relating to shortages in materials and increased costs for transportation, energy, and raw material due in part to the negative impact of the Russia-Ukraine war on the global economy;

•other governmental and environmental regulation;

•public opinion and perception of the cannabis industry;

•risks related to contracts with third-party service providers;

•risks related to the enforceability of contracts and lack of access to U.S. bankruptcy protections;

•reliance on the expertise and judgment of senior management of Acreage;

•risks related to proprietary intellectual property and potential infringement by third parties;

•the concentrated voting control of Acreage’s founder and the unpredictability caused by Acreage’s capital structure;

•risks relating to the management of growth;

•increasing competition in the industry;

•risks inherent in an agricultural business;

•risks relating to energy costs;

•risks associated with cannabis products manufactured for human consumption including potential product recalls;

•reliance on key inputs, suppliers and skilled labor;

•cybersecurity risks;

•ability and constraints on marketing products;

•fraudulent activity by employees, contractors and consultants;

•tax and insurance related risks;

•risks related to the economy generally;

•risk of litigation;

•conflicts of interest;

•risks relating to certain remedies being limited and the difficulty of enforcement judgments and effecting service outside of Canada;

•risks related to future acquisitions or dispositions;

•sales by existing shareholders; and

•limited research and data relating to cannabis.

A description of additional assumptions used to develop such forward-looking statements and a description of additional risk factors that may cause actual results to differ materially from forward-looking statements can be found in Part I, Item 1A of the Company’s Annual Report on Form 10-K, under the heading “Risk Factors”, dated March 11, 2022, as filed with the Securities and Exchange Commission. Although Acreage has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. Readers are cautioned that the foregoing list of factors is not exhaustive. Readers are further cautioned not to place undue reliance on forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which they are placed will occur. Forward-looking statements contained in this Form 10-Q are expressly qualified by this cautionary statement. The forward-looking statements contained in this Form 10-Q represent the expectations of Acreage as of the date of this Form 10-Q and, accordingly, are subject to change after such date. However, Acreage expressly disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as expressly required by applicable securities law.

Management’s discussion and analysis of financial condition and results of operations is intended to help provide an understanding of the Company’s financial condition, changes in financial condition and results of operations. This discussion is organized as follows:

•Overview—This section provides a general description of the Company’s businesses, its strategic objectives, as well as developments that occurred during the three and nine months ended September 30, 2022 and 2021 that the Company believes are important in understanding its results of operations and financial condition or to disclose known trends.

•Results of Operations—This section provides an analysis of the Company’s results of operations for the three and nine months ended September 30, 2022 and 2021. This analysis is presented on a consolidated basis. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.

•Liquidity and Capital Resources—This section provides an analysis of the Company’s cash flows for the three and nine months ended September 30, 2022 and 2021, as well as a discussion on the Company’s outstanding debt and commitments that existed as of September 30, 2022. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund the Company’s future commitments and obligations, as well as a discussion of other financing arrangements.

Overview

Acreage, a vertically integrated, multi-state operator of cannabis licenses and assets in the U.S, was continued into the Province of British Columbia under the Business Corporations Act (British Columbia). Acreage Fixed Shares and Floating Shares (as such terms are defined at Note 13 of the unaudited condensed consolidated financial statements) are each listed on the Canadian Securities Exchange under the symbols “ACRG.A.U” and “ACRG.B.U”, respectively, and are quoted on the OTCQX® Best Market by OTC Markets Group under the symbols “ACRHF” and “ACRDF”, respectively and on the Open Market of the Frankfurt Stock Exchange under the symbols “0VZ1” and “0VZ2”, respectively. Acreage operates through its consolidated subsidiary High Street Capital Partners, LLC (“HSCP”), a Delaware limited liability company. HSCP, which does business as “Acreage Holdings”, was formed on April 29, 2014. The Company became an indirect parent of HSCP on November 14, 2018 in connection with a reverse takeover (“RTO”) transaction. The Company’s operations include (i) cultivating cannabis plants, (ii) manufacturing branded consumer products, (iii) distributing cannabis flower and manufactured products, and (iv) retailing high-quality, effective and dosable cannabis products to consumers. The Company appeals to medical and adult-use customers through brand strategies intended to build trust and loyalty.

As of September 30, 2022, Acreage owned and operated a total of twenty-three dispensaries - four in New York, three in New Jersey, three in Connecticut, two in Massachusetts, two in Illinois, five in Ohio, and four in Maine. As of September 30, 2022, Acreage owned and operated a total of nine cultivation and processing facilities, one each in California, Illinois, Maine, New Jersey, New York, Ohio and Pennsylvania, respectively, and two in Massachusetts.

Strategic Priorities

The Company believes its refocused strategy is the key to continued improvements in its financial results and shareholder value. The Company remains focused on three key strategic objectives - accelerating growth in its core markets, driving profitability, and strengthening the balance sheet.

Accelerating Growth in Core Markets: Through prior acquisitions and capital expenditures, management believes Acreage is well positioned for future success in several key markets as regulations regarding the use of cannabis continue to evolve. The Company will continue to focus its growth on its core markets where it can take advantage of and expand on the presence already established.

Driving Profitability: The Company's focus on improving operational and financial results has generally resulted in improving profitability. Management continues to diligently control costs, improve operational efficiencies, and accelerate organic growth in its core markets to continue to report improved profitability going forward.

Strengthening the Balance Sheet: Strengthening the balance sheet is key to both providing the Company with the necessary capital to achieve its operational plans and building shareholder confidence. The Company has worked to ensure that sufficient capital is available when needed. Going forward, the Company will monitor the capital markets and utilize opportunities to access additional debt or equity, or both, when it is necessary and advantageous to do so.

Highlights from the three and nine months ended September 30, 2022:

•Subsequent to the end of the quarter, the Company entered into a new strategic arrangement with Canopy Growth that would allow Canopy Growth to acquire 100% of Acreage by i) waiving its existing Floating Share option and entering into a new Floating Share acquisition agreement; and ii) committing to exercise its Fixed Share option, all subject to required approvals and terms of the related agreements.

•Subsequent to the end of the quarter, the Company amended its $150 million credit facility to provide immediate access to $25 million and increased flexibility through updated covenants.

•Subsequent to the end of the quarter, the Company’s social equity joint venture in Connecticut was approved for both a Disproportionately Impacted Area Cultivation License and an Adult-use Cannabis Retailer license.

•The Company achieved total consolidated revenue growth of 28% and 37% as compared with the three and nine months ended September 30, 2021, respectively.

•Adjusted EBITDA for the three and nine months ended September 30, 2022 was $8.8 million and $27.9 million, respectively, compared to adjusted EBITDA of $6.5 million and $16.2 million, respectively, during the same period in

2021. This marks seven consecutive quarters of positive adjusted EBITDA, further validating management's refocused strategic plan. Refer to section “Non-GAAP Information” in this Item 2 for discussion of Adjusted EBITDA as a non-GAAP measure.

•Launched Botanist Vape Cartridges and Disposables in Illinois as well as Superflux Cured Concentrates to build on reputation of national brand. Further, Superflux Won Best Vape Pen and Cartridge category in High Times Cannabis Cup Illinois with their Live Resin Margalope Cartridge.

•On July 5, 2022, the Company completed the sale of its four remaining Oregon dispensaries for total proceeds of $6.2 million with $5.85 million being satisfied by a 36 month promissory note bearing interest at a rate of 12% per annum.

•On May 3, 2022, the Company completed the sale of its cultivation facility in Medford, Oregon for total proceeds of $2.0 million.

•On May 1, 2022, the Company acquired and converted to adult use the final dispensary owned by our partner in Maine.

•On April 25, 2022, the Company commenced adult-use operations in New Jersey, offering a range of products from flagship brand The Botanist for adult-use sales.

Operational and Regulation Overview

The Company believes its operations are in material compliance with all applicable state and local laws, regulations and licensing requirements in the states in which it operates. However, cannabis is illegal under U.S. federal law. Substantially all of the Company’s revenue is derived from U.S. cannabis operations. For information about risks related to U.S. cannabis operations, please refer to Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

COVID-19

In response to the outbreak, governmental authorities in the United States, Canada and internationally have introduced various recommendations and measures to try to limit the pandemic, including travel restrictions, border closures, non-essential business closures, quarantines, self-isolations, shelters-in-place and social distancing. The COVID-19 outbreak and the response of governmental authorities to try to limit it are having a significant impact on the private sector and individuals, including unprecedented business, employment and economic disruptions. Management has been closely monitoring the impact of COVID-19, with a focus in the health and safety of our employees, business continuity and supporting our communities. The Company implemented various measures at the height of the pandemic to reduce the spread of the virus, such as implementing social distancing measures at its facilities. Most of these measures are no longer considered to be necessary or required; however, the Company reserves the right to implement similar precautionary measures in the future as circumstances change.

Aside from minimal impact to our day-to-day operations at select locations, COVID-19 has had an immaterial impact overall on our Company’s performance as key performance metrics are trending positively, including, but not limited to, significant improvements to net revenue and net loss as well as positive adjusted EBITDA results.

Results of Operations

The following table presents selected financial data derived from the unaudited condensed consolidated financial statements of the Company for the three and nine months ended September 30, 2022 and 2021. The selected financial information set out below may not be indicative of the Company’s future performance.

Summary Results of Operations


					Better/(Worse)									Better/(Worse)
in thousands, except per share amounts	Three Months Ended September 30,				2022 vs. 2021				Nine Months Ended September 30,				2022 vs. 2021
	2022		2021		$		%		2022		2021			$		%
Revenues, net	$	61,419	$	48,152	$	13,267	28	%	$	179,649	$	130,762		$	48,887	37	%
Net operating loss	(16,435)		(6,494)		(9,941)		(153)		(15,847)		(11,444)			(4,403)		(38)
Net loss attributable to Acreage	(22,214)		(12,296)		(9,918)		(81)		(44,837)		(22,657)			(22,180)		(98)
Basic and diluted loss per share attributable to Acreage	$	(0.20)	$	(0.12)	$	(0.08)	(67)	%	$	(0.41)	$	(0.22)		$	(0.19)	(86)	%

Revenues, Cost of goods sold and Gross profit

The Company derives its revenues from sales of cannabis and cannabis-infused products through retail dispensary, wholesale and manufacturing and cultivation businesses, as well as from management or consulting fees from entities for whom the Company provides management or consulting services.

Gross profit is revenue less cost of goods sold. Cost of goods sold includes costs directly attributable to inventory sold such as direct material, labor, and overhead, including depreciation. Such costs are further affected by various state regulations that limit the sourcing and procurement of cannabis and cannabis-related products, which may create fluctuations in gross profit over comparative periods as the regulatory environment changes.


							Better/(Worse)											Better/(Worse)
in thousands	Three Months Ended September 30,						2022 vs. 2021				Nine Months Ended September 30,						2022 vs. 2021
	2022			2021			$		%		2022			2021				$		%
Retail revenue, net	$	48,314		$	30,795		$	17,519	57	%	$	136,426		$	85,038			$	51,388	60	%
Wholesale revenue, net	12,810			17,077			(4,267)		(25)		42,342			42,634				(292)		(1)
Other revenue, net	295			280			15		5		881			3,090				(2,209)		(71)
Total revenues, net	$	61,419		$	48,152		$	13,267	28	%	$	179,649		$	130,762			$	48,887	37	%
Cost of goods sold, retail	(26,097)			(16,279)			(9,818)		(60)		(70,331)			(43,412)				(26,919)		(62)
Cost of goods sold, wholesale	(14,096)			(8,069)			(6,027)		(75)		(27,968)			(19,049)				(8,919)		(47)
Total cost of goods sold	$	(40,193)		$	(24,348)		$	(15,845)	(65)	%	$	(98,299)		$	(62,461)			$	(35,838)	(57)	%
Gross profit	$	21,226		$	23,804		$	(2,578)	(11)	%	$	81,350		$	68,301			$	13,049	19	%
Gross margin	35		%	49		%			(14)	%	45		%	52		%				(7)	%
n/m - Not Meaningful

Three months ended September 30, 2022 vs. 2021

Total revenues for the three months ended September 30, 2022 grew by $13,267, or 28%, compared with 2021. On a comparative basis, total revenue increased by $14,208 due to i) the acquisitions of Greenleaf Ohio in October 2021 and ii) the acquisition of certain Maine operations and offset by iii) the disposition of the Company’s operations in Oregon in July 2022. Excluding these acquisitions and divestitures/closures, total revenue decreased by $941, or 2% for the three months ended September 30, 2022, as compared to 2021.

Retail revenue for the three months ended September 30, 2022 grew by $17,519, or 57%, compared with 2021. Excluding the impact of acquisitions and divestitures/closures, retail revenue increased by $4,730 or 16% for the three months ended September 30, 2022 compared to fiscal 2021. This organic growth was primarily driven by increased demand and production across various states, offset by price compression.

Wholesale revenue for the three months ended September 30, 2022 decreased by $4,267, or 25%, compared to fiscal 2021. The decreased wholesale revenue was primarily due to price compression and decreased wholesale demand in select markets, and somewhat offset by the acquisition of Greenleaf Ohio.

Retail cost of goods sold increased $9,818, or 60%, for the three months ended September 30, 2022 compared to 2021, which was generally consistent with the 57% increase in retail revenue. Price compression in select markets was offset by cost efficiencies.

Wholesale cost of goods sold increased $6,027, or 75%, for the three months ended September 30, 2022 compared to 2021, which outpaced the 25% increase in wholesale revenue. Wholesale cost of goods sold increased due to $6,286 of non-cash inventory adjustments made in the three months ended September 30, 2022 as a result of i) excess inventory in select markets

ii) reducing the carrying value of wholesale inventory to reflect the lower of cost and net realizable value and iii) increased costs due to inflation. Excluding these non-cash inventory adjustments, wholesale costs of goods sold decreased $259 or 3%.

Gross profit decreased $2,578, or 11%, for the three months ended September 30, 2022 to $21,226 from $23,804 in 2021. Gross margin decreased from 49% of revenue for the three months ended September 30, 2021 to 35% of revenue in 2022, or (14)%. Efficiencies gained from further economies of scale were unable to offset overall selling price declines, cost increases due to inflation, and the aforementioned wholesale non-cash inventory adjustments. Excluding these non-cash inventory adjustments, margin decreased to 45%.

Nine months ended September 30, 2022 vs. 2021

Total revenues for the nine months ended September 30, 2022 grew by $48,887, or 37%, compared with 2021. On a comparative basis, total revenue increased by $49,066 due to the acquisitions of (i) Greenleaf Ohio in October 2021, (ii) certain Maine operations and (iii) CWG in May 2021 and was offset by decreases of $3,428 due to the decreased performance and ultimate divestiture of the Company’s operations in Oregon in July 2022 and the divestiture of Acreage Florida in April 2021. Additionally, total revenue for the prior comparative nine months ended September 30, 2021 included (i) $2,530 of previously unrecognized management fees in New Hampshire, some of which related to prior periods and (ii) a bulk wholesale sale transaction of $1,500 that did not recur. Excluding these acquisitions and divestitures/closures, the impact of total revenue declines in the Company’s Oregon operations and the non-recurring transactions for the nine months ended September 30, 2021, total revenue increased by $3,249, or 3%, for the nine months ended September 30, 2022, as compared to fiscal 2021.

Retail revenue for the nine months ended September 30, 2022 grew by $51,388, or 60%, compared with 2021. Excluding the impact of acquisitions and divestitures/closures, as well as declines in the Company’s Oregon operations prior to their ultimate sale, retail revenue increased by $9,790, or 12%, for the nine months ended September 30, 2022 compared to the nine months ended 2021. This organic growth was primarily driven by increased demand and production across various states.

Wholesale revenue for the nine months ended September 30, 2022 decreased slightly by $292, or 1%, compared to fiscal 2021. The relatively flat wholesale revenue was primarily due to increased capacity, coupled with maturing operations offset by price compression and decreased wholesale demand in select markets. Additionally, wholesale revenue for the nine months ended September 30, 2022 increased by $4,040 due to acquisitions that have occurred over the prior 24 months which was somewhat offset by a bulk wholesale sale transaction of $1,500 in the second quarter of 2021 that did not recur.

Retail cost of goods sold increased $26,919, or 62%, for the nine months ended September 30, 2022 compared to 2021, which was generally consistent with the 60% increase in retail revenue. Price compression in select markets was offset by cost efficiencies.

Wholesale cost of goods sold increased $8,919, or 47%, for the nine months ended September 30, 2022 compared to 2021, which outpaced the 1% decrease in wholesale revenue. Wholesale cost of goods sold increased due to $6,286 of non-cash inventory adjustments made in the nine months ended September 30, 2022 as a result of i) excess inventory in select markets, ii) reducing the carrying value of wholesale inventory to reflect the lower of cost and net realizable value and iii) increased costs due to inflation. Excluding these non-cash inventory adjustments, wholesale costs of goods sold increased $2,633 or 14%.

Gross profit increased $13,049, or 19%, for the nine months ended September 30, 2022 to $81,350 from $68,301 in 2021, and Gross margin decreased from 52% of revenue for the nine months ended September 30, 2021 to 45% of revenue in 2022, or (7)%, due to the factors discussed above. Efficiencies gained from further economies of scale were unable to offset overall selling price declines, cost increases due to inflation, and the aforementioned wholesale non-cash inventory adjustments. Excluding these non-cash inventory adjustments, margin decreased to 49%.

Revenue by geography

While the Company operates under one operating segment for the production and sale of cannabis products, the below revenue breakout by geography is included as management believes it provides relevant and useful information to investors.


Revenue by region					Better/(Worse)									Better/(Worse)
in thousands	Three Months Ended September 30,				2022 vs. 2021				Nine Months Ended September 30,				2022 vs. 2021
	2022		2021		$		%		2022		2021			$		%
New England	$	16,481	$	19,893	$	(3,412)	(17)	%	$	49,293	$	56,070		$	(6,777)	(12)	%
Mid-Atlantic	21,235		14,694		6,541		45		56,125		43,474			12,651		29
Midwest	23,096		10,012		13,084		131		70,059		22,333			47,726		214
West	607		3,553		(2,946)		(83)		4,172		8,264			(4,092)		(50)
South	—		—		—		n/m		—		621			(621)		(100)
Total revenues, net	$	61,419	$	48,152	$	13,267	28	%	$	179,649	$	130,762		$	48,887	37	%

n/m - Not Meaningful

Total operating expenses

Total operating expenses consist primarily of loss on impairments, compensation expense at our corporate offices as well as operating subsidiaries, professional fees, which includes, but is not limited to, legal and accounting services, depreciation and other general and administrative expenses.


Operating expenses					Better/(Worse)									Better/(Worse)
in thousands	Three Months Ended September 30,				2022 vs. 2021				Nine Months Ended September 30,				2022 vs. 2021
	2022		2021		$		%		2022		2021			$		%
General and administrative	$	9,727	$	8,465	$	1,262	15	%	$	27,036	$	23,067		$	3,969	17	%
Compensation expense	15,271		10,699		4,572		43		42,045		32,236			9,809		30
Equity-based compensation expense	3,156		4,168		(1,012)		(24)		8,970		17,191			(8,221)		(48)
Marketing	735		583		152		26		2,396		992			1,404		142
Impairments, net	506		2,339		(1,833)		(78)		2,973		3,157			(184)		(6)
Loss on notes receivable	7,219		—		7,219		n/m		7,219		1,726			5,493		318
Write down (recovery) of assets held-for-sale	—		—		—		n/m		874		(8,616)			9,490		n/m
Legal settlements (recoveries)	—		—		—		n/m		(335)		322			(657)		n/m
Depreciation and amortization	1,047		4,044		(2,997)		(74)		6,019		9,670			(3,651)		(38)
Total operating expenses	$	37,661	$	30,298	$	7,363	24	%	$	97,197	$	79,745		$	17,452	22	%

n/m - Not Meaningful

Three months ended September 30, 2022 vs. 2021

Total operating expenses for the three months ended September 30, 2022 were $37,661, an increase of $7,363, or 24%, compared with 2021. The primary drivers of the increase in operating expenses were as follows:

•General and administrative expenses increased $1,262 during the three months ended September 30, 2022 compared with 2021, primarily due to (i) increased costs associated with the Company’s expanded operations from both organic growth and acquisitions, (ii) an increases in professional fees, which was driven by professional and consulting fees incurred, and (iii) an increase in the cost of insurance.

•Compensation expense increased $4,572 during the three months ended September 30, 2022 as compared with 2021, primarily due to increased headcount required to manage the Company’s expanded operations, including the acquisitions of Greenleaf during the period, as well as certain non-recurring retention payments made in the current period.

•Equity-based compensation expense decreased $1,012, or 24%, during the three months ended September 30, 2022 as compared with 2021, primarily due to benefits associated with reorganization efforts undertaken in prior periods, resulting in the acceleration of restricted share vesting for certain employees and previously issued awards becoming fully vested and cancelled in prior periods.

•Impairments, net decreased $1,833 for the nine months ended September 30, 2022 as compared with 2021, which was primarily driven by the non-recurrence of the write-off of $2,339 of capital assets at the Sewell, New Jersey locations resulting from damage by Hurricane Ida.

•Loss on notes receivable for the three months ended September 30, 2022 is due to the determination that the payment for certain notes receivables was doubtful based on the most recent information available to the Company.

•Depreciation and amortization expenses decreased by $2,997 during the three months ended September 30, 2022 compared with 2021, primarily due to an acceleration of the amortization of certain intangible assets as a result of a reduction in the expected useful lives of such assets during the three months ended September 30, 2021.

Nine months ended September 30, 2022 vs. 2021

Total operating expenses for the nine months ended September 30, 2022 were $97,197, an increase of $17,452, or 22%, compared with 2021. The primary drivers of the decrease in operating expenses were as follows:

•General and administrative expenses increased $3,969 during the nine months ended September 30, 2022 compared with 2021, primarily due to increases in (i) professional fees, which was driven by professional and consulting fees incurred, (ii) an increase in the cost of insurance, fees, permits and licenses and (iii) increased costs associated with the Company’s expanded operations from both organic growth and acquisitions.

•Compensation expense increased $9,809 during the nine months ended September 30, 2022 as compared with 2021, primarily due to increased headcount required to manage the Company’s expanded operations, including the acquisitions of certain Maine operations, CWG, and Greenleaf during the period, as well as certain non-recurring retention payments made in the current period.

•Equity-based compensation expense decreased $8,221, or 48%, during the nine months ended September 30, 2022 as compared with 2021, primarily due to benefits associated with reorganization efforts undertaken in prior periods, resulting in the acceleration of restricted share vesting for certain employees and previously issued awards becoming fully vested and cancelled in prior periods. Additionally, no annual grants were issued to employees under the Company’s normal long-term incentive plan until July 2022 for the current year-to-date period.

•The loss on notes receivable for the nine months ended September 30, 2022 and September 30, 2021 is due to the determination that the payment for certain notes receivables were doubtful based on the most recent information available to the Company.

•Write down (recovery) of assets held-for-sale of $874 for the nine months ended September 30, 2022 related to the Company’s Oregon operations, Write down (recovery) of assets held-for-sale of for the nine months ended September 30, 2021 were due to a recovery that was attributable to the Company agreeing on terms to sell Acreage Florida, and determining that the fair value less costs to sell its Acreage Florida disposal group increased $8,616 in excess of its previously written down value.

Total other income (loss)


Other income (loss)					Better/(Worse)									Better/(Worse)
in thousands	Three Months Ended September 30,				2022 vs. 2021				Nine Months Ended September 30,				2022 vs. 2021
	2022		2021		$		%		2022		2021			$		%
Income (loss) from investments, net	$	17	$	489	$	(472)	(97)	%	$	154	$	(777)		$	931	n/m
Interest income from loans receivable	474		1,067		(593)		(56)		1,256		4,125			(2,869)		(70)	%
Interest expense	(5,688)		(3,620)		(2,068)		(57)		(15,989)		(14,072)			(1,917)		(14)
Other income, net	4,743		80		4,663		n/m		5,019		7,825			(2,806)		(36)
Total other loss	$	(454)	$	(1,984)	$	1,530	77	%	$	(9,560)	$	(2,899)		$	(6,661)	(230)	%

n/m - Not Meaningful

Three months ended September 30, 2022 vs. 2021

Total other loss for the three months ended September 30, 2022 was $(454), a decrease of $1,530 compared with 2021. The primary drivers of the decrease in Total other income (loss) were as follows:

•Income from investments and interest income from loans receivable have declined due to the performance of certain investments held by the Company and a reduced balance of notes receivable due to repayments that have occurred over the past 15 months.

•Interest expense for the three months ended September 30, 2022 of $5,688 increased by $2,068 as a result of the Company having a larger debt balance as compared to 2021.

•Other income, net for the three months ended September 30, 2022 of $4,743 increased by $4,663 as compared with 2021. Other income, net for the three months ended September 30, 2022 was primarily related to a gain on the sale of the Company’s Oregon operations of $3,189.

Nine months ended September 30, 2022 vs. 2021

Total other loss for the nine months ended September 30, 2022 was $9,560, an increase of $6,661 compared with 2021. The primary drivers of the decrease in Total other income (loss) were as follows:

•Income (loss) from investments, net of $154 for the nine months ended September 30, 2022 has increased $931 as compared with 2021 due to improved performance of certain investments held by the Company.

•Interest income from loans receivable of $1,256 for the nine months ended September 30, 2022 has declined $2,869 as compared with 2021 due to a reduction in loans receivable outstanding during the comparative period.

•Interest expense for the nine months ended September 30, 2022 of $15,989 increased by $1,917 as a result of the Company having a larger debt balance as compared to 2021, somewhat offset by a lower over blended interest rate that is payable on the Company’s debt.

•Other income, net for the nine months ended September 30, 2022 of $5,019 decreased by $2,806 as compared with 2021. Other income, net for the nine months ended September 30, 2022 was primarily related to a gain on the sale of the Company’s Oregon operations of $3,189. Other income, net for the nine months ended September 30, 2021 was primarily related to a gain on the sale of Acreage Florida of $11,682 and was partially offset by the loss on the subsequent sale of notes receivable received as consideration from the buyer of Acreage Florida of approximately $2,000 and by losses related to the disposal of capital assets related to Form Factory.

Net loss


Net loss					Better/(Worse)									Better/(Worse)
in thousands	Three Months Ended September 30,				2022 vs. 2021				Nine Months Ended September 30,				2022 vs. 2021
	2022		2021		$		%		2022		2021			$		%
Net loss	$	(24,998)	$	(14,057)	$	(10,941)	(78)	%	$	(49,512)	$	(26,004)		$	(23,508)	(90)	%
Less: net loss attributable to non-controlling interests	(2,784)		(1,761)		(1,023)		(58)		(4,675)		(3,347)			(1,328)		(40)
Net loss attributable to Acreage Holdings, Inc.	$	(22,214)	$	(12,296)	$	(9,918)	(81)	%	$	(44,837)	$	(22,657)		$	(22,180)	(98)	%

n/m - Not Meaningful

The changes in net loss are driven by the factors discussed above.

Non-GAAP Information

This statement includes Adjusted EBITDA, which is a non-GAAP performance measure that we use to supplement our results presented in accordance with U.S. GAAP. The Company uses Adjusted EBITDA to evaluate its actual operating performance and for planning and forecasting future periods. The Company believes that the adjusted results presented provide relevant and useful information for investors because they clarify the Company’s actual operating performance, make it easier to compare our results with those of other companies and allow investors to review performance in the same way as our management. Since these measures are not calculated in accordance with U.S. GAAP, they should not be considered in isolation of, or as a substitute for, net loss or our other reported results of operations as reported under U.S. GAAP as indicators of our performance, and they may not be comparable to similarly named measures from other companies.

The Company defines Adjusted EBITDA as net income before interest, income taxes and, depreciation and amortization and excluding the following: (i) income from investments, net (the majority of the Company's investment income relates to remeasurement to net asset value of previously-held interests in connection with our roll-up of affiliates, and the Company expects income from investments to be a non-recurring item as its legacy investment holdings diminish), (ii) equity-based compensation expense, (iii) non-cash impairment losses, (iv) transaction costs, (v) non-cash inventory adjustments and (vi) other non-recurring expenses (other expenses and income not expected to recur).


Adjusted EBITDA					Better/(Worse)									Better/(Worse)
in thousands	Three Months Ended September 30,				2022 vs. 2021				Nine Months Ended September 30,				2022 vs. 2021
	2022		2021		$		%		2022		2021			$		%
Net loss (U.S. GAAP)	$	(24,998)	$	(14,057)					$	(49,512)	$	(26,004)
Income tax expense	8,109		5,579						24,105		11,661
Interest expense, net	5,214		2,553						14,733		9,947
Depreciation and amortization(1)	2,583		4,590						9,930		11,384
EBITDA (non-GAAP)	$	(9,092)	$	(1,335)	$	(7,757)	n/m		$	(744)	$	6,988		$	(7,732)	(111)	%
Adjusting items:
Loss (income) from investments, net	(17)		(489)						(154)		777
Impairments, net	506		—						2,596		818
Non-cash inventory adjustments	6,286		—						6,286		—
Loss on extraordinary events(2)	—		2,339						376		2,339
Loss on notes receivable	7,219		—						7,219		1,726
Write down (recovery) of assets held-for-sale	—		—						874		(8,616)
Legal settlements, net	—		—						(335)		322
Gain on business divestiture	(3,200)		(109)						(3,496)		(11,791)
Equity-based compensation expense	3,156		4,168						8,970		17,191

Other non-recurring expenses(3)	3,989		1,924						6,267		6,425
Adjusted EBITDA (non-GAAP)	$	8,847	$	6,498	$	2,349	36	%	$	27,859	$	16,179		$	11,680	72	%

n/m - Not Meaningful

(1) Depreciation and amortization as of September 30, 2021 contains depreciation and amortization included in cost of goods sold.

(2) Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence.

(3) Other non-recurring expenses relates to certain compensation, general and administrative, and other miscellaneous expenses. The Company excludes these items as they are not expected to recur.

The increases in adjusted EBITDA are driven by the factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Sources and uses of cash

The Company’s primary uses of capital include operating expenses, capital expenditures and the servicing of outstanding debt. The Company’s primary sources of capital include funds generated by cannabis sales as well as financing activities. Through September 30, 2022, the Company had primarily used private financing as a source of liquidity for short-term working capital needs and general corporate purposes.

As of September 30, 2022, the Company had cash of $26,476 (not including $95 of restricted cash). The Company’s ability to fund its operations, capital expenditures, acquisitions, and other obligations depends on its future operating performance and ability to obtain financing, which are subject to prevailing economic conditions, as well as financial, business and other factors, some of which are beyond the Company’s control.

The Company’s future contractual obligations include the following:

Leases

As of September 30, 2022, the Company had future operating lease obligations and future finance lease obligations of $38,866 and $21,365, respectively, with $1,147 and $5,858 payable within the remaining three months, respectively. The Company leases land, buildings, equipment and other capital assets which it plans to use for corporate purposes in addition to the production and sale of cannabis products. Leases with an initial term of 12 months or less are not recorded on the Unaudited Condensed Consolidated Statements of Financial Position and are expensed in the Unaudited Condensed Consolidated Statements of Operations on the straight-line basis over the lease term. The Company does not have any material variable lease payments, and accounts for non-lease components separately from leases. Refer to Note 8 of the Unaudited Condensed Consolidated Financial Statements for further discussion.

Debt

As of September 30, 2022, the Company had outstanding debt with varying maturities for an aggregate principal amount of $202,092, with $6,426 payable within the remaining three months. The Company has related future interest payments of $65,469, with $4,134 payable within the remaining three months. Refer to Note 10 of the Unaudited Condensed Consolidated Financial Statements for further discussion.

The Company expects that its total readily available funds of $26,476 as of September 30, 2022 and its further ability to obtain private and/or public financing, will be adequate to support the future obligations discussed above as well as the capital needs of the existing operations and expansion plans over the next twelve months. Additionally, subsequent to the end of the quarter, the Company amended its $150 million credit facility to provide immediate access to $25 million of the committed accordion with further access to the remaining $25 million of the committed accordion available on January 1, 2023 provided certain predetermined milestones are achieved. Refer to Note 2 of the Unaudited Condensed Consolidated Financial Statements for further discussion.

Cash flows

Cash and cash equivalents, restricted cash, and cash held for sale were $26,571 as of September 30, 2022, which represents a net decrease of $17,930 for the nine months ended September 30, 2022. The following table details the change in cash, cash equivalents, restricted cash and cash related to assets held for sale for the nine months ended September 30, 2022 and 2021.


Cash flows						Better/(Worse)
in thousands	Nine Months Ended September 30,				2022 vs. 2021
	2022		2021			$		%
Net cash used in operating activities	$	(30,473)	$	(18,312)		$	(12,161)	(66)	%
Net cash provided by (used in) investing activities	(5,328)		34,152			(39,480)		n/m
Net cash provided by (used in) financing activities	17,871		(40,995)			58,866		n/m
Net decrease in cash, cash equivalents, restricted cash, and cash held for sale	$	(17,930)	$	(25,155)		$	7,225	29	%

n/m - Not Meaningful

Net cash used in operating activities

During the nine months ended September 30, 2022, the Company used $30,473 of net cash in operating activities, which represented an increase of $12,161, or 66%, when compared with 2021. Although the reported net loss increased by $23,508 during the nine months ended September 30, 2022 when compared to the same period of 2021, the net loss excluding non-cash items such as impairments, equity based compensation, write-offs and recoveries, gains and losses on disposals and depreciation and amortization increased by $10,044 when compared to the same period of 2021. Additionally, cash used in operating activities for the nine months ended September 30, 2021 benefited from a difference in the timing of tax payments.

Net cash provided by (used in) investing activities

During the nine months ended September 30, 2022, the Company used $5,328 of net cash through investing activities compared to $34,152 of net cash provided by investing activities for the nine months ended September 30, 2021, which represented a change of $39,480. Net cash used in investing activities for the nine months ended September 30, 2022 included (i) $12,582 on the purchase of capital assets and intangibles and (ii) $3,400 paid for short-term investments, which was partially offset by (iii) the collection of notes receivable of $7,106. Net cash provided by investing activities for the nine months ended September 30, 2021 included (i) proceeds from the sale of promissory notes for $26,000, (ii) proceeds from business divestitures if $24,407, and (iii) the collection of notes receivable of $13,225, which was partially offset by (iv) $27,535 on the purchase of capital assets and intangibles.

Net cash provided by (used in) financing activities

During the nine months ended September 30, 2022, the Company had $17,871 of net cash provided by financing activities compared to $40,995 of net cash used in financing activities for the nine months ended September 30, 2021, which represented a change of $58,866. Net cash provided by financing activities for the nine months ended September 30, 2022 included (i) $24,489 of net proceeds from financing and was partially offset by (ii) $5,534 of capital distributions to non-controlling interest repayments of debt, and (iii) $1,084 of repayments of debt. Net cash used in financing activities for the nine months ended September 30, 2021 included (i) 46,321 of repayments of debt and was partially offset by (ii) $6,301 of net proceeds from financing.

Capital Resources

Capital structure and debt

Our debt outstanding as of September 30, 2022 and December 31, 2021 is as follows:


Debt balances	September 30, 2022		December 31, 2021
Financing liability (failed sale-leaseback)	$	15,253	$	15,253
Finance lease liabilities	10,925		5,245
7.50% Loan due April 2026	31,156		30,763
6.10% Secured debenture due September 2030	46,388		46,050
Note due December 2024	3,958		4,750
9.75% Credit facilities due January 2026	94,412		68,673
Total debt	$	202,092	$	170,734
Less: current portion of debt	7,218		1,583
Total long-term debt	$	194,874	$	169,151

Commitments and contingencies

Commitments

The Company provides revolving lines of credit to several third parties. Refer to Note 6 of the Unaudited Condensed Consolidated Financial Statements for further discussion.

Arrangement with Canopy Growth

On June 19, 2019, the shareholders of the Company and of Canopy Growth separately approved the Prior Plan of Arrangement involving the two companies. Subsequently, on September 23, 2020, Acreage and Canopy Growth entered into an amending agreement and the Amended Arrangement became effective on September 23, 2020.

Subsequent to September 30, 2022,the Company entered into a new strategic arrangement with Canopy Growth that, would allow Canopy Growth to acquire 100% of Acreage by i) waiving its existing Floating Share option and entering into a new Floating Share acquisition agreement; and ii) committing to exercise its Fixed Share option, all subject to required approvals and terms of the related agreements.

Refer to Notes 13 and 17 of the Unaudited Condensed Consolidated Financial Statements for further discussion.

Advisor fee

In connection with the Prior Plan of Arrangement, the Company entered into an agreement with its financial advisor providing for a fee payment of $7,000 in either cash, Acreage shares or Canopy Growth shares, at the discretion of the Company, upon the successful acquisition of Acreage by Canopy Growth. Subsequent to September 30, 2022, the Company amended the terms of the agreement with its financial advisors providing for a fee payment of $3,000 in cash, less a $500 initial payment, and $2,000 in shares of the Company, upon the successful acquisition of Acreage by Canopy Growth.

Tax Receivable Agreement

and certain directors, officers and consultants of the Company (together the “Tax Receivable Recipients”). Under the Tax Receivable Agreement and the Tax Receivable Bonus Plans, the Company is required to make cash payments to the Tax Receivable Recipients equal to 85% of the tax benefits, if any, that the Company actually realizes, or in certain circumstances is deemed to realize, as a result of (i) the increases in its share of the tax basis of assets of HSCP resulting from any redemptions or exchanges of Units from the HSCP Members, and (ii) certain other tax benefits related to the Company making payments under the Tax Receivable Agreement and the Tax Receivable Bonus Plan.

Surety bonds

The Company has indemnification obligations with respect to surety bonds primarily used as security against non-performance in the amount of $5,000 as of September 30, 2022, for which no liabilities are recorded on the Unaudited Condensed Consolidated Statements of Financial Position.

The Company is subject to other capital commitments and similar obligations. As of September 30, 2022, such amounts were not material.

Contingencies

Critical accounting policies and estimates

We have adopted various accounting policies to prepare the Unaudited Condensed Consolidated Financial Statements in accordance with GAAP. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. In our 2021 Annual Report on Form 10-K, we identified the critical accounting policies which affect our more significant estimates and assumptions used in preparing our consolidated financial statements.

As of September 30, 2022 there have been no material changes to our critical accounting policies and estimates from those previously disclosed in our 2021 Annual Report on Form 10-K for the year ended December 31, 2021.

Item 3. Quantitative and Qualitative Disclosures About Market Risk (presented in thousands, except share amounts).

The Company has exposure to certain risks, including market, credit, liquidity, asset forfeiture, banking and interest rate risk, and assesses the impact and likelihood of those risks. However, there have been no material changes in our market risk during the three and nine months ended September 30, 2022. For additional information, refer to our 2021 Annual Report on Form 10-K for the year ended December 31, 2021.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, and due to the material weakness in internal controls over financial reporting described below, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective for the period ending September 30, 2022 to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Inherent Limitations Over Internal Controls

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. The Company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of the Company’s management and directors; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Management, including the Company’s Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also, any evaluation of the effectiveness of controls in future periods are subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting for the first fiscal year in which the acquisition occurred. Management, including the Chief Executive Officer and Chief Financial Officer, has limited the evaluation of the Company’s internal controls over financial reporting to exclude controls, policies and procedures and internal controls over financial reporting of the recently acquired operations of:

•Greenleaf Apothecaries, Greenleaf Gardens, and Greenleaf Therapeutics, collectively “Greenleaf” (acquired October 1, 2021).

The operations of Greenleaf represents approximately 11% of the Company’s total assets as of September 30, 2022 and 25% of the Company’s gross revenue for the three and nine months ended September 30, 2022.

Material Weaknesses in Internal Control Over Financial Reporting

A material weakness in internal controls over financial reporting is a deficiency, or a combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The review, testing and evaluation of key internal controls over financial reporting completed by the Company resulted in the Company’s principal executive officer and principal financial officer concluding that as of September 30, 2022, a material weakness existed in the Company’s internal controls over financial reporting. Specifically, as a result of turnover and the availability of resources with the appropriate level of technical capabilities (including the impacts on staffing and recruiting and the general global labor shortage brought about by the global COVID-19 pandemic), the Company did not have effective staffing levels and adequate segregation of duties within several finance and accounting processes. Further, and as a result of this material weakness, the Company’s financial disclosures for the quarterly period ending June 30, 2021 incorrectly disclosed certain debt that was due 11 months after the balance sheet date as long-term rather than as current liabilities. Additionally, and as a result of this material weakness, the Company’s financial disclosures for the quarterly and annual periods ended June 30, 2020, September 30, 2020, December 31, 2020, March 31, 2021, June 30, 2021, and September 30, 2021 incorrectly reported the weighted average shares outstanding which resulted in an incorrect determination of earnings per share and diluted earnings per share.

The Company has begun to address the material weakness described above through the following actions, which are expected to be completed by the second half of 2023:

a.Engaging third-party consultants with appropriate expertise to assist the finance and accounting department on an interim basis until key roles are filled;

b.Assessing finance and accounting resources to identify the areas and functions that lack sufficient personnel and recruiting for experienced personnel to assume these roles;

c.Further centralization of key accounting processes to enable greater segregation of duties;

d.Developing further training on segregation of duties; and

e.Designing and implementing additional compensating controls where necessary.

The Company is working diligently to remediate this material weakness by hiring qualified and capable personnel. Further, we will continue to evaluate and assess the staffing needs of the Company as the landscape and needs of the Company continue to evolve. While we are working diligently to remediate this material weakness, there is no assurance that this material weakness will be fully remediated by the second half of 2023 given continuing lasting impacts of COVID-19 on staffing and labor for companies within our industry and otherwise.

Changes in Internal Control Over Financial Reporting

Other than the changes discussed above in connection with our implementation of the remediation plan, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a–15(f) and 15d–15(f) under the Exchange Act) that occurred during our most recent quarter, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

For information on legal proceedings, refer to Note 13 to the Unaudited Condensed Consolidated Financial Statements included this report.

Item 1A. Risk Factors.

There have been no material changes to the risk factors described in the section titled “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

Exhibit No.

Description of Document

Schedule Form

File Number

Exhibit/Form

Filing Date

Filed or Furnished Herewith

10.1

Arrangement Agreement, dated October 24, 2022, by and among Acreage Holdings, Inc., Canopy Growth Corporation and Canopy USA, LLC.

8-K

10.1

10/31/2022

10.2

Form of Voting Support Agreement dated October 24, 2022.

8-K

10.2

10/31/2022

10.3+

First Amendment to Credit Agreement and Incremental Increase Activation Notice, dated October 24, 2022 by and among High Street Capital Partners, LLC, Acreage Holdings, Inc., each lender identified on the signature pages thereto, AFC Agent LLC, as co-agent for the lenders and VRT Agent LLC, as co-agent for the lenders.

8-K

10.3

10/31/2022

10.4+

Third Amendment to Tax Receivable Agreement, dated October 24, 2022, by and among Acreage Holdings America, Inc., High Street Capital Partners, LLC, the members signatory thereto, Canopy Growth Corporation and Canopy USA LLC.

8-K

10.4

10/31/2022

10.5

Fourth Amendment to Third Amended and Restated Limited Liability Agreement of High Street Capital Partners, LLC, dated October 24, 2022.

8-K