Close

Form 8-K/A Village Farms Internatio For: Aug 16

November 1, 2021 4:44 PM EDT

Get instant alerts when news breaks on your stocks. Claim your 1-week free trial to StreetInsider Premium here.

Exhibit 23.1

 

 

Consent of Independent Auditors

The consolidated financial statements of Balanced Health Botanicals, LLC as of December 31, 2020 and for the period then ended, included in Exhibit Number 99.1 of Village Farms International, Inc. Form 8-K/A (“Form 8-K/A”), have been audited by Eide Bailly LLP, independent auditors, as stated in our report appearing herein.

We consent to the inclusion in the Form 8-K/A of our report, dated June 1, 2021, on our audit of the financial statements of Balanced Health Botanicals, LLC.

 

 

/s/ Eide Bailly LLP

 

Denver, Colorado

November 1, 2021

 

 

 

 

 

 

 

 

 

 

 

Exhibit 99.1

 

 

 

 

 

 

 

 

Balanced Health Botanicals, LLC

 

 

Consolidated Financial Statements

 

Years Ended December 31, 2020 and 2019

 

 

 

 


 

 

 

Balanced Health Botanicals, LLC

Index to Consolidated Financial Statements

 

 

 

 

Consolidated Financial Statements

Page

Report of Independent Registered Public Accounting Firm

2

Consolidated Balance Sheets as of December 31, 2020 and 2019

3

Consolidated Statements of Operations for the years ended December 31, 2020 and 2019

4

Consolidated Statements of Comprehensive Income for years ended December 31, 2020 and 2019

5

Consolidated Statements of Members’ Equity for the years ended December 31, 2020 and 2019

6

Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019

7

Notes to Consolidated Financial Statements

8

 

 

1


 

 

 

 

 

 

Independent Auditor’s Report

 

To the Members and the Board of Directors Balanced Health Botanicals, LLC

 

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Balanced Health Botanicals, LLC, which comprise the consolidated balance sheet as of December 31, 2020, and the related consolidated statements of operations, comprehensive income, members’ equity, and cash flows for the year then ended, and the related notes to the financial statements.

 

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

 

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

 

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Balanced Health Botanicals, LLC as of December 31, 2020, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

 

What inspires you, inspires us. | eidebailly.com

7001 E. Belleview Ave., Ste. 700 | Denver, CO 80237-2733 | TF 866.740.4100 | T 303.770.5700 | F 303.770.7581 | EOE

 

2


 

 

 

Emphasis of Matter Regarding Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net deficit. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion is not modified with respect to that matter.

 

Other Matter

The consolidated financial statements of Balanced Health Botanicals, LLC as of December 31, 2019, were audited by other auditors, whose report dated October 8, 2020, expressed an unmodified opinion on those statements.

 

 

 

Denver, Colorado June 1, 2021

 

 

3


 

 

BALANCED HEALTH BOTANICALS, LLC

CONSOLIDATED BALANCE SHEETS

 

 

 

December 31,

 

 

2020

 

2019

Assets

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

$1,678,576

 

$     2,311,883

Restricted cash

 

250,000

 

789,802

Accounts receivable, net

 

506,456

 

850,885

Inventory

 

3,174,884

 

10,758,914

Prepaid expenses and other

 

820,273

 

737,011

Total current assets

 

6,430,189

 

15,448,495

 

 

 

 

 

Property & equipment, net

 

1,681,307

 

2,020,214

Intangible assets, net

 

975,189

 

144,472

Other assets

 

291,114

 

712,709

Total assets

 

$  9,377,799

 

$18,325,890

 

 

 

 

 

Liabilities and members' equity

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable

 

$1,302,065

 

$3,759,942

Accrued expenses and other

 

4,219,554

 

4,047,470

Current portion of notes payable, net

 

6,889,012

 

5,447,850

Deferred revenue

 

2,401,511

 

2,438,688

Total current liabilities

 

14,812,142

 

15,693,950

 

 

 

 

 

Notes payable, net

 

2,846,771

 

1,950,267

Other long term liabilities

 

436,387

 

260,635

Total liabilities

 

18,095,300

 

17,904,852

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

 

Members’ equity

 

 

 

 

Members’ equity; 13,754,940 and 15,151,515 units issued and outstanding as of

    December 31, 2020 and 2019, respectively

 

(8,690,342)

 

429,736

Accumulated other comprehensive loss

 

(27,159)

 

(8,698)

Total members’ equity

 

(8,717,501)

 

421,038

 

 

 

 

 

Total liabilities and members’ equity

 

$                 9,377,799

 

$              18,325,890

 

 

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

4


 

 

BALANCED HEALTH BOTANICALS, LLC

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Year Ended December 31,

 

 

2020

 

2019

Net sales

 

$                36,815,367

 

$                55,303,769

Cost of goods sold

 

18,929,645

 

27,899,999

    Gross profit

 

17,885,722

 

27,403,770

 

 

 

 

 

Sales and marketing

 

12,309,107

 

13,580,553

General and administrative

 

12,041,525

 

12,509,393

Operating expenses

 

24,350,632

 

26,089,946

    Operating income

 

                (6,464,910)

 

                   1,313,824

 

 

 

 

 

Other expense, net

 

                   1,880,168

 

                     368,470

 

 

 

 

 

    Net income

 

$                (8,345,078)

 

$                     945,354

 

 

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

 

5


 

 

 

BALANCED HEALTH BOTANICALS, LLC

CONSOLIDATED STATEMENTS OF  COMPREHENSIVE INCOME

 

 

 

 

 

Year Ended December 31,

 

 

2020

 

2019

Net income

 

$             (8,345,078)

 

$                    945,354

Other comprehensive loss:

 

 

 

 

    Foreign currency translation adjustment

 

(18,461)

 

(8,698)

Comprehensive income

 

$                (8,363,539)

 

$                  936,656

 

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

6


 

 

BALANCED HEALTH BOTANICALS, LLC

CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITY

 

 

 

Members’ equity

 

 

Accumulated other comprehensive loss

 

Noncontrolling interest

 

Total

members’ equity

Balance – December 31, 2018

 

$                     5,202,688

 

$                                   -

 

$                       (13,236)

 

$                     5,189,452

Purchase of units from noncontrolling interest

 

(13,236)

 

                                    -

 

                        13,236

 

-

Foreign currency translation adjustment

 

-

 

(8,698)

 

-

 

(8,698)

Distributions declared to members

 

(5,705,070)

 

-

 

-

 

                    (5,705,070)

Net income

 

945,354

 

-

 

-

 

                        945,354

Balance - December 31, 2019

 

429,736

 

(8,698)

 

        -

 

421,038

Foreign currency translation adjustment

 

-

 

(18,461)

 

-

 

(18,461)

Distributions declared to members

 

(100,000)

 

-

 

-

 

(100,000)

Repurchase of members units

 

(675,000)

 

-

 

-

 

                       (675,000)

Net income

 

(8,345,078)

 

-

 

-

 

                   (8,345,078)

Balance - December 31, 2020

 

$                  (8,690,342)

 

$                       (27,159)

 

$                                   -

 

$                  (8,717,501)

 

 

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

7


 

 

BALANCED HEALTH BOTANICALS, LLC

CONSOLIDATED STATEMENTS OF CASH FLOW

 

 

                Year Ended December 31,

 

2020

 

2019

Operating activities:

 

 

 

Net income

$       (8,345,078)

 

$         945,354

 

Adjustments to reconcile net income to net cash flows (used in) provided by operating activities:

     Depreciation and amortization

777,319

 

240,004

     Bad debt expense

192,779

 

244,249

     Loss on disposal of assets

9,639

 

3,424

     (Gain) loss on equity method investment

-

 

(147,412)

 

Changes in operating assets and liabilities:

 

 

 

     Accounts receivable

151,650

 

888,142

     Inventory

7,584,030

 

(5,972,596)

     Related party receivable

-

 

450,000

     Prepaid expenses and other current assets

(83,262)

 

(291,071)

     Other assets

403,134

 

(698,907)

     Accounts payable

(2,457,877)

 

344,059

     Accrued expenses and other

172,084

 

2,188,077

     Deferred revenue

(37,177)

 

1,405,796

     Other liabilities

175,752

 

260,635

Cash used in operating activities

(1,457,007)

 

(140,246)

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

     Proceeds from sale of equity method investment

-

 

147,412

     Purchase of software

(770,972)

 

(279,786)

     Purchase of property & equipment

(507,796)

 

(2,055,395)

Cash used in investing activities

(1,278,768)

 

(2,187,769)

 

 

 

 

Financing Activities:

 

 

 

     Proceeds from borrowings

2,875,051

 

7,500,000

     Repayment of notes payable

(492,385)

 

(28,133)

     Debt issuance costs

(45,000)

 

(73,750)

     Repurchase of members units

(675,000)

 

-

     Distributions paid to members

(100,000)

 

(4,773,066)

Cash provided by financing activities

1,562,666

 

2,625,051

 

 

 

 

Net increase in cash, cash equivalents and restricted cash

(1,173,109)

 

297,036

Cash, cash equivalents and restricted cash, beginning of year

3,101,685

 

2,804,649

Cash, cash equivalents and restricted cash, end of year

$          1,928,576

 

$      3,101,685

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

     Interest paid

$             727,835

 

$           43,328

 

 

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

 

 

8


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

1.

ORGANIZATION

 

 

Balanced Health Botanicals, LLC (“Balanced Health Botanicals”, “BHB”, “We”, or the “Company”), is a Colorado limited liability company formed on September 26, 2016, under the name ELS Universal, LLC. Effective January 4, 2019, the Company changed the name to Balanced Health Botanicals, LLC.   On February 22, 2019, the Company increased its ownership in Bota Holdings, LLC from 51% to a wholly owned subsidiary. On August 30, 2019, the Company incorporated Balanced Health Botanicals International Limited, an Ireland entity, as a wholly owned subsidiary. On April 6, 2020, the Company incorporate Balanced Health Botanicals UK, LTD, a United Kingdom entity, as a wholly owned subsidiary.

 

The Company is headquartered in Denver, Colorado, and manufactures and distributes hemp-derived Cannabidiol (CBD) products within the United States and Europe under its CBDistillery™ and BOTA™ brands.  The Company’s current product lines include tinctures, ingestible products, topicals, and pet products.  The Company’s products are distributed through its eCommerce website, third party eCommerce websites, wholesalers, and various retailers.

 

Profits and losses are allocated to the members based on their ownership interests in accordance with the operating agreement. No member or manager shall be individually liable under judgment, decree or order of any court, or in any other matter, for debt, obligation or liability of the Company.  The term of the Company is perpetual unless and until the Company is dissolved pursuant to applicable law.

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 

Basis of Presentation

 

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The consolidated financial statements include the accounts of Balanced Health Botanicals and its subsidiaries, CBDistillery, LLC, Bota Holdings, LLC, Balanced Health Botanicals International, Ltd, and Balanced Health Botanicals UK, LTD. Intercompany balances and transactions are eliminated in preparation of the consolidated financial statements.

 

Going Concern

 

The Company currently has debt in the form of an outstanding convertible note (the “Convertible Note Payable”) with TTCP Executive Fund with a principal balance of $5,000,000 and accrued interest of $1,103,853 as of December 31, 2020.  The Convertible Note Payable matured in January 2020 and was subsequently extended for 90 days.  Pursuant to the terms of the agreement, the Convertible Note Payable was mandatorily convertible in the event a qualified financing event or acquisition transaction occurred on or prior to the maturity date (as further described in Note 8).  Since a qualified financing event or acquisition transaction had not occurred as of the maturity date, TTCP Executive Fund has the option to convert the note (as further described in Note 8), however, if not sooner converted, the entire unpaid principal balance and accrued but unpaid interest is due on demand.  As of June 1, 2021, the issuance date of the annual consolidated financial statements for the year ended December 31, 2020, the Convertible Note Payable has not been converted to equity and the Company does not expect that its cash or cash provided by financing activities, would be sufficient to fund its debt service payments related to the Convertible Note Payable if called by the holder.

 

Based on the uncertainty of the Company’s cash position and the due on demand nature of the convertible note with TTCP Executive Fund, as of the issuance date of the annual consolidated financial statements for the year ended December 31, 2020, the Company has concluded that there is substantial doubt about its ability to continue as a going concern for one year after the date that the consolidated financial statements are issued. To mitigate this risk, the Company plans to focus on cost management while making strategic investments in marketing and selling strategies to support revenue growth.  The Company also plans to pursue capital raising strategies.  However, the Company may be unable to obtain incremental equity or debt financing at favorable terms, or at all.  If we are unable to raise additional capital, we may be forced to reduce operations which would have a material impact on the Company.

 

The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates. Key estimates for the Company’s financial statements include valuation of inventory and assumptions related to deferred revenue and revenue recognition related to the Company’s loyalty program.

 

 

 

 

9


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Segments

 

The Company currently operates one segment engaged in the sale of hemp-derived Cannabidiol (CBD) products.  Information regarding revenues and operations for this segment is utilized on a regular basis by our chief operating decision maker ("CODM") to evaluate performance. Our Chief Executive Officer has been identified as the CODM.

 

Concentrations of Credit Risk

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable.

 

The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. The Company had a $1,432,224 and $2,099,142 uninsured balance at December 31, 2020 and 2019, respectively.

 

Concentration of credit risk with respect to receivables is principally limited to receivables from credit card processors. As of December 31, 2020, and 2019, receivable balances of $609,954 and $1,400,912, respectively, were due from two credit card processors. Management considers these customer receivables to represent normal business risk. The Company did not have any customers that represented a significant amount of our sales for the years ended December 31, 2020 and 2019.

 

The restricted cash on the consolidated balance sheets relates to arrangements with the same credit card processors.

 

The Company purchases its inventory from various vendors.  For the year ended December 31, 2020, approximately 61% of the Company's purchases were made from 3 vendors.  For the year ended December 31, 2019, approximately 62% of the Company's purchases were made from 3 vendors.  

 

Fair Value Measurements

 

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The accounting guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgement used to estimate the fair value of assets and liabilities.

 

 

Level 1 – uses unadjusted quoted prices that are available in active markets for identical assets or liabilities.

 

 

 

Level 2 – uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data.  These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgement because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data.

 

 

 

Level 3 – used one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgement.  Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgement or estimation.

 

 

The carrying amount of cash, accounts receivable, accounts payable, and accrued expenses approximates their fair value due to their short maturity. The carrying amount of notes payable approximates fair value because stated or implied interest rates approximate current interest rates that are available for debt with similar terms.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. As of December 31, 2020 and 2019, the Company did not hold any cash equivalents.

 

 

 

 

 

 

 

10


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Restricted Cash

 

The Company has restricted cash with contracted credit card processors where the current arrangement provides those credit card processors the right to withhold a cash reserve balance from the Company’s credit card receipt transactions that is generally based off a percentage of sales. The Company had restricted cash of $250,000 and $789,802 as of December 31, 2020 and 2019, respectively. The amounts are classified as current as they are reasonably expected to be realized as an unrestricted asset within the next 12 months.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows.

 

                                                                                                                                                                                December 31,

 

2020

 

2019

Cash and cash equivalents

$           1,678,576

 

$           2,311,883

Restricted cash

               250,000

 

             789,802

Total cash, cash equivalents, and restricted cash shown in the Statement of Cash Flows

$           1,928,576

 

$          3,101,685

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Generally, the Company requires payment prior to shipment of its products to customers. However, in certain circumstances, the Company extends credit to various wholesalers and retailers. Accounts receivable consists of receivables from credit card processors that are related to payments from customers and trade accounts arising in the normal course of business. The Company considers any receivables outstanding greater than 90 days to be delinquent. Accounts receivable are carried at original invoice amount less a reserve made for doubtful receivables based on a review of all outstanding amounts.

 

Management has determined the allowance for doubtful accounts by evaluating individual customer receivables and considering a customer’s financial condition and credit history, and current economic conditions. As of December 31, 2020 and 2019, the Company’s allowance for doubtful accounts related to accounts receivable was $79,191 and $20,951, respectively.  Bad debt expense for the years ended December 31, 2020 and 2019, was $192,779 and $244,249 respectively, of which $0 and $248,216 related to a receivable with a single credit card processor that was not collected.

 

 

Balance at beginning of year

 

Charged to income

 

Write-down

 

Balance at end

of year

Allowance for doubtful accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year ended December 31, 2020

 

$                      20,951

 

$                    192,779

 

$                    134,539

 

$                      79,191

 

 

 

 

 

 

 

 

 

Year ended December 31, 2019

 

$                    174,743

 

$                    244,249

 

$                    398,041

 

$                      20,951

 

Inventory

 

Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. Cost includes all expenses directly attributable to procurement of raw materials and finished goods, manufacturing of finished goods and suitable portions of related production overheads, based on normal operating capacity. Cost is determined by use of the first-in, first-out method.

 

The Company performs an assessment of inventory obsolescence to measure inventory at the lower of cost or net realizable value. Factors considered in the determination of obsolescence include slow-moving or non-marketable items.

 

Property and Equipment, net

 

Property and equipment is stated at cost less accumulated depreciation.  Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.  Maintenance or repairs are charged to expense as incurred.  Depreciation is provided on a straight-line basis over the assets estimated useful lives, and leasehold improvements are amortized on a straight-line basis over the shorter of the useful life or the remaining life of the related lease.  Estimated useful lives for property and equipment are as follows:

 

Machinery and Equipment5-10 years

Furnitures and Fixtures5-7 years

Leasehold ImprovementsShorter of lease life or estimated useful life

 

Upon sale or disposition, the historical asset cost and accumulated depreciation are removed from the respective accounts and any related gain or loss is recognized.

11


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Impairment of Long-lived Assets

 

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Circumstances that may lead to impairment of property and equipment include a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition and a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset including an adverse action or assessment by a regulator. As of December 31, 2020, and 2019, the Company determined there were no impairments of long-lived assets.

 

Intangible Assets, net

 

The Company’s intangible assets consists of software and a trademark.  Software is stated at cost less accumulated amortization.  The Company’s trademark is determined to have an indefinite life and therefore not subject to amortization.  The Company evaluates the carrying value of intangible assets annually during the fourth quarter and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount. Such circumstances could include but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. If the fair value of the intangible asset is less than its carrying amount, an impairment loss is recognized in an amount equal to the difference. Estimated useful lives for intangible assets are as follows:

 

Software3-5 years

TrademarksIndefinite

 

No impairments were identified during the years ended December 31, 2020 and 2019.

 

Revenue Recognition

 

The Company records revenue from the sales of its products when control passes to the customer, which is when the performance obligation has been satisfied.  Net sales are comprised of gross revenues less estimated product returns, trade promotional programs, consumer incentives, and allowances and discounts used to incentivize sales growth and build brand awareness.  These incentive costs are recognized at the date on which the Company recognizes the related revenue. The Company accepts returns for goods that do not meet the customer’s expectations, are unopened and within seven days of receipt, and accrues for an estimated level of returns.  Shipping fees charged to customers are included in sales and totaled $856,546 and $1,202,641 for the years ended December 31, 2020 and 2019, respectively. Taxes collected from customers that are remitted to governmental agencies are accounted for on a net basis and not included as revenue.

 

Additionally, the Company offers a loyalty program in which direct-to-consumer customers who elect to enroll in the program can earn loyalty points which are primarily earned through spend-based activities.  Loyalty members earn one point for every dollar spent, with a stated value of $0.10 per point.  Points cannot be redeemed for cash.  The Company recognizes revenue for the redeemed points upon delivery of the free or discounted product purchased.  The Company also estimates points expected to never be redeemed (“estimated breakage”) based on historical experience and expectations of future loyalty member’s behavior.

 

 Disaggregated Revenue

 

The majority of the Company’s revenue is derived from sales of branded products to consumers via our direct-to-consumer ecommerce website, and wholesale and retail business-to-business customers.  We believe that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.

 

A description of our principal revenue generating activities are as follows:

 

 

-

Direct-to-consumer product sales – products sold through our online channel. Revenue is recognized when control of the purchased goods is transferred to the customer, which occurs upon delivery, at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. Payment is due prior to the date of shipment.

 

 

-

Business-to-business product sales – products sold to our wholesale and retail customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and can typically be 30 days from the date control over the product is transferred to the customer.

 

 

 

 

 

 

 

12


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

The following table represents a disaggregation of revenue by sales channel:

                                                                                                                                                                      Year ended December 31,

 

2020

 

2019

Direct-to-consumer

$              28,231,624

 

$             32,943,699

Business-to-business

                8,583,743

 

               22,360,070

Net sales

$             36,815,367

 

$            55,303,769

 

 

The Company recognizes revenues following the five step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

 

 Performance Obligations

 

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company has reviewed its various revenue streams for its existing contracts under the five-step approach. Direct-to-consumer product sales for non-loyalty members and business-to-business product sales contain a single performance obligation of the Company, the delivery of the underlying purchased goods.  Direct-to-consumer product sales for loyalty members include multiple performance obligations: (i) the delivery of the underlying purchased goods, and (ii) the promise to provide a free or discounted product upon future redemption.

 

Allocation of Transaction Price

 

Direct-to-consumer product sales for loyalty members contain two distinct performance obligations for which the Company allocates the transaction price based on the relative stand-alone value of each performance obligation, such that both revenue related to the delivery of the underlying purchased goods and deferred revenue for loyalty points issued to the customer are recognized based on the allocated consideration of value, after giving consideration to loyalty point breakage.  The loyalty liability represents a performance obligation to provide goods for free or at a discount to loyalty members in exchange for the redemption of points earned from past activities.

 

Contract Balances

 

Contract balances as a result of transactions with customers primarily consist of receivables included in accounts receivable, net, and deferred revenue in the Company's consolidated balance sheets.  Deferred revenue consists of cash received prior to transfer of control of goods to a customer, as well as the liability for loyalty points.  The beginning and ending balances for accounts receivable, unbilled receivables, and deferred revenues were as follows for the years ended December 31, 2020 and December 31, 2019.

 

 

 

December 31,

2020

 

December 31,

2019

 

January 1,

2019

Accounts receivable, net

 

$            506,456

 

$            850,885

 

$         1,983,276

Unbilled receivables

 

$                        -

 

$                        -

 

$                        -

Deferred revenues

 

$         2,401,511

 

$         2,438,688

 

$         1,032,892

 

Cost of Sales

 

The Company’s cost of sales includes costs associated with procurement, distribution, fulfillment and labor expense, manufacturing overhead, third-party providers, inbound and outbound freight and inventory cost adjustments to recognize inventory at their net realizable value. These expenses are reflected in the Company’s consolidated statements of operations when the product is sold and revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.

 

Compensation and Benefits

 

Compensation and benefits are presented within cost of goods sold, sales and marketing, and general and administrative in the consolidated statements of operations, based on the function of the employee or contractor.  The Company records compensation and benefits expense for all cash compensation, benefits, and related taxes as earned by its employees. Compensation and benefits expense also includes compensation earned by temporary employees and contractors who perform similar services to those performed by the Company’s employees, primarily information technology, human resources, and project management activities. The Company maintains a defined contribution 401(k) plan available to eligible employees. Employee contributions are voluntary, are determined on an individual basis and are limited to the maximum amount allowable under federal tax regulations. The Company, at its discretion, may make certain matching contributions to the 401(k) plan. The Company did not make any matching contributions during the years ended December 31, 2020 or 2019.

 

13


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Research and Development Expense

 

Research and development expenses are presented within general and administrative in the consolidated statements of operations.  Research and development costs are charged to expense as incurred and include, but are not limited to, employee salaries and benefits, cost of inventory used in product development, and consulting service fees. For the years ended December 31, 2020 and 2019, cost related to research and development were $531,863 and $326,015, respectively.

 

Advertising

 

Advertising costs are presented within sales and marketing in the consolidated statement of operations.  The Company supports its products with advertising to build brand awareness of the Company’s various products in addition to other marketing programs executed by the Company’s marketing team. The Company believes the continual investment in advertising is critical to the development and sale of its CBDistillery™ and BOTA™ branded products. Advertising costs of $5,727,866 and $5,382,468 were expensed as incurred during the years ending December 31, 2020 and 2019, respectively.

 

Sales Taxes

 

Various states impose a sales tax on the Company’s sales to non-exempt customers.  The Company collects the sales tax from customers and remits the entire amount to each respective state.  The Company’s accounting policy is to exclude the tax collected and remitted to the states from revenues and cost of sales.

 

Income Taxes

 

As a limited liability corporation, the Company’s taxable income or loss is allocated to the members in proportion to their respective ownership percentages.  Accordingly, there is no provision for federal income taxes in the accompanying consolidated financial statements.

 

The Company is not subject to U.S. federal, state, and local, or non-U.S. income tax examinations by tax authorities for years ending December 31, 2020 and 2019.

 

Cumulative Translation Adjustment

 

The reporting currency of the Company is the U.S. dollar.  The functional currency of our foreign operation is the applicable local currency for the foreign subsidiary.  Assets and liabilities of the foreign subsidiary (including intercompany balance for which settlement is not anticipated in the foreseeable future) are translated at the spot rate in effect at the applicable reporting date.  The amounts reported in our consolidated statements of operations are translated at the average exchange rates in effect during the applicable period. The resulting foreign currency translation adjustment is recorded as a component of other comprehensive earnings in our consolidated statements of comprehensive income.  

 

Commitments and Contingencies

 

Liabilities for loss contingencies arising from claims, assessments, litigation and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.  

 

Indirect tax contingencies related to historical sales tax collection that are both probable and reasonably estimable total $1,694,060 and $1,546,532 as of December 31, 2020 and 2019, respectively, and are recorded in accrued expenses and other on the consolidated balance sheets.

 

Legal fees and related litigation costs are expensed as incurred.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Recent Accounting Pronouncements Not Yet Adopted

 

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40). This Update addresses users’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for fiscal years beginning after December 15, 2020, and interim periods in annual periods beginning after December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently in the process of evaluating the impact of this new standard.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 was effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), to delay the adoption date for ASU 2016-02. ASU 2016-02 is now effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is still permitted. The Company is currently in the process of evaluating the impact of this new standard.

 

 

3.

INVENTORY

 

 

Inventory as of December 31, 2020 and 2019 was comprised of the following:

                                                                                                                                                                                December 31,

 

2020

 

2019

Finished goods

$           2,249,754

 

$           4,890,479

Work in process

             925,130

 

             5,868,435

Inventory

$           3,174,884

 

$         10,758,914

 

The Company recorded inventory cost adjustments to recognize inventory at their net realizable value of $3,956,548 and $1,264,999 for the years ended December 31, 2020 and 2019, respectively.  During the year ended December 31, 2020, the Company incurred inventory losses of $2,329,912 related to net realizable adjustments and $1,361,059 related to excess and obsolete inventory.  During the year ended December 31, 2019, the Company incurred inventory losses of $1,264,999 related to inventory received from a contract manufacturer that did not meet the Company’s quality standards.

 

 

4.

INVESTMENTS

 

 

On February 21, 2018, the Company purchased 50% of Iso-Pharm LLC for cash consideration of $100,620. On March 1, 2019, the Company sold its interest in Iso-Pharm LLC for cash consideration of $147,412 and recognized a gain on the sale of $147,412 included in other expense, net on the consolidated statements of operations.  Prior to its sale, the Company used the equity method of accounting to record its portion of income or loss as the Company did not exercise control over the significant economic decisions of Iso-Pharm LLC.  

 

 

5.

PROPERTY & EQUIPMENT, NET

 

 

Property and equipment, net, as of December 31, 2020 and 2019 were as follows:

                                                                                                                                                                                   December 31,

 

 

 

2020

 

2019

Leasehold improvements

 

 

$           959,866

 

$            797,723

Machinery and equipment

 

 

792,054

 

772,544

Furniture and fixtures

 

 

724,811

 

694,557

 

 

 

2,476,731

 

2,264,824

Less: accumulated depreciation

 

 

(795,424)

 

(244,610)

Property and equipment, net

 

 

$        1,681,307

 

$        2,020,214

 

 

Depreciation expense for the years ended December 31, 2020 and 2019 was $557,278 and $240,004, respectively.

 

 

 

15


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

 

6.

INTANGIBLES ASSETS, NET

 

 

Intangible assets, net, as of December 31, 2020 and 2019 were as follows:

                                                                                                                                                                                   December 31,

 

 

 

2020

 

2019

Software

 

 

$           1,050,758

 

$                         -

Trademarks

 

 

144,472

 

144,472

 

 

 

1,195,230

 

144,472

Less: accumulated amortization

 

 

(220,041)

 

-

Intangible assets, net

 

 

$            975,189

 

$             144,472

 

 

Amortization expense for the years ended December 31, 2020 and 2019 was $220,041 and $0, respectively. Amortization expense on intangibles assets subsequent to December 31, 2020 are as follows:

2021

 

$                               351,772

2022

 

351,772

2023

 

127,173

2024

 

-

2025 and thereafter

 

-

 

 

$                               830,717

 

 

7.

ACCRUED EXPENSES AND OTHER

 

 

Accrued expenses and other as of December 31, 2020 and 2019 were as follows:

December 31,

 

 

2020

 

2019

Sales tax reserve

 

$         1,694,060

 

$         1,546,532

Interest payable

 

1,112,963

 

467,742

Compensation related

 

683,264

 

687,787

Accrued distributions

 

-

 

932,005

Other accrued liabilities

 

729,267

 

413,404

Accrued expenses and other

 

$         4,219,554

 

$         4,047,470

 

 

 

8.

DEFERRED REVENUE

 

 

Deferred revenue as of December 31, 2020 and 2019 was as follows:

December 31,

 

 

2020

 

2019

Loyalty deferred revenue

 

$           2,113,509

 

$          1,414,912

Deferred revenue

 

284,762

 

1,020,105

Other

 

3,240

 

3,671

Deferred revenue

 

$         2,401,511        

 

$         2,438,688         

 

 

 

 

 

 

9.

NOTES PAYABLE

 

 

The Company’s notes payable, net as of December 31, 2020 and 2019 were as follows:

                                                                                                                                                                                   December 31,

 

 

 

2020

 

2019

Convertible note payable

 

 

$           5,000,000

 

$           5,000,000

Secured notes payable, net

 

 

3,360,732

 

2,398,117

Paycheck protection program

 

 

1,375,051

 

-

 

 

 

9,735,783

 

7,398,117

Current portion of notes payable, net

 

 

6,889,012

 

5,447,850

Notes payable, net

 

 

$        2,846,771

 

$        1,950,267

 

 

16


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Convertible Note Payable

 

In January 2019, the Company issued the Convertible Note Payable for a notional amount of $5,000,000 to TTCP Executive Fund. The Convertible Note Payable bears interest at a rate of 10.0% per annum with an original maturity date of January 2020 and an option to extend the maturity for 90 days.  The Convertible Note Payable represents an unsecured obligation of the Company and shall be paid prior to any payments in full of any senior indebtedness incurred by the Company.  Pursuant to the terms of the agreement, the outstanding principal and accrued interest are mandatorily redeemable in the event any qualified financing event occurs, in which the Company issues preferred equity securities, on or before the maturity date with total proceeds to the Company of at least $20,000,000, at a conversion price equal to 80% of the lowest price per preferred equity security issued.  Additionally, the outstanding principal and accrued interest was mandatorily redeemable in the event an acquisition transaction occurred on or before the maturity date, at a conversion price equal to 80% of the lower of $350,000,000 or the enterprise value of the Company ascribed to such acquisition transaction.  In the event that the Company closed a transaction or series of transactions in which the Company sold any equity securities, including, but not limited to, preferred equity securities, on or before the maturity date, and such financing did not constitute a qualified financing event, TTCP Executive Fund had the option to convert all of the outstanding principal and accrued interest at a conversion price equal to 80% of the lowest price per equity security issued.  If neither a qualified financing event nor an acquisition transaction has been consummated by the maturity date, TTCP Executive Fund has the option to convert all or a portion of the outstanding principal and accrued interest into equity securities at a conversion price equal to a) the price per common unit of the Company based on the Company’s first completed valuation determination under Section 409A of the Internal Revenue Code of 1986, as amended, or b) if no such 409A valuation has been completed by the Company at or near the date of the note, the price per equity security shall be based on a valuation of the Company equal to $200,000,000, and the outstanding balance of the note shall be the greater of a) the then outstanding principal amount plus a premium amount, as provided for in the agreement, or b) the then outstanding principal amount plus all accrued interest thereon.

 

Secured Notes Payable

 

In November 2019, the Company entered into a loan arrangement for $2,000,000.  The note bears interest at a rate of 19.0% per annum, matures March 2024 and is secured by inventory. Principal and interest payments of $59,800 are due monthly. In connection with the loan arrangement, the Company incurred $60,000 in debt issuance costs.

 

In December 2019, the Company entered into a loan arrangement for $500,000.  The note bears interest at a rate of 19.0% per annum, matures April 2024, and is secured by inventory.  Principal and interest payments of $14,950 are due monthly.  In connection with the loan arrangement, the Company incurred $15,000 in debt issuance costs.

 

In January 2020, the Company entered into a loan arrangement for $1,500,000.  The note bears interest at a rate of 19.0% per annum, matures April 2024 and is secured by inventory.  Principal and interest payments of $44,850 are due monthly. In connection with the loan arrangement, the Company incurred $45,000 in debt issuance costs.

 

Paycheck Protection Program

 

On May 6, 2020, the Company signed a Paycheck Protection Program Promissory Note and Agreement for a loan of $1,375,051. The Loan is established under the terms and conditions of the SBA program of the United States Small Business Administration (“SBA”) and the USA CARES Act (2020)(H.R. 748)(15 U.S.C 636 et seq.) (the “Act”) and matures after two years on May 6, 2022, with monthly repayments of $77,384 commencing December, 2020.

 

Minimum principal payments on notes payable subsequent to December 31, 2020 are as follows:

2021

 

$                            6,917,131

2022

 

1,336,329

2023

 

1,240,618

2024

 

332,803

2025 and thereafter

 

-

 

 

$                             9,826,881

 

 

 

 

 

 

 

 

 

 

 

17


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

10.

MEMBERS’ EQUITY

 

 

The Company has authorized one class of units, Common Units.  As of December 31, 2020, and 2019, the Company had 13,754,940 and 15,151,515 units, respectively, outstanding.  Prior to January 22, 2019, membership equity was based on the proportional ownership interests of the respective LLC owners. On January 22, 2019, the Company issued units to members in proportion to their ownership interest.  Certain stock appreciation rights were issued to executives of the Company.  The terms of those awards provide for a cash payout commensurate to a percentage of excess value over the net equity value as defined in the award agreement.  The awards vest upon a change in control, and as that has not yet occurred, no expense has been recorded.

 

In July 2020, in exchange for the amendment of certain non-compete arrangements with prior unitholders and officers, the Company entered into settlement agreements to repurchase 1,396,575 units of the Company for $675,000.

 

 

11.

RELATED PARTY TRANSACTIONS

 

 

During 2018, the Company provided financing to Industrial Hemp Partners, LLC for $450,000, bearing interest at 6.0% per annum.  One member of Industrial Hemp Partners, LLC, PT Brothers, LLC, was an affiliate of a member of the Company.  As of December 31, 2019, and 2018, unpaid principal of $0 and $450,000, respectively, is included in related party notes receivable on the consolidated balance sheets.  In January 2019, the Company collected the receivable in full.

 

For the years ended December 31, 2020 and 2019, the Company recognized revenue for products sold to Feals, Inc. of $0 and $358,002, respectively.  Feals, Inc. is an affiliate of a member of the Company’s Board of Directors. Revenue recognized to the related party is included in net sales on the consolidated statement of operations.  No trade receivables are outstanding as of December 31, 2020 or 2019.

 

For the years ended December 31, 2020 and 2019, the Company recognized expenses related to marketing services provided by Parcon Media of $534,787 and $494,547, respectively, which are included in sales and marketing on the consolidate statement of operations.  Parcon Media is an affiliate of a member of the Company.  As of December 31, 2020, and 2019, accounts payable outstanding are $23,500 and $67,000, respectively, and are included in accounts payable on the consolidated balance sheet.

 

 

 

12.

COMMITMENTS AND CONTINGENCIES

 

 

The Company has entered into operating leases primarily for real estate. These leases are for the Company's operations, production, warehouse, sales, marketing and back office functions and have terms which range from 2 to 10 years. Certain leases are subject to renewal at the option of the Company.

 

The future minimum payments under non-cancelable operating leases with initial remaining terms in excess of one year as of December 31, 2020, are as follows:

 

Operating Lease Commitment

2021

 

$                               971,564

2022

 

847,979

2023

 

861,069

2024

 

874,160

2025 and thereafter

 

4,802,878

 

 

$                             8,357,650

 

The Company incurred rent expense of $1,093,715 and $549,634 for the years ended December 31, 2020 and 2019, respectively.

 

 

13.

SUBSEQUENT EVENTS

 

 

The Company has evaluated subsequent events through June 1, 2021, which is the date the financial statements were issued.  

 

On January 26, 2021, the Company signed a Paycheck Protection Program Promissory Note and Agreement for a loan of $1,709,301. The Loan is established under the terms and conditions of the SBA program of the United States Small Business Administration (“SBA”) and the USA CARES Act (2020)(H.R. 748)(15 U.S.C 636 et seq.) (the “Act”) and matures on January 26, 2026, with monthly repayments of $32,546 commencing August, 2021.

 

 

 

 

18

 

 

Exhibit 99.2

 

 

 

 

 

 

 

 

Balanced Health Botanicals, LLC

 

 

Consolidated Financial Statements

 

Six Months Ended June 30, 2021

 

 

 

 


 

 

 

Balanced Health Botanicals, LLC

Index to Consolidated Financial Statements

 

 

 

 

Consolidated Financial Statements

Page

Consolidated Balance Sheet as of June 30, 2021

2

Consolidated Statement of Operations for the six months ended June 30, 2021

3

Consolidated Statement of Comprehensive Income for the six months ended June 30, 2021

4

Consolidated Statement of Members’ Equity for the six months ended June 30, 2021

8

Consolidated Statement of Cash Flows for the six months ended June 30, 2021

6

Notes to Consolidated Financial Statements

7

 

 

1


 

 

 

 

BALANCED HEALTH BOTANICALS, LLC

CONSOLIDATED BALANCE SHEET

(In thousands of dollars, except unit data)

 

 

 

 

June 30, 2021

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

 

$             5,224

 

Restricted cash

 

250

 

Accounts receivable, net

 

748

 

Inventory

 

1,918

 

Prepaid expenses and other

 

686

 

Total current assets

 

8,826

 

 

 

 

 

Property & equipment, net

 

1,356

 

Intangible assets, net

 

813

 

Other assets

 

353

 

Total assets

 

$                       11,348

 

 

 

 

 

Liabilities and members' equity

 

 

 

Current liabilities:

 

 

 

Accounts payable

 

$             591

 

Accrued expenses and other

 

6,419

 

Current portion of notes payable, net

 

7,616

 

Deferred revenue

 

235

 

Total current liabilities

 

14,861

 

 

 

 

 

Notes payable, net

 

2,062

 

Other long-term liabilities

 

441

 

Total liabilities

 

17,364

 

 

 

 

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

Members’ equity

 

 

 

Members’ equity: 13,754,940 and 15,151,515 units issued and outstanding as of

    June 30, 2021, respectively

 

(5,972)

 

Accumulated other comprehensive loss

 

(44)

 

Total members’ equity

 

(6,016)

 

 

 

 

 

Total liabilities and members’ equity

 

$                       11,348

 

 

 

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

2


 

 

BALANCED HEALTH BOTANICALS, LLC

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands of dollars)

 

 

 

 

Six months ending

 

 

June 30, 2021

Net sales

 

$                                     15,418

Cost of goods sold

 

5,332

    Gross profit

 

10,086

 

 

 

Sales, general and administrative

 

8,076

    Operating income

 

                                       2,010

 

 

 

Interest expense

 

                                             676

Other income, net

 

                                      (1,374)

 

 

 

    Net income

 

$                                     2,708

 

 

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

 

3


 

 

 

BALANCED HEALTH BOTANICALS, LLC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(In thousands of dollars)

 

 

 

 

 

Six months ending

 

 

June 30, 2021

Net income

 

$                                     2,708

Other comprehensive loss:

 

 

    Foreign currency translation adjustment

 

(17)

Comprehensive income

 

$                                     2,691

 

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

4


 

 

BALANCED HEALTH BOTANICALS, LLC

CONSOLIDATED STATEMENT OF MEMBERS’ EQUITY

(In thousands of dollars)

 

 

 

 

Members’ equity

 

 

Accumulated other comprehensive loss

 

Noncontrolling interest

 

Total

members’ equity

Balance - December 31, 2020

 

(8,690)

 

(27)

 

        -

 

(8,717)

Foreign currency translation adjustment

 

-

 

(17)

 

-

 

(17)

Net income

 

2,708

 

-

 

-

 

                           2,708

Balance – June 30, 2021

 

$                         (5,982)

 

$                              (44)

 

$                                   -

 

$                         (6,026)

 

 

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

5


 

 

BALANCED HEALTH BOTANICALS, LLC

CONSOLIDATED STATEMENT OF CASH FLOW

(In thousands of dollars)

 

 

 

Six months ending June 30, 2021

 

 

Operating activities:

 

 

 

Net income

$                         2,708

 

 

 

 

 

Adjustments to reconcile net income to net cash flows (used in) provided by operating activities:

     Depreciation and amortization

501

 

 

     Bad debt expense

9

 

 

     Interest expense

676

 

 

     Deferred financing fees

13

 

 

     Gain on extinguishment of debt

  (1,375)

 

 

Changes in operating assets and liabilities:

 

 

 

     Accounts receivable

(251)

 

 

     Inventory

1,260

 

 

     Prepaid expenses and other current assets

134

 

 

     Other assets

(62)

 

 

     Accounts payable

(810)

 

 

     Accrued expenses and other

(169)

 

 

     Deferred revenue

(50)

 

 

     Other liabilities

5

 

 

Cash used in operating activities

2,589

 

 

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

     Purchase of software

(14)

 

 

Cash used in investing activities

(14)

 

 

 

 

 

 

Financing Activities:

 

 

 

     Proceeds from borrowings

1,709

 

 

     Repayment of notes payable

(405)

 

 

     Interest paid on borrowings

(326)

 

 

Cash provided by financing activities

978

 

 

Effect of exchange rate changes on cash and cash equivalents

(8)

 

 

Net increase in cash, cash equivalents and restricted cash

3,545

 

 

Cash, cash equivalents and restricted cash, beginning of year

1,929

 

 

Cash, cash equivalents and restricted cash, end of year

$                         5,474

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

     Interest paid

$                            326

 

 

 

 

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

 

 

6


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars unless otherwise noted)

 

 

 

1.

ORGANIZATION

 

 

Balanced Health Botanicals, LLC (“Balanced Health Botanicals”, “BHB”, “We”, or the “Company”), is a Colorado limited liability company formed on September 26, 2016, under the name ELS Universal, LLC. Effective January 4, 2019, the Company changed the name to Balanced Health Botanicals, LLC.   On February 22, 2019, the Company increased its ownership in Bota Holdings, LLC from 51% to a wholly owned subsidiary. On August 30, 2019, the Company incorporated Balanced Health Botanicals International Limited, an Ireland entity, as a wholly owned subsidiary. On April 6, 2020, the Company incorporated Balanced Health Botanicals UK, LTD, a United Kingdom entity, as a wholly owned subsidiary.

 

The Company is headquartered in Denver, Colorado, and manufactures and distributes hemp derived Cannabidiol (CBD) products within the United States and Europe under its CBDistillery™ and BOTA™ brands.  The Company’s current product lines include tinctures, ingestible products, topicals, and pet products.  The Company’s products are distributed through its eCommerce website, third party eCommerce websites, wholesalers, and various retailers.

 

Profits and losses are allocated to the members based on their ownership interests in accordance with the operating agreement. No member or manager shall be individually liable under judgment, decree or order of any court, or in any other matter, for debt, obligation or liability of the Company.  The term of the Company is perpetual unless and until the Company is dissolved pursuant to applicable law.

 

 

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

 

Basis of Presentation

 

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The consolidated financial statements include the accounts of Balanced Health Botanicals and its subsidiaries, CBDistillery, LLC, Bota Holdings, LLC, Balanced Health Botanicals International, Ltd, and Balanced Health Botanicals UK, LTD. Intercompany balances and transactions are eliminated in preparation of the consolidated financial statements.

 

Use of Estimates

 

The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates. Key estimates for the Company’s financial statements include valuation of inventory and assumptions related to deferred revenue and revenue recognition related to the Company’s loyalty program.

 

Segments

 

The Company currently operates one segment engaged in the sale of hemp derived Cannabidiol (CBD) products.  Information regarding revenues and operations for this segment is utilized on a regular basis by our chief operating decision maker ("CODM") to evaluate performance. Our Chief Executive Officer has been identified as the CODM.

 

Concentrations of Credit Risk

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash and accounts receivable.

 

The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. The Company had a $5,202 uninsured balance as of June 30, 2021.

 

Concentration of credit risk with respect to receivables is principally limited to receivables from credit card processors. As of June 30, 2021, a receivable balance of $378 was due from two credit card processors. Management considers these customer receivables to represent normal business risk. The Company did not have any customers that represented a significant amount of our sales for the six months ending June 30, 2021.

 

The restricted cash on the consolidated balance sheets relates to arrangements with the same credit card processors.

 

The Company purchases its inventory from various vendors.  For the six months ending June 30, 2021, approximately 53% of the Company's purchases were made from 3 vendors.  

 

 

7


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars unless otherwise noted)

 

 

Fair Value Measurements

 

Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The accounting guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgement used to estimate the fair value of assets and liabilities.

 

 

Level 1 – uses unadjusted quoted prices that are available in active markets for identical assets or liabilities.

 

 

 

Level 2 – uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data.  These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgement because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data.

 

 

 

Level 3 – used one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgement.  Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgement or estimation.

 

 

The carrying amount of cash, accounts receivable, accounts payable, and accrued expenses approximates their fair value due to their short maturity. The carrying amount of notes payable approximates fair value because stated or implied interest rates approximate current interest rates that are available for debt with similar terms.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with original maturities of three months or less to be cash and cash equivalents. As of June 30, 2021, the Company did not hold any cash equivalents.

 

Restricted Cash

 

The Company has restricted cash with contracted credit card processors where the current arrangement provides those credit card processors the right to withhold a cash reserve balance from the Company’s credit card receipt transactions that is generally based off a percentage of sales. The Company had restricted cash of $250 as of June 30, 2021. The amount is classified as current as they are reasonably expected to be realized as an unrestricted asset within the next 12 months.

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown in the consolidated statements of cash flows.

 

 

As of June 30, 2021

 

Cash and cash equivalents

$                       5,224

 

Restricted cash

                            250

 

Total cash, cash equivalents, and restricted cash shown in the Statement of Cash Flows

$                       5,474

 

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Generally, the Company requires payment prior to shipment of its products to customers. However, in certain circumstances, the Company extends credit to various wholesalers and retailers. Accounts receivable consists of receivables from credit card processors that are related to payments from customers and trade accounts arising in the normal course of business. The Company considers any receivables outstanding greater than 90 days to be delinquent. Accounts receivable are carried at original invoice amount less a reserve made for doubtful receivables based on a review of all outstanding amounts.

 

Management has determined the allowance for doubtful accounts by evaluating individual customer receivables and considering a customer’s financial condition and credit history, and current economic conditions. As of June 30, 2021, the Company’s allowance for doubtful accounts related to accounts receivable was $79. Bad debt expense for the six months ending June 30, 2021 was $9.

 

 

 

8


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars unless otherwise noted)

 

 

Inventory

 

Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less any applicable selling expenses. Cost includes all expenses directly attributable to procurement of raw materials and finished goods, manufacturing of finished goods and suitable portions of related production overheads, based on normal operating capacity. Cost is determined by use of the first-in, first-out method.

 

The Company performs an assessment of inventory obsolescence to measure inventory at the lower of cost or net realizable value. Factors considered in the determination of obsolescence include slow-moving or non-marketable items.

 

Property and Equipment, net

 

Property and equipment are stated at cost less accumulated depreciation.  Cost represents the purchase price of the asset and other costs incurred to bring the asset into its existing use.  Maintenance or repairs are charged to expense as incurred.  Depreciation is provided on a straight-line basis over the assets estimated useful lives, and leasehold improvements are amortized on a straight-line basis over the shorter of the useful life or the remaining life of the related lease.  Estimated useful lives for property and equipment are as follows:

 

Machinery and Equipment5-10 years

Furnitures and Fixtures5-7 years

Leasehold ImprovementsShorter of lease life or estimated useful life

 

Upon sale or disposition, the historical asset cost and accumulated depreciation are removed from the respective accounts and any related gain or loss is recognized.

 

Impairment of Long-lived Assets

 

The Company reviews property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Circumstances that may lead to impairment of property and equipment include a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition and a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset including an adverse action or assessment by a regulator. As of June 30, 2021, the Company determined there were no impairments of long-lived assets.

 

Intangible Assets, net

 

The Company’s intangible assets consists of software and a trademark.  Software is stated at cost less accumulated amortization.  The Company’s trademark is determined to have an indefinite life and therefore not subject to amortization.  The Company evaluates the carrying value of intangible assets annually during the fourth quarter and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the asset below its carrying amount. Such circumstances could include but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. If the fair value of the intangible asset is less than its carrying amount, an impairment loss is recognized in an amount equal to the difference. Estimated useful lives for intangible assets are as follows:

 

Software3-5 years

TrademarksIndefinite

 

No impairments were identified during the six months ending June 30, 2021.

 

Revenue Recognition

 

The Company records revenue from the sales of its products when control passes to the customer, which is when the performance obligation has been satisfied.  Net sales are comprised of gross revenues less estimated product returns, trade promotional programs, consumer incentives, and allowances and discounts used to incentivize sales growth and build brand awareness.  These incentive costs are recognized at the date on which the Company recognizes the related revenue. The Company accepts returns for goods that do not meet the customer’s expectations, are unopened and within seven days of receipt, and accrues for an estimated level of returns.  Shipping fees charged to customers are included in sales and totaled $513 for the six months ending June 30, 2021. Taxes collected from customers that are remitted to governmental agencies are accounted for on a net basis and not included as revenue.

 

Additionally, the Company offers a loyalty program in which direct-to-consumer customers who elect to enroll in the program can earn loyalty points which are primarily earned through spend-based activities.  Loyalty members earn one point for every dollar spent, with a stated value of

9


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars unless otherwise noted)

 

$0.10 per point.  Points cannot be redeemed for cash.  The Company recognizes revenue for the redeemed points upon delivery of the free or discounted product purchased.  The Company also estimates points expected to never be redeemed (“estimated breakage”) based on historical experience and expectations of future loyalty member’s behavior.

 

 Disaggregated Revenue

 

The majority of the Company’s revenue is derived from sales of branded products to consumers via our direct-to-consumer ecommerce website, and wholesale and retail business-to-business customers.  We believe that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.

 

A description of our principal revenue generating activities are as follows:

 

 

-

Direct-to-consumer product sales – products sold through our online channel. Revenue is recognized when control of the purchased goods is transferred to the customer, which occurs upon delivery, at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods. Payment is due prior to the date of shipment.

 

 

-

Business-to-business product sales – products sold to our wholesale and retail customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and can typically be 30 days from the date control over the product is transferred to the customer.

 

 

The following table represents a disaggregation of revenue by sales channel:

                                                                                                                                                        

 

Six months ending June 30, 2021

 

Direct-to-consumer

$                       13,652

 

Business-to-business

                            1,766                

 

Net sales

$                         15,418

 

 

The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

 

 Performance Obligations

 

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company has reviewed its various revenue streams for its existing contracts under the five-step approach. Direct-to-consumer product sales for non-loyalty members and business-to-business product sales contain a single performance obligation of the Company, the delivery of the underlying purchased goods.  Direct-to-consumer product sales for loyalty members include multiple performance obligations: (i) the delivery of the underlying purchased goods, and (ii) the promise to provide a free or discounted product upon future redemption.

 

Allocation of Transaction Price

 

Direct-to-consumer product sales for loyalty members contain two distinct performance obligations for which the Company allocates the transaction price based on the relative stand-alone value of each performance obligation, such that both revenue related to the delivery of the underlying purchased goods and deferred revenue for loyalty points issued to the customer are recognized based on the allocated consideration of value, after giving consideration to loyalty point breakage.  The loyalty liability represents a performance obligation to provide goods for free or at a discount to loyalty members in exchange for the redemption of points earned from past activities.

 

Contract Balances

 

Contract balances as a result of transactions with customers primarily consist of receivables included in accounts receivable, net, and deferred revenue in the Company's consolidated balance sheets.  Deferred revenue consists of cash received prior to transfer of control of goods to a customer, as well as the liability for loyalty points.  The beginning and ending balances for accounts receivable and deferred revenues were as follows for the six months ending June 30, 2021:

 

 

 

Six months ending June 30, 2021

 

Accounts receivable, net

 

$ 370            

 

Deferred revenues

 

$ 235        

 

10


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars unless otherwise noted)

 

 

Cost of Sales

 

The Company’s cost of sales includes costs associated with procurement, distribution, fulfillment and labor expense, manufacturing overhead, third-party providers, inbound and outbound freight and inventory cost adjustments to recognize inventory at their net realizable value. These expenses are reflected in the Company’s consolidated statements of operations when the product is sold and revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.

 

Compensation and Benefits

 

Compensation and benefits are presented within cost of goods sold, sales and marketing, and general and administrative in the consolidated statements of operations, based on the function of the employee or contractor.  The Company records compensation and benefits expense for all cash compensation, benefits, and related taxes as earned by its employees. Compensation and benefits expense also includes compensation earned by temporary employees and contractors who perform similar services to those performed by the Company’s employees, primarily information technology, human resources, and project management activities. The Company maintains a defined contribution 401(k) plan available to eligible employees. Employee contributions are voluntary, are determined on an individual basis and are limited to the maximum amount allowable under federal tax regulations. The Company, at its discretion, may make certain matching contributions to the 401(k) plan. The Company did not make any matching contributions during the six months ending June 30, 2021.

 

Advertising

 

Advertising costs are presented within sales and marketing in the consolidated statement of operations.  The Company supports its products with advertising to build brand awareness of the Company’s various products in addition to other marketing programs executed by the Company’s marketing team. The Company believes the continual investment in advertising is critical to the development and sale of its CBDistillery™ and BOTA™ branded products. Advertising costs of $1,306 were expensed as incurred during the nine months ending June 30, 2021.

 

Sales Taxes

 

Various states impose a sales tax on the Company’s sales to non-exempt customers.  The Company collects the sales tax from customers and remits the entire amount to each respective state.  The Company’s accounting policy is to exclude the tax collected and remitted to the states from revenues and cost of sales.

 

Income Taxes

 

As a limited liability corporation, the Company’s taxable income or loss is allocated to the members in proportion to their respective ownership percentages.  Accordingly, there is no provision for federal income taxes in the accompanying consolidated financial statements.

 

Cumulative Translation Adjustment

 

The reporting currency of the Company is the U.S. dollar.  The functional currency of our foreign operation is the applicable local currency for the foreign subsidiary.  Assets and liabilities of the foreign subsidiary (including intercompany balance for which settlement is not anticipated in the foreseeable future) are translated at the spot rate in effect at the applicable reporting date.  The amounts reported in our consolidated statements of operations are translated at the average exchange rates in effect during the applicable period. The resulting foreign currency translation adjustment is recorded as a component of other comprehensive earnings in our consolidated statements of comprehensive income.  

 

Commitments and Contingencies

 

Liabilities for loss contingencies arising from claims, assessments, litigation and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.  

 

Indirect tax contingencies related to historical sales tax collection that are both probable and reasonably estimable total $1,586 as of June 30, 2021, and are recorded in accrued expenses and other on the consolidated balance sheet.

 

Legal fees and related litigation costs are expensed as incurred.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40). This Update addresses users’ accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment

11


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars unless otherwise noted)

 

aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This Update is effective for fiscal years beginning after December 15, 2020, and interim periods in annual periods beginning after December 15, 2021. The amendments in this Update can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently in the process of evaluating the impact of this new standard.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 was effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. In November 2019, the FASB issued ASU 2019-10, Financial Instruments — Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842), to delay the adoption date for ASU 2016-02. ASU 2016-02 is now effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. Early adoption is still permitted. The Company is currently in the process of evaluating the impact of this new standard.

 

 

3.

INVENTORY

 

 

Inventory as of June 30, 2021 was comprised of the following:

 

 

June 30, 2021

Raw materials

$                        683

Finished goods

                       1,331  

Work in process

                         404          

Inventory reserve

                        (500)

Inventory, net

$                     1,918

 

 

4.

PROPERTY & EQUIPMENT, NET

 

 

Property and equipment, net, as of June 30, 2021 were as follows:

                                                                                                                                                                                  

 

 

 

June 30, 2021

 

Leasehold improvements

 

 

$                  963

 

Machinery and equipment

 

 

785

 

Furniture and fixtures

 

 

728

 

 

 

 

2,476

 

Less: accumulated depreciation

 

 

  (1,120)

 

Property and equipment, net

 

 

$               1,356

 

 

 

Depreciation expense for the nine months ending June 30, 2021 was $325.

 

 

5.

INTANGIBLES ASSETS, NET

 

 

Intangible assets, net, as of June 30, 2021 were as follows:

                                                                                                                                                                                  

 

 

 

June 30, 2021

 

Software

 

 

$                 1,066

 

Trademarks

 

 

144

 

 

 

 

1,210

 

Less: accumulated amortization

 

 

(397)

 

Intangible assets, net

 

 

$                    813

 

 

 

 

 

 

 

 

12


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars unless otherwise noted)

 

 

Amortization expense for the six months ending June 30, 2021 was $177. Amortization expense on intangibles assets after June 30, 2021 is as follows:

 

Remainder of 2021

 

$                    178

2022

 

357

2023

 

134

2024

 

-

2025 and thereafter

 

-

 

 

$                   669

 

 

6.

ACCRUED EXPENSES AND OTHER

 

 

Accrued expenses and other as of June 30, 2021 were as follows:

 

 

 

June 30, 2021

 

Sales tax reserve

 

1,586

 

Interest payable

 

1,463

 

Compensation related

 

370

 

Other accrued liabilities

 

696

 

Accrued expenses and other

 

$                4,115

 

 

 

 

7.

DEFERRED REVENUE

 

 

Deferred revenue as of June 30, 2021 was as follows:

 

 

 

June 30, 2021

 

Loyalty deferred revenue

 

$                 2,304

 

Deferred revenue

 

235

 

Deferred revenue

 

$                2,539        

 

 

 

 

 

 

 

8.

NOTES PAYABLE

 

 

The Company’s notes payable, net as of June 30, 2021 were as follows:

                                                                                                                                                                                  

 

 

 

June 30, 2021

 

Convertible note payable

 

 

$                  5,000

 

Secured notes payable, net

 

 

4,678

 

 

 

 

9,678

 

Current portion of notes payable, net

 

 

7,616

 

Notes payable, net

 

 

$                  2,062

 

 

 

Convertible Note Payable

 

In January 2019, the Company issued the Convertible Note Payable for a notional amount of $5,000 to TTCP Executive Fund. The Convertible Note Payable bears interest at a rate of 10.0% per annum with an original maturity date of January 2020 and an option to extend the maturity for 90 days.  The Convertible Note Payable represents an unsecured obligation of the Company and shall be paid prior to any payments in full of any senior indebtedness incurred by the Company.  Pursuant to the terms of the agreement, the outstanding principal and accrued interest are mandatorily redeemable in the event any qualified financing event occurs, in which the Company issues preferred equity securities, on or before the maturity date with total proceeds to the Company of at least $20,000, at a conversion price equal to 80% of the lowest price per preferred equity security issued.  Additionally, the outstanding principal and accrued interest was mandatorily redeemable in the event an acquisition transaction occurred on or before the maturity date, at a conversion price equal to 80% of the lower of $350,000 or the enterprise value of the Company ascribed to such acquisition transaction.  In the event that the Company closed a transaction or series of transactions in which the Company sold any equity securities, including, but not limited to, preferred equity securities, on or before the maturity date, and such financing did not constitute a qualified financing event, TTCP Executive Fund had the option to convert all of the outstanding principal and accrued interest at a conversion price equal to 80% of the lowest price per equity security issued.  If neither a qualified financing event nor an acquisition transaction has been consummated by the maturity date, TTCP Executive Fund has the option to convert all or a portion of the outstanding

13


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars unless otherwise noted)

 

principal and accrued interest into equity securities at a conversion price equal to a) the price per common unit of the Company based on the Company’s first completed valuation determination under Section 409A of the Internal Revenue Code of 1986, as amended, or b) if no such 409A valuation has been completed by the Company at or near the date of the note, the price per equity security shall be based on a valuation of the Company equal to $200,000,000, and the outstanding balance of the note shall be the greater of a) the then outstanding principal amount plus a premium amount, as provided for in the agreement, or b) the then outstanding principal amount plus all accrued interest thereon.

 

Secured Notes Payable

 

In November 2019, the Company entered a loan arrangement for $2,000.  The note bears interest at a rate of 19.0% per annum, matures March 2024 and is secured by inventory. Principal and interest payments of $60 are due monthly. In connection with the loan arrangement, the Company incurred $60,000 in debt issuance costs.

 

In December 2019, the Company entered a loan arrangement for $500.  The note bears interest at a rate of 19.0% per annum, matures April 2024, and is secured by inventory.  Principal and interest payments of $15 are due monthly.  In connection with the loan arrangement, the Company incurred $15 in debt issuance costs.

 

In January 2020, the Company entered a loan arrangement for $1,500.  The note bears interest at a rate of 19.0% per annum, matures April 2024 and is secured by inventory.  Principal and interest payments of $45 are due monthly. In connection with the loan arrangement, the Company incurred $45 in debt issuance costs.

 

   Paycheck Protection Program

 

On May 6, 2020, the Company signed a Paycheck Protection Program Promissory Note and Agreement (“PPP Note”) for $1,375. The loan was established under the terms and conditions of the SBA program of the United States Small Business Administration and the USA CARES Act (2020)(H.R. 748)(15 U.S.C 636 et seq.) (“US SBA Program”), and expires on May 6, 2022, with monthly repayments of $77 commencing on December, 2020. In June 2021, the loan was forgiven, and the Company recognized a gain on forgiveness of debt of $1,375 which is included in the consolidated statement of operations as other income.

 

On January 26, 2021, the Company signed a second PPP Note established under the terms and conditions of the US SBA Program for $1,709 with an expiration date of January 26, 2026, and monthly repayments of $32 commencing on August 26, 2021.

 

Minimum principal payments on notes payable after June 30, 2021 are as follows:

Remainder of 2021

 

$                                  7,141                          

2022

 

1,000

2023

 

1,214

2024

 

323

2025 and thereafter

 

-

 

 

$                                  9,678

 

 

9.

MEMBERS’ EQUITY

 

 

The Company has authorized one class of units, Common Units.  As of June 30, 2021 the Company had 13,754,940 units outstanding.  

 

 

10.

RELATED PARTY TRANSACTIONS

 

 

For the nine months ended June 30, 2021, the Company recognized expenses related to marketing services provided by Parcon Media of $176, which are included in sales and marketing on the consolidate statement of operation.  Parcon Media is an affiliate of a member of the Company.  As of June 30, 2021, accounts payable outstanding are $47 and are included in accounts payable on the consolidated balance sheet.

 

 

 

11.

COMMITMENTS AND CONTINGENCIES

 

 

The Company has entered operating leases primarily for real estate. These leases are for the Company's operations, production, warehouse, sales, marketing and back office functions and have terms which range from 2 to 10 years. Certain leases are subject to renewal at the option of the Company.

 

 

 

 

 

14


 

BALANCED HEALTH BOTANICALS, LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of dollars unless otherwise noted)

 

 

The future minimum payments under non-cancelable operating leases with initial remaining terms in excess of one year as of June 30, 2021, are as follows:

 

Operating Lease Commitment

2021

 

$                                      516

2022

 

1,046

2023

 

1,030

2024

 

874

2025 and thereafter

 

4,802

 

 

$                                    8,279

 

The Company incurred rent expense of $527 for the six months ending June 30, 2021.

 

 

 

 

 

 

15

Exhibit 99.3

 

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following unaudited pro forma condensed combined financial information presents the unaudited pro forma condensed combined statements of income (loss) for the year ended December 31, 2020, and the six months ended June 30, 2021, and the unaudited pro forma condensed combined statement of financial position as of June 30, 2021. The unaudited pro forma condensed combined financial information includes the previously reported results of Village Farms International, Inc. (“Village Farms”, the “Company”, “we”, “us” or “our”), incorporated under the Canada Business Corporations Act, and Balanced Health Botanicals LLC (“Balanced Health”), a Colorado limited liability company, after giving pro forma effect to Village Farms’ acquisition of Balanced Health (the “Balanced Health Acquisition”) described in the following paragraphs and accompanying notes.

The unaudited pro forma condensed combined financial information was prepared in accordance with Article 11 of Regulation S-X and applicable Canadian securities laws. The unaudited pro forma adjustments reflecting the Balanced Health Acquisition have been prepared in accordance with the acquisition method of accounting in accordance with Financial Accounting Standard Board Accounting Standards Codification (“ASC”) Topic 805, Business Combinations.

The unaudited pro forma condensed combined financial information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or consolidated financial condition would have been had the Balanced Health Acquisition actually occurred on January 1, 2021 for the statements of income (loss) and comprehensive income (loss), and on June 30, 2021 for the statement of financial position, nor does it purport to project the future consolidated results of operations or consolidated financial condition for any future period or as of any future date. The assumed accounting for the Balanced Health Acquisition, including estimated purchase consideration, is based on provisional amounts and the associated purchase accounting is not final. The preliminary allocation of the purchase price to the acquired tangible and intangible assets and assumed liabilities is based upon the preliminary estimate of fair values. The unaudited pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable under the circumstances. Actual results may differ materially from the assumptions within the accompanying unaudited pro forma condensed combined financial information. All pro forma adjustments and their underlying assumptions are described more fully in the notes to the unaudited pro forma condensed combined financial information.

The Balanced Health Acquisition

On August 16, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”), by and among Village Farms, Balanced Health and the other parties thereto, including the members of Balanced Health (collectively, the “Sellers”), which provided for the acquisition of a 100% interest in Balanced Health, for a total purchase price comprised of a cash purchase price of $30 million, and an aggregate of 4,707,113 of our common shares that were issued to the Sellers on a private placement basis valued at an aggregate of $45 million, based on the volume weighted average trading price on The Nasdaq Stock Market LLC (“Nasdaq”) for the ten (10) trading days ending the day prior to the closing date of the Balanced Health Acquisition (the “Closing Date”).

In connection with the Balanced Health Acquisition, each of the Sellers entered into a lock-up agreement with us, pursuant to which each such Seller has agreed not to resell the Village Farms common shares received as consideration in the Balanced Health Acquisition until such common shares cease to be “Restricted Shares” (as defined in the Purchase Agreement) (“Restricted Shares”).  Under the terms of the Purchase Agreement and the lock-up agreements, such common shares cease to be Restricted Shares, as follows: (i) with respect to one-fourth (1/4) of such common shares, on the Closing Date; (ii) with respect to an additional one-fourth (1/4) of such common shares, on the last day of the four (4) month period following the Closing Date; (iii) with respect to an additional one-fourth (1/4) of such common shares, on the last day of the eight (8) month period following the Closing Date; and (iv) with respect to an additional one-fourth (1/4) of such common shares, on the last day of the twelve (12) month period following the Closing Date.

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Village Farms International, Inc.

Unaudited Pro Forma Combined Statement of Financial Position

As of June 30, 2021

(In thousands of United States dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Historical Village Farms

 

 

Historical          Balanced Health     (Note 1)

 

 

Transaction Accounting Adjustments (Note 2)

 

 

(Note)

 

Pro Forma Combined

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         Current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

               Cash and cash equivalents

 

114,029

 

 

 

5,224

 

 

 

(30,000

)

 

2(a)(d)

 

 

89,253

 

 

               Restricted cash

 

9,157

 

 

 

250

 

 

 

 

 

 

 

 

 

9,407

 

 

               Trade receivables, net

 

41,303

 

 

 

748

 

 

 

 

 

 

 

 

 

42,051

 

 

               Inventories

 

48,607

 

 

 

1,917

 

 

 

 

 

 

 

 

 

50,524

 

 

               Other receivables

 

756

 

 

 

-

 

 

 

 

 

 

 

 

 

756

 

 

               Income taxes receivable

 

21

 

 

 

-

 

 

 

 

 

 

 

 

 

21

 

 

               Prepaid expenses, deposits and other current assets

 

8,127

 

 

 

760

 

 

 

 

 

 

 

 

 

8,887

 

 

         Total current assets

 

222,000

 

 

 

8,899

 

 

 

(30,000

)

 

 

 

 

200,899

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         Non-current assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

               Property, plant and equipment

 

196,236

 

 

 

2,025

 

 

 

 

 

 

 

 

 

198,261

 

 

               Right-of-use assets

 

3,267

 

 

 

-

 

 

 

5,158

 

 

2(b)

 

 

8,425

 

 

               Note receivable from joint ventures

 

3,344

 

 

 

-

 

 

 

 

 

 

 

 

 

3,344

 

 

               Investment in minority interests

 

2,227

 

 

 

 

 

 

 

 

 

 

 

 

 

2,227

 

 

               Deferred tax asset

 

15,869

 

 

 

-

 

 

 

 

 

 

 

 

 

15,869

 

 

               Goodwill

 

24,698

 

 

 

-

 

 

 

66,820

 

 

2(c)

 

 

91,518

 

 

               Intangibles

 

17,311

 

 

 

144

 

 

 

 

 

 

 

 

 

17,455

 

 

               Other assets

 

2,432

 

 

 

352

 

 

 

 

 

 

 

 

 

2,784

 

 

         Total assets

 

487,384

 

 

 

11,420

 

 

 

41,978

 

 

 

 

 

540,782

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

         Current liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

               Trade payables

 

19,425

 

 

 

591

 

 

 

 

 

 

 

 

 

20,016

 

 

               Current maturities of long-term debt, net of issuance costs

 

10,889

 

 

 

7,616

 

 

 

(7,616

)

 

2(d)

 

 

10,889

 

 

               Accrued liabilities

 

28,818

 

 

 

592

 

 

 

192

 

 

2(a)

 

 

29,602

 

 

               Lease liabilities - current

 

1,149

 

 

 

-

 

 

 

509

 

 

2(b)

 

 

1,658

 

 

               Income taxes payable

 

1,760

 

 

 

39

 

 

 

 

 

 

 

 

 

1,799

 

 

               Loyalty program liability

 

-

 

 

 

2,304