Business Combinations

12 Months Ended

Dec. 31, 2020

On September 5, 2019, the Company closed the Redwood Acquisition. Redwood manufactures, markets and distributes U.S. hemp-derived supplements and cosmetics product through e-commerce, retail and hospitality channels in the U.S. under the brand Lord Jones™. Redwood’s products use high quality U.S. hemp extract that retains naturally occurring phytocannabinoids and terpenes found in the plant. The Company plans to leverage Redwood’s capabilities to capitalize on the significant demand to further create and scale U.S. hemp-derived consumer products and brands.

In 2019, the Company acquired all the issued and outstanding shares of each of the four Redwood operating subsidiaries for an aggregate consideration of $283,300, which included $227,191 in cash and 5,086,586 common shares of the Company with a fair value of $56,109. The fair value of the shares issued as part of the consideration paid was based on the volume weighted average trading price of the common shares on Nasdaq on each of the ten consecutive trading days prior to the date of the Membership Interest Purchase Agreement dated August 1, 2019 (the “MIPA”), by and among the Company, Redwood Holding Group, LLC, and certain Key Persons solely for the purposes as described in the MIPA, at C$14.74 per share.

The Redwood Acquisition was unanimously approved by the board of directors of Redwood Holdings Group, LLC and by the Board following the unanimous recommendation of a special committee of independent directors (“Special Committee”). A Special Committee composed entirely of independent directors of the Company was formed to evaluate and make recommendations to the Board since one of our directors, Jason Adler, and Michael Gorenstein, our Executive Chairman and former President and Chief Executive Officer, each held an indirect interest in Redwood Holding Group, LLC by way of their interest in certain funds affiliated with Gotham Green Partners, which funds were equity holders in Redwood Holding Group, LLC. Jason Adler is the co-founder and Managing Member of Gotham Green Partners, a private equity firm focused primarily on early-stage investing in companies in the cannabis industry, and Michael Gorenstein is a co-founder and non-managing Member of Gotham Green Partners. The Special Committee engaged Perella Weinberg Partners LP as financial advisor.

The Redwood Acquisition was accounted for as a business combination as defined in ASC 805 Business Combinations. As a result of the change in control of Redwood, the assets and liabilities of Redwood are recorded at fair value in the consolidated financial statements of the Company. The following table summarizes the Company’s finalized allocation of the purchase price to assets acquired and liabilities assumed at the acquisition date.


	September 5, 2019
Fair value of net assets acquired
Cash	$	2,896
Accounts receivable (i)		647
Prepaid expenses and other assets		265
Inventory		2,806
Property and equipment		1,890
Right-of-use assets		3,533
Intangible assets (ii)		64,037
Goodwill		213,414
Accounts payable and accrued liabilities		(2,688)
Lease obligations		(3,500)
	$	283,300

(i) The fair value of acquired accounts receivable is $647. No loss allowance was recognized on acquisition.

(ii) Intangible assets include the fair value of brand name of $64,000, the remaining balance relates to software.

For the year ended December 31, 2019, acquisition-related costs of $8,531 were expensed. These costs are included in the consolidated statement of net income (loss) in financing and transaction costs.

The goodwill recognized represents the excess over the fair value of the net tangible and intangible assets acquired as a part of the Redwood acquisition. This goodwill is attributable to the expertise and reputation of the assembled workforce acquired, the expected synergies, and other intangible assets that do not qualify for separate recognition. The goodwill is not deductible for income tax purposes. The Relief-from-Royalty Method was used to value the intangible asset relating to the Lord Jones™ brand. Significant inputs include discount rate, growth rates, and cash flow projections.

During the period from September 5, 2019 to December 31, 2019, the Company recognized $3,364 in revenues and a net loss of $2,613 from Redwood operations. If the acquisition had occurred on January 1, 2019, the Company estimates that for the year ended December 31, 2019, it would have recorded an increase of $12,266 in revenues and a decrease of $1,112 in net income and that for the year ended December 31, 2018, it would have recorded an increase of $7,630 in revenues and an increase of $1,533 in net income.

There were no business combinations during the years ended December 31, 2020 or December 31, 2018.