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Business Combination | 9 Months Ended
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Sep. 30, 2022
Business Combinations [Abstract] |
Business Combination | Note 8 — Business Combination Acquisition of Lab Society On February 1, 2022, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Lab Society, a newly-formed wholly-owned subsidiary of the Company (“Merger Sub”), Michael S. Maibach Jr., as the Owner Representative thereunder, and each of the shareholders of Lab Society (collectively, the “Owners”), pursuant to which the Company agreed to acquire Lab Society. Concurrently with the execution of the Merger Agreement, the Company consummated the merger of Lab Society with and into Merger Sub, with Merger Sub surviving such merger as a wholly-owned subsidiary of the Company (the “Lab Society Acquisition”). The aggregate consideration for the Lab Society Acquisition consisted of: $4.0 million in cash, subject to certain adjustments for working capital, cash, and indebtedness of Lab Society at closing; 42,561 shares of Common Stock (the “Buyer Shares”); and the Earn-out Consideration (as defined below), to the extent earned. The Company withheld 12,768 of the Buyer Shares issuable to the Owners (the “Holdback Lab Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Merger Agreement. During the third quarter of 2022, 2,785 of the Holdback Lab Buyer Shares were forfeited after the finalization of the net working capital settlement. The remaining 9,983 Holdback Lab Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions of the Merger Agreement. The Merger Agreement includes customary post-closing adjustments, representations and warranties, and covenants of the parties. The Owners may become entitled to additional consideration with a value of up to $3.5 million based on the eligible net revenues achieved by the Lab Society business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 50% will be payable in cash and the remaining 50% will be payable by issuing shares of Common Stock. Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements. Transaction and related costs, consisting primarily of professional fees, related to the acquisition, totaled approximately $0 and $66 thousand for the three months and nine months ended September 30, 2022, respectively. All transaction and related costs were expensed as incurred and are included in general and administrative expenses. The Company has prepared purchase price allocations for the business combination with Lab Society on a preliminary basis. Changes to those allocations may occur as additional information becomes available during the respective measurement period (up to one year from the acquisition date). The following table sets forth the components and the allocation of the purchase price for the business combination:
(In thousands) |  |  |
Purchase price consideration |  |  |
Estimated closing proceeds |  | $ | 4,002 |
Transaction expenses |  |  | 80 |
Closing buyer shares |  |  | 1,904 |
Holdback buyer shares |  |  | 816 |
Earn-out consideration |  |  | 1,420 |
Estimated working capital adjustment |  |  | (255 | )
Fair value of total consideration transferred |  |  | 7,967 |
Total purchase price, net of cash acquired |  | $ | 7,402 |
Fair value allocation of purchase price |  |  |  |
Cash and cash equivalents |  | $ | 565 |
Accounts receivable |  |  | 511 |
Inventory |  |  | 2,130 |
Prepaid expenses and other current receivables |  |  | 55 |
Right - of-use assets, net |  |  | 304 |
Property and equipment, net |  |  | 177 |
Prepaid and refundable taxes |  |  | 194 |
Accounts payable, accrued expenses, and other current liabilities |  |  | (1,244 | )
Deferred revenue |  |  | (963 | )
Deferred tax liability |  |  | (237 | )
Finance lease liabilities, current |  |  | (36 | )
Finance lease liabilities, non-current |  |  | (35 | )
Operating lease liabilities, current |  |  | (112 | )
Operating lease liabilities, non-current |  |  | (192 | )
Acquired intangible assets |  |  | 2,462 |
Goodwill |  |  | 4,388 |
Total purchase price |  | $ | 7,967 |
Identified intangible assets consist of trade names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC805 and are outlined in the table below:
(In thousands) |  | Asset Value |  |  | Useful Life |
Identified intangible assets |  |  |  |  |  |
Trade names |  | $ | 317 |  |  |  | 5 years |
Acquired developed technology |  |  | 1,432 |  |  |  | 8 years |
Customer relationships |  |  | 713 |  |  |  | 6 years |
Total identified intangible assets |  | $ | 2,462 |  |  |  |  |
The Company’s initial fair value estimates related to the various identified intangible assets of Lab Society were determined under various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending, and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate. During the three-month period ended June 30, 2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements. The amount of revenue of Lab Society included in the consolidated statements of operations from the acquisition date of February 1, 2022 to September 30, 2022 was $4.0 million. Acquisition of Precision and Cascade On September 29, 2021 (the “Execution Date”), the Company entered into a Plan of Merger and Equity Purchase Agreement, as amended by an amendment dated October 1, 2021 (as amended, the “Purchase Agreement”), with Sinclair Scientific, LLC, a Delaware limited liability company (“Sinclair”), Mass2Media, LLC, Precision, a Michigan limited liability company; and each of the equity holders of Sinclair named therein (collectively, the “Sinclair Members”). On October 1, 2021, the Company consummated the transactions contemplated by the Purchase Agreement. Subject to the terms and conditions set forth in the Purchase Agreement, (1) Sinclair transferred, to the Company, and the Company purchased (the “Interest Purchase”) from Sinclair, 100% of the equity interests of Cascade, a Delaware limited liability company, such that immediately after the consummation of such Interest Purchase, Cascade became a wholly-owned subsidiary of the Company, and (2) Precision merged (the “Merger”) with and into a newly-formed wholly-owned subsidiary of the Company, Precision Extraction NewCo, LLC. The aggregate consideration for the Interest Purchase and the Merger consisted of: (a) the sum of $30 million in cash, plus consideration payable to holders of outstanding Sinclair equity awards, subject to certain adjustments for working capital, cash and indebtedness, payable in connection with the Interest Purchase; (b) the number of shares of Common Stock, subject to adjustment, equal to the quotient of (i) $20.0 million divided by (ii) the volume weighted-average price per share of Common Stock on The Nasdaq Capital Market for the 30 consecutive trading days ending on the Execution Date (the “VWAP Price”), issuable in connection with the Merger; and (c) the True-Up Buyer Shares, if any (as defined below), issuable in connection with the Merger. The Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Sinclair Members may become entitled to additional shares of Common Stock (the “True-Up Buyer Shares”) and cash (together with the True-Up Buyer Shares, the “Aggregate True-Up Payment) based on the eligible net revenues (as defined in the Purchase Agreement) achieved by the Cascade and Precision businesses during the fiscal year ending December 31, 2021. However, in no event shall the aggregate purchase price paid by the Company pursuant to the terms of the Purchase Agreement, taking into account any Aggregate True-Up Payment in favor of the Sinclair Members, exceed $65.0 million. On August 10, 2022, the Company entered into a post-closing adjustment settlement agreement (“Agreement”) with Sinclair. The Agreement was entered into in connection with the Purchase Agreement. According to the Purchase Agreement, $2.5 million was held by the escrow agent as the Adjustment Escrow Amount, $4.5 million was held by the escrow agent as the Indemnity Escrow Amount and 11,760 Buyer Shares were held by the Company as the Holdback Buyer Shares. During the three-month period ended September 30, 2022, the Company made the final Aggregate True-up Payment of approximately $5.6 million, of which, $3.3 million was paid in cash and 8,704 Holdback Buyer Shares were released to the Sinclair Members and the Company received $1.4 million from the Adjustment Escrow Amount, and the remaining $1.1 million balance of the Adjustment Escrow Amount became part of the Indemnity Escrow Amount. Transaction and related costs, consisting primarily of professional fees, related to the acquisition, totaled approximately $0 and $63 thousand for the three and nine months ended September 30, 2022, respectively. All transaction and related costs were expensed as incurred and are included in selling, general and administrative expenses. The following table sets forth the components and the allocation of the purchase price for the business combination:
(In thousands) |  |  |
Purchase price consideration |  |  |
Cash paid to Sinclair Members at the close |  | $ | 23,000 |
Cash contributed to escrow accounts at the close |  |  | 7,000 |
Cash paid for excess net working capital |  |  | 1,430 |
Stock issued at the close |  |  | 14,535 |
Fair value of contingent consideration to be achieved |  |  | 3,953 |
Fair value of total consideration transferred |  |  | 49,918 |
Total purchase price, net of cash acquired |  | $ | 48,630 |
Fair value allocation of purchase price |  |  |  |
Cash and cash equivalents |  | $ | 1,288 |
Accounts receivable |  |  | 897 |
Inventory |  |  | 6,761 |
Prepaid expenses and other current receivables |  |  | 1,736 |
Property and equipment, net |  |  | 970 |
Right-of-use assets, net |  |  | 730 |
Capitalized web costs, net |  |  | 2 |
Accounts payable and accrued expenses |  |  | (9,223 | )
Deferred revenue |  |  | (5,419 | )
Long-term debt |  |  | (1,961 | )
Operating lease liabilities, current |  |  | (392 | )
Operating lease liabilities, non-current |  |  | (362 | )
Acquired intangible assets |  |  | 9,889 |
Goodwill |  |  | 45,002 |
Total purchase price |  | $ | 49,918 |
Identified intangible assets consist of trade names, technology, non-compete agreements, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC805 and are outlined in the table below:
(In thousands) |  | Asset Value |  |  | Useful Life |
Identified intangible assets |  |  |  |  |  |
Trade names |  | $ | 1,260 |  |  |  | 6 to 7 years |
Acquired developed technology |  |  | 3,818 |  |  |  | 5 years |
Non-compete agreements |  |  | 1,202 |  |  |  | 5 years |
Customer relationships |  |  | 3,609 |  |  |  | 7 to 8 years |
Total identified intangible assets |  | $ | 9,889 |  |  |  |  |
The Company’s initial fair value estimates related to the various identified intangible assets were determined under various valuation approaches including the Income Approach, Relief-from-Royalty Method, and Discounted Cash Flow Method. These valuation methods require management to project revenues, operating expenses, working capital investment, capital spending and cash flows for the reporting unit over a multiyear period, as well as determine the weighted-average cost of capital to be used as a discount rate. During the three-month period ended June 30, 2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements. Acquisition of PurePressure On December 31, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Pure Purchase Agreement”) with PurePressure, LLC, a Colorado Limited liability company (“PurePressure”), and the members of PurePressure (collectively, the “Members”), Benjamin Britton as the Member Representative thereunder, and each of the Members. Concurrently with the execution of the Pure Purchase Agreement, the Company consummated the acquisition of all the outstanding equity interests of PurePressure, such that immediately after the consummation of such purchase, PurePressure became a wholly-owned subsidiary of the Company (the “Acquisition”). The aggregate consideration for the Acquisition consisted of: (a) $4.0 million in cash, subject to certain adjustments for working capital, cash and indebtedness of PurePressure at closing; (b) 32,918 shares of Common Stock (the “Buyer Shares”); and (c) the Earn-out Consideration (as defined below), to the extent earned. The Company withheld 8,888 of the Buyer Shares issuable to certain Members (the “Holdback Buyer Shares”) for the purpose of securing any post-closing adjustment owed to the Company and any claim for indemnification or payment of damages to which the Company may be entitled under the Pure Purchase Agreement. During the third quarter of 2022, 1,456 of the Holdback Buyer Shares were forfeited after the finalization of the net working capital settlement. The remaining 7,432 of the Holdback Buyer Shares will be released following the twelve-month anniversary of the Closing Date in accordance with and subject to the conditions of the Pure Purchase Agreement. The Pure Purchase Agreement includes customary post-closing adjustments, representations and warranties and covenants of the parties. The Members may become entitled to additional consideration with a value of up to $3.0 million based on the eligible net revenues achieved by the PurePressure business during the fiscal years ending December 31, 2022 and December 31, 2023, of which 40% will be payable in cash and the remaining 60% will be payable by issuing shares of Common Stock (collectively, the “Earn-out Consideration”). Additional information regarding the Company’s contingent consideration arrangements may be found in Note 4 – Fair Value Measures, included elsewhere in the notes to the consolidated financial statements. Subject to certain customary limitations, (i) the Members will indemnify the Company and its affiliates, officers, directors and other agents against certain losses related to, among other things, breaches of the Members’ and PurePressure’s representations and warranties, indebtedness, transaction expenses, pre-closing taxes and the failure to perform covenants or obligations under the Pure Purchase Agreement, and (ii) the Company will indemnify the Members and their respective affiliates, officers, directors and other agents against certain losses related to, among other things, breaches of the Company’s representations and warranties and the failure to perform covenants or obligations under the Pure Purchase Agreement. Transaction and related costs, consisting primarily of professional fees, related to the acquisition, totaled approximately $0 and $563 thousand for the three and nine months ended September 30, 2022, respectively. All transaction and related costs were expensed as incurred and are included in general and administrative expenses. The purchase price allocation for the business combination has been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available during the respective measurement period (up to one year from the acquisition date). The following table sets forth the components and the allocation of the purchase price for the business combination:
(In thousands) |  |  |
Purchase price consideration |  |  |
Estimated closing proceeds |  | $ | 3,613 |
Indebtedness paid |  |  | 320 |
Transaction expenses |  |  | 115 |
Closing buyer shares |  |  | 2,211 |
Holdback buyer shares |  |  | 654 |
Earn-out consideration |  |  | 707 |
Estimated working capital adjustments |  |  | 330 |
Fair value of total consideration transferred |  |  | 7,950 |
Total purchase price, net of cash acquired |  | $ | 7,647 |
Fair value allocation of purchase price |  |  |  |
Cash and cash equivalents |  | $ | 303 |
Accounts receivable, net |  |  | 48 |
Inventory |  |  | 1,537 |
Property and equipment, net |  |  | 219 |
Right-of-use assets, net |  |  | 191 |
Prepaid expenses and other current receivables |  |  | 61 |
Other non-current assets |  |  | 16 |
Accounts payable and accrued expenses |  |  | (765 | )
Deferred revenue |  |  | (762 | )
Operating lease liabilities, current |  |  | (117 | )
Operating lease liabilities, non-current |  |  | (74 | )
Finance lease liabilities, current |  |  | (4 | )
Finance lease liabilities, non-current |  |  | (10 | )
Notes payable, current |  |  | (260 | )
Notes payable, non-current |  |  | (12 | )
Acquired intangible assets |  |  | 3,037 |
Goodwill |  |  | 4,542 |
Total purchase price |  | $ | 7,950 |
Identified intangible assets consist of trade names, technology, and customer relationships. The fair value of intangible assets and the determination of their respective useful lives were made in accordance with ASC805 and are outlined in the table below:
(In thousands) |  | Asset Value |  |  | Useful Life |
Identified intangible assets |  |  |  |  |  |
Trade name |  | $ | 227 |  |  |  | 5 years |
Acquired developed technology |  |  | 1,093 |  |  |  | 8 years |
Customer relationships |  |  | 1,717 |  |  |  | 5 years |
Total identified intangible assets |  | $ | 3,037 |  |  |  |  |
During the three-month period ended June 30, 2022, the Company identified an impairment-triggering event associated with both a sustained decline in the Company’s stock price and associated market capitalization, as well as a second-quarter slowdown in the cannabis industry as a whole. Due to these factors, the Company deemed that there was an impairment to the carrying value of its long-lived assets and accordingly performed interim testing as of June 30, 2022. Based on its interim testing, the Company noted that the entire carrying value of its goodwill and intangible assets should be impaired. Additional information regarding the Company’s interim testing on goodwill and intangible assets may be found in Note 7 – Goodwill and Intangible Assets, Net, included elsewhere in the notes to the consolidated financial statements.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI https://asc.fasb.org/topic&trid=2303972 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 5 -Subparagraph (b) -URI https://asc.fasb.org/extlink&oid=128092470&loc=d3e4946-128472 + Details
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