Jushi Holdings Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

DERIVATIVE LIABILITIES

DERIVATIVE LIABILITIES

12 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]


14. DERIVATIVE LIABILITIES

The continuities of the Company’s derivative liabilities are as follows:


	Total Derivative Liabilities (1)(4)
Carrying amounts as of January 1, 2021	$	205,361
Fair value changes (2)	(105,170)
Derivative Warrants exercised and settled	(7,756)
Carrying amounts as of December 31, 2021 (4)	$	92,435
Derivative Warrants issued (3)	23,205
Fair value changes (2)	(91,887)
Derivative Warrants exercised and settled (5)	(9,619)
Carrying amounts as of December 31, 2022	$	14,134

(1)Refer to Note 15 - Equity for the continuity of the number of these warrants outstanding.

(2)Included in other income (expense), net in the consolidated statements of operations and comprehensive income (loss).

(3)Includes fair value of 17,512,280 derivative warrants issued in connection with the Second Lien Notes issuance in December 2022, and 2,000,000 derivative warrants issued relating to the second amendment of the Acquisition Facility in December 2022.

(4)Includes mandatory prepayment option on the Senior Notes, which had a fair value of $174 as of December 31, 2021.

(5)Includes mandatory prepayment option on the Senior Notes of $218, which was settled in December 2022 with the Company’s redemption of the Senior Notes.

The Company’s derivative liabilities are primarily comprised of derivative warrants (“Derivative Warrants”). These are warrants to purchase SVS of the Company which were issued in connection with: (i) the Senior Notes, and have an expiration date of December 23, 2024 and an exercise price of US$1.25; and (ii) the Second Lien Notes and Acquisition

Facility second amendment, and have an expiration date of December 7, 2026 and an exercise price of $2.086 per share (refer to Note 12 - Debt for additional information). The Derivative Warrants may be net share settled. As of December 31, 2022 and 2021, there were 55,375,202 and 40,124,355 Derivative Warrants outstanding, respectively.

These Derivative Warrants were considered derivative financial liabilities measured at fair value with all gains or losses recognized in profit or loss as the settlement amount for the Derivative Warrants may be adjusted during certain periods for variables that are not inputs to standard pricing models for forward or option equity contracts, i.e., the “fixed for fixed” criteria under ASC 815-40. The estimated fair value of the Derivative Warrants is measured at the end of each reporting period and an adjustment is reflected in fair value changes in derivatives in the consolidated statements of operations and comprehensive (loss) income. These are Level 3 recurring fair value measurements. The estimated fair value of the Derivative Warrants was determined using the (i) Black-Scholes model with stock price based on the OTCQX closing price of the Derivative Warrants issue date in December 2022 and as of December 31, 2022, and (ii) Monte Carlo simulation model with stock price based on the OTCQX closing price as of December 31, 2021. The assumptions used in the fair value calculations as of the balance sheet dates presented include the following:


	December 2022 (New Issuances)	As of December 31,
		2022	2021
Stock price per share	$1.12 - $2.06	$0.76	$3.25
Risk-free annual interest rate	3.76% - 3.91%	3.99% - 4.11%	0.97%
Exercise price	$2.086	$1.25 - $2.086	$0.04 - $1.25
Weighted average volatility	77%	79%	73%
Remaining life	4 years	1.98 - 3.96 years	3 years
Forfeiture rate	0%	0%	0%
Expected annual dividend yield	0%	0%	0%

Volatility was estimated by using a weighting of the Company’s historical volatility and the average historical volatility of comparable companies from a representative peer group of publicly traded cannabis companies. The risk-free interest rate for the expected life of the Derivative Warrants was based on the yield available on government benchmark bonds with an approximate equivalent remaining term. The expected life is based on the contractual term. If any of the assumptions used in the calculation were to increase or decrease, this could result in a material or significant increase or decrease in the estimated fair value of the derivative liability. For example, the following table illustrates an increase or decrease in certain significant assumptions as of the balance sheet dates:


	As of December 31, 2022							As of December 31, 2021
	Input			Effect of 10% Increase		Effect of 10% Decrease		Input			Effect of 10% Increase		Effect of 10% Decrease
Stock price per share	$	0.76		$	2,529	$	(2,396)	$	3.25		$	12,781	$	(10,834)
Volatility	79		%	$	2,070	$	(2,121)	73		%	$	4,473	$	(3,210)