Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE LIABILITIES

v3.23.1
DERIVATIVE LIABILITIES
 3 Months Ended
Mar. 31, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE LIABILITIES
 9. DERIVATIVE LIABILITIES
The following table summarizes the change in the Company’s derivative liabilities for the three months ended March 31, 2023.
Total Derivative Liabilities (1)
Carrying amounts as of January 1, 2023 $ 14,134 
Fair value changes (8,030)
Carrying amounts as of March 31, 2023 $ 6,104 
(1)Refer to Note 10 - Equity for the change in number of warrants during the three months ended March 31, 2023.
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 10% senior secured notes (the “Senior Notes”), and have an expiration date of December 23, 2024 and an exercise price of $1.25; and (ii) the Second Lien Notes and the Acquisition Facility second amendment, and have an expiration date of December 7, 2026 and an exercise price of $2.086. The Derivative Warrants may be net share settled. As of March 31, 2023 and December 31, 2022, there were 55,375,202 Derivative Warrants outstanding.
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 income (loss). These are Level 3 recurring fair value measurements. The estimated fair value of the Derivative Warrants was determined using the Black-Scholes model with stock price based on the OTCQX closing price of the Derivative Warrants issue date as of March 31, 2023 and December 31, 2022. The assumptions used in the fair value calculations as of the balance sheet dates presented include the following:
March 31, 2023 (unaudited) December 31, 2022
Stock price $0.52 $0.76
Risk-free annual interest rate
3.63% - 4.22%
3.99% - 4.11%
Range of estimated possible exercise price
$1.25 - $2.086
$1.25 - $2.086
Volatility 79% 79%
Remaining life
1.73 years - 3.69 years
1.98 years - 3.96 years
Forfeiture rate 0% 0%
Expected annual dividend yield 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 March 31, 2023 As of December 31, 2022
(unaudited)
Input Effect of 10% Increase Effect of 10% Decrease Input Effect of 10% Increase Effect of 10% Decrease
Stock price $ 0.52 $ 1,407  $ (1,051) $ 0.76 $ 2,529  $ (2,396)
Volatility 79  % $ 1,511  $ (1,220) 79  % $ 2,070  $ (2,121)