8-K: Schwazze Announces Restatement of Prior Financial Statements Due to Accounting Errors

Schwazze, formerly Medicine Man Technologies, will restate its financial statements for fiscal years 2022 and 2023, and the first three quarters of 2023, due to identified accounting errors.

Summary

• Medicine Man Technologies, operating as Schwazze, has determined that its previously issued financial statements for the fiscal years ended December 31, 2022 and 2023, and the quarterly periods ended March 31, 2023, June 30, 2023, and September 30, 2023, will be restated.
• The restatement is due to the identification of certain accounting errors, primarily related to technical accounting areas.
• These errors include issues with the classification of preferred shares, operating lease accounting, purchase accounting for acquisitions, inventory valuations, loyalty point accounting, debt accounting for convertible notes, and tax accounting.
• The company has also identified errors related to goodwill impairment and out-of-period expenses.
• The company has concluded that the impact of these corrections is material and that the previously issued financial statements should no longer be relied upon.
• Schwazze does not believe that the corrections will have a negative material impact on revenue, adjusted EBITDA, cash from operations, or cash position.
• The company is working to file amended reports as soon as reasonably practicable.

Sentiment

Score: 4

Explanation: The sentiment is negative due to the restatement of financial statements and the identification of material accounting errors. However, the company's statement that the restatements will not materially impact key financial metrics provides some reassurance.

Positives

• The company does not believe the restatements will have a negative material impact on revenue, adjusted EBITDA, cash from operations, or cash position.
• The company is actively working to correct the errors and file amended reports as soon as reasonably practicable.
• The company has engaged a new auditor, Baker Tilly US, LLP, to ensure the accuracy of the restated financials.

Negatives

• The company's previously issued financial statements for the fiscal years ended December 31, 2022 and 2023, and the quarterly periods ended March 31, 2023, June 30, 2023, and September 30, 2023, should no longer be relied upon.
• The restatement is due to material accounting errors, indicating potential weaknesses in internal controls.
• The company is undergoing a re-audit and re-review of its financial statements, which may cause delays in reporting.
• There is a risk that the actual effects of the restatements may differ from the preliminary estimates.

Risks

• The company has underestimated the scope and impact of the restatements.
• There are risks and uncertainties around the effectiveness of the company's disclosure controls and procedures.
• There are risks and uncertainties around the effectiveness of the company's internal control over financial reporting.
• The restated financial statements may take longer to complete than expected.
• The company's stock price could be adversely affected by the restatements and related uncertainties.
• The company faces risks related to regulatory limitations, manufacturing, acquisitions, economic conditions, access to capital, debt obligations, and key personnel.

Future Outlook

The company is working to file amended reports as soon as reasonably practicable and is assessing the effectiveness of its internal controls over financial reporting. The company cautions against placing undue reliance on forward-looking statements.

Management Comments

• The Audit Committee determined the need to restate prior financial statements following discussions with Baker Tilly and the company's management.
• The company does not currently believe that the corrections will have any negative material impact on the company's revenue, adjusted EBITDA, cash from operations or cash position.
• The company's management is assessing the effectiveness of the company's internal control over financial reporting and its disclosure controls and procedures.

Industry Context

The cannabis industry is subject to complex and evolving accounting standards, making it prone to restatements. This announcement highlights the importance of robust internal controls and the challenges of navigating the regulatory landscape.

Comparison to Industry Standards

• Restatements are not uncommon in the cannabis industry due to the complex accounting and regulatory environment.
• Other cannabis companies have faced similar issues with accounting for acquisitions, leases, and complex financial instruments.
• The engagement of a reputable auditor like Baker Tilly is a positive step towards ensuring the accuracy of the restated financials, which is a standard practice for companies facing such issues.
• The company's focus on maintaining its revenue, adjusted EBITDA, cash from operations, and cash position is consistent with industry priorities.

Stakeholder Impact

• Shareholders are impacted by the restatement of financial statements and the potential for a negative impact on the stock price.
• Employees may be affected by the uncertainty surrounding the company's financial reporting.
• Customers and suppliers may experience some uncertainty due to the restatement.

Next Steps

• The company will file amendments to its 2023 Form 10-K and each Form 10-Q for the fiscal periods ended March 31, 2023, June 30, 2023, and September 30, 2023.
• The company will assess the effectiveness of its internal control over financial reporting and its disclosure controls and procedures.
• The company will implement changes to remediate any identified material weaknesses.

Key Dates

Keywords

restatement, financial statements, accounting errors, audit, internal controls, Schwazze, Medicine Man Technologies, Baker Tilly, BF Borgers, SEC, cannabis