SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
¨ REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
¨ ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended __________
OR
¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
x SHELL COMPANY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report: June 29,
2021
For the transition period from _________ to __________
Commission file number 000-56261
GLASS
HOUSE BRANDS INC.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
British
Columbia, Canada
(Jurisdiction of incorporation or organization)
3645
Long Beach Blvd. Long Beach, California 90807
(Address of principal executive offices)
Kyle Kazan
c/o Glass House Brands Inc.
3645 Long Beach Blvd. Long Beach, California 90807
Telephone: 212-299-7670
Facsimile: 562-753-6830
(Name, Telephone, E-Mail and/or Facsimile number and Address of
Company Contact Person)
Securities registered or to be registered pursuant to
Section 12(b) of the Act: NONE
Securities registered or to be registered pursuant to
Section 12(g) of the Act: Subordinate, Restricted and
Limited Voting Shares, without par value.
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: NONE
Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period
covered by the shell company report: 22,860,947 shares of Equity
Shares, 4,754,979 shares of Multiple Voting Shares, and 27,290,154
shares of Exchangeable Shares.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
YES¨ NO x
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934.
YES¨ NO ¨
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
YES ¨ NO x
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
YES x NO ¨
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or
an emerging growth company. See definition of “large accelerated
filed,” “accelerated filer,” and “emerging growth company” in
Rule 12b-2 in the Exchange Act.
|
Large
accelerated filer ¨ |
Accelerated
filer ¨ |
Non-accelerated
filer x |
|
|
|
Emerging
growth company x |
If an emerging growth company that prepares its financial
statements in accordance with U.S. GAAP, indicate by check mark if
the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting
standards† provided pursuant to Section 13(a) of the
Exchange Act.
¨
† The term “new or revised financial accounting standard” refers to
any update issued by the Financial Accounting Standards Board to
its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on
and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or
issued its audit report.
¨
Indicate by check mark which basis of accounting the registrant has
used to prepare the financial statements included in this
filing:
|
U.S.
GAAP x |
International
Financial Reporting Standards as issued by the International
Accounting Standards Board ¨ |
Other
¨ |
If “Other” has been checked in response to the previous question,
indicate by check mark which financial statement item the
registrant has elected to follow:
x Item 17 ¨ Item 18
If this is an annual report indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act:
¨ YES ¨ NO
TABLE OF CONTENTS
Explanatory Note
This Shell Company Report on Form 20-F (this “Shell Company
Report”) of Glass House Brands Inc. (the “Company,” “we,” “us” or
“our”) speaks as of June 29, 2021 (i.e., the consummation of the
Business Combination (as such term defined in this Shell Company
Report)), and does not update any other information or disclosure
relating to any events that have occurred after June 29, 2021,
except for the “Risk factors” beginning on page 5 and
“Element 7 Acquisition and Litigation” beginning on page 40.
The Company disclaims any duty to update any information set forth
in this Shell Company Report.
PART I
In this Shell Company Report, unless the context otherwise
requires, the Company refers to Glass House Brands Inc. together
with its subsidiaries, which entity was previously a
publicly-listed special purpose acquisition corporation named
Mercer Park Brand Acquisition Corp. (“Mercer Park” or “BRND”).
Brief Introduction
We were previously a publicly-listed special purpose acquisition
corporation named Mercer Park, incorporated under
the Business Corporations Act (British Columbia)
(“BCBCA”) on April 16, 2019, for the purpose of effecting an
acquisition of one or more businesses or assets. Mercer Park
completed an initial public offering and became listed on the Neo
Exchange Inc. (the “Neo Exchange”) on May 13, 2019, and,
on June 29, 2021 completed its qualifying transaction under
the rules of the Neo Exchange (the “Transaction” or “Business
Combination”) pursuant to the terms of an Agreement and Plan of
Merger dated as of April 8, 2021, as amended June 18,
2021 and June 28, 2021 (collectively, the “Business
Combination Agreement”), pursuant to which Mercer Park acquired
indirectly 100% of the common equity interests of GH
Group, Inc. (“GH Group”), a California based vertically
integrated cannabis company, and changed its name to Glass House
Brands Inc.
As a result of the Business Combination, GH Group’s shareholders
became our controlling shareholders, and we continued to carry on
the business of GH Group. The Business Combination was effected by
a reverse merger of an indirect subsidiary of Mercer Park with GH
Group, with GH Group as the surviving entity, and GH Group became
our a majority-owned indirect subsidiary.
In connection with the Business Combination, our articles (the
“Articles”) were amended to, among other things: (i) create
and set the terms of the restricted voting shares (“Restricted
Voting Shares”) and limited voting shares of the Company (“Limited
Voting Shares”), (ii) amend the terms of Mercer Park’s
Class A restricted voting shares to provide for the conversion
of such shares into Restricted Voting Shares, Limited Voting
Shares, or subordinate voting shares of the Company (“Subordinate
Voting Shares,” and collectively with the Restricted Voting Shares
and Limited Voting Shares, the “Equity Shares”), as applicable
(rather than solely into Subordinate Voting Shares) on completion
of the Business Combination, (iii) provide for the conversion
of Mercer Park’s Class B shares directly or indirectly on a
one-for-one basis into Equity Shares on completion of the Business
Combination, (iv) amend the terms of the multiple voting
shares of the Company (“Multiple Voting Shares”) to convert the
terms of such class of shares into non-transferable, redeemable and
retractable preferred shares carrying 50 votes per share with no
dividend or conversion rights and a $0.001 redemption and
liquidation value, and (v) amend the terms of the Subordinate
Voting Shares issuable on conversion of Mercer Park’s Class A
restricted voting shares, including by amending the requirements in
respect of who may hold Subordinate Voting Shares.
Our
head office is 3645 Long Beach Boulevard, Long Beach, California
90807. Our registered office is Suite 2200, HSBC
Building, 885 West
Georgia Street, Vancouver,
BC V6C 3E8 Canada.
We were previously a shell company prior to the Business
Combination. Since, as a result of the Business Combination, we
ceased to be a shell company, the Company is required pursuant to
Rule 13a-19 under the Securities Exchange Act of 1934 (the
“Exchange Act”) to disclose the information in this Shell Company
Report that would be required to be disclosed if it were
registering securities under the Exchange Act within four business
days following the consummation of the Business Combination.
Item 1. Identity of Directors,
Senior Management and Advisers.
A. Directors and senior management.
Our directors and senior management include the individuals
indicated below:
|
Name |
Function |
Business
Address |
|
Kyle
Kazan |
Chairman
and Chief Executive Officer |
3645
Long Beach Blvd., Long Beach, California 90807 |
|
Graham
Farrar |
President
and Director |
3645
Long Beach Blvd., Long Beach, California 90807 |
|
Robert
(“Jamie”) Mendola |
Director |
3645
Long Beach Blvd., Long Beach, California 90807 |
|
Lameck
Humble Lukanga |
Director |
3645
Long Beach Blvd., Long Beach, California 90807 |
|
Jocelyn
Rosenwald |
Director |
3645
Long Beach Blvd., Long Beach, California 90807 |
|
George
Raveling |
Director |
3645
Long Beach Blvd., Long Beach, California 90807 |
|
Hector
De La Torre |
Director |
3645
Long Beach Blvd., Long Beach, California 90807 |
|
Robert
(“Bob”) Hoban |
Director |
3645
Long Beach Blvd., Long Beach, California 90807 |
|
Derek
Higgins |
Chief
Financial Officer |
3645
Long Beach Blvd., Long Beach, California 90807 |
|
Jamin
Horn |
General
Counsel and Corporate Secretary |
3645
Long Beach Blvd., Long Beach, California 90807 |
|
Joe
Andreae |
Vice
President, Business Development |
3645
Long Beach Blvd., Long Beach, California 90807 |
|
Daryl
Kato |
Chief
Operating Officer |
3645
Long Beach Blvd., Long Beach, California 90807 |
B. Advisers.
Not applicable.
C. Auditors.
The auditor of BRND was MNP LLP, having an address at 111 Richmond
Street West, Suite 300, Toronto, Ontario, Canada M5H 2G4. Such
firm was independent during their auditor tenure within the meaning
of PCAOB Rule 3520, Auditor Independence.
Our auditor is Macias Gini & O’Connell LLP, having an
address at 700 South Flower Street, Suite 800, Los Angeles, CA
90017. Such firm is independent within the meaning of the CPA Code
of Professional Conduct and within the meaning of PCAOB
Rule 3520, Auditor Independence.
Item 2. Offer Statistics and
Expected Timetable.
A. Offer statistics.
Not applicable.
B. Method and expected timetable.
Not applicable.
Item 3. Key Information.
A.
[Reserved]
B. Capitalization and indebtedness.
The following table sets forth our consolidated capitalization as
of December 31, 2020 adjusted to give effect to (i) the
Transaction (ii) the proposed acquisition of SoCal Greenhouse,
(iii) the Private Placement, and (iv) the GH Group Financing
(as defined below), assuming zero and a 25% level of redemptions of
BRND Class A Restricted Voting Shares. Since December 31,
2020, other than in the normal course of business, there has been
no material change in our equity and debt capital.
This table should be read in conjunction with the BRND Audited
Annual Financial Statements, the GH Group Audited Annual Financial
Statements, the Farmacy Berkeley Audited Annual Financial
Statements, and the Pro Forma Financial Statements attached to this
Shell Company Report.
| |
|
As
of December 31, 2020, as adjusted after giving effect to
(i) the Transaction and the acquisition of Farmacy Berkeley,
(ii) the proposed acquisition of SoCal Greenhouse,
(iii) the Private Placement, and (iv) the GH Group
Financing and assuming no redemptions of BRND Class A
Restricted Voting Shares |
|
|
As
of December 31, 2020, as adjusted after giving effect to the
Transaction and the acquisition of Farmacy Berkeley, (ii) the
proposed acquisition of SoCal Greenhouse, (iii) the Private
Placement, and (iv) the GH Group Financing and assuming 25%
redemptions of BRND Class A Restricted Voting
Shares |
|
| Cash
and cash equivalents |
|
|
365,936,258 |
|
|
|
162,167,730 |
|
| Debt(2) |
|
|
989,554 |
|
|
|
989,554 |
|
| Shareholders’ equity(1) |
|
|
710,415,065 |
|
|
|
509,165,065 |
|
| Total
Capitalization |
|
|
711,404,619 |
|
|
|
510,154,619 |
|
| Debt,
net of cash |
|
|
(364,946,704 |
) |
|
|
(161,178,176 |
) |
Notes:
| |
(1) |
Excludes
the Equity Shares issuable upon the exercise of the BRND Warrants,
which are exercisable commencing 65 days after the completion of
the Transaction. |
| |
(2) |
Unsecured. |
C. Reasons for the offer and use of proceeds.
Not applicable.
D. Risk factors.
There are a number of risk factors that could cause future results
to differ materially from those described herein. The following are
certain factors relating to the Company and its business that may
have a material adverse effect on the Company’s business, financial
condition, results of operations and prospects, or the trading
price of the Equity Shares. These risks and uncertainties are not
the only ones facing the Company. Additional risks and
uncertainties not presently known to the Company or currently
deemed immaterial by the Company may also impair the operations of
the Company. If any such risks actually occur, security holders of
the Company could lose all or part of their investment and the
business, financial condition, liquidity, cash flows, results of
operations and prospects of the Company could be materially
adversely affected and the ability of the Company to implement its
growth plans could be adversely affected.
Risks Related to Legality of Cannabis
While legal under applicable U.S. State and local laws, the
Company’s business activities are currently illegal under U.S.
federal law.
Investors are cautioned that in the United States, commercial
activity regarding cannabis is largely regulated at the State
level, and in California, at both the State and local levels. To
the Company’s knowledge, as of the date hereof, some form of
cannabis has been legalized in 38 States, the District of Columbia,
and the territories of Guam, U.S. Virgin Islands, Northern Mariana
Islands and Puerto Rico. Additional States have pending legislation
regarding the same. Although California authorizes medical and/or
adult-use cannabis production and distribution by duly licensed or
registered entities, and numerous other states have legalized
cannabis in some form, under current U.S. federal law, the
possession, use, cultivation, and transfer of cannabis and any
related drug paraphernalia is illegal, and any such acts are
criminal acts under federal law under any and all circumstances
under the Controlled Substances Act of 1970 (the “Substances Act”).
The concepts of “medical cannabis,” “retail cannabis” and
“adult-use cannabis” do not exist under current U.S. federal law.
Marijuana is a Schedule I drug under the Substances Act. Under
current U.S. federal law, a Schedule I drug or substance has a high
potential for abuse, no accepted medical use in the U.S., and a
lack of safety for the use of the drug under medical supervision.
Although the Company believes that the business of the Company is
and will be compliant with applicable U.S. state and local law,
strict compliance with state and local laws with respect to
cannabis may not absolve the Company of liability under U.S.
federal law, nor may it provide a defense to any federal proceeding
which may be brought against the Company. Any such proceedings
brought against the Company may result in a material adverse effect
on the Company.
Since the possession and use of cannabis and any related drug
paraphernalia is illegal under current U.S. federal law, the
Company may be deemed to be conducting an illegal activity and/or
aiding and abetting illegal activities. The Company manufactures
and distributes medical and adult-use cannabis. As a result, U.S.
law enforcement authorities, in their attempt to regulate the
illegal use of cannabis and any related drug paraphernalia, may
seek to bring an action or actions against the Company, including,
but not limited to, a claim regarding the possession, use and sale
of cannabis, and/or aiding and abetting another’s criminal
activities. The U.S. federal aiding and abetting statute provides
that anyone who “commits an offense or aids, abets, counsels,
commands, induces or procures its commission, is punishable as a
principal.” As a result, the U.S. DOJ, under the current
administration, could also allege that the Company’s lenders,
landlords and other service providers have “aided and abetted”
violations of federal law by providing financing and services to
the Company. Under these circumstances, the federal prosecutor
could enforce applicable laws in many ways, including, without
limitation, to seek to seize the assets of the Company and
third-party lenders, landlords and other service providers, and to
recover the “illicit profits” previously distributed to
shareholders resulting from any of the foregoing. In these
circumstances, the Company’s operations would cease, the state and
local authorizations issued to the underlying cannabis operating
business(es) could be rescinded, the underlying cannabis operator
business(es) could lose any leasehold interest held by such
business(es), shareholders may lose their entire investment and
directors, officers and/or shareholders may be left to defend any
criminal charges against them at their own expense and, if
convicted, be sent to federal prison. Such an action would result
in a material adverse effect on the Company.
U.S. Customs and Border Protection (“CBP”) enforces the laws of the
United States. Crossing the border while in violation of the
Substances Act and other related federal laws may result in denied
admission, seizures, fines and apprehension. CBP officers
administer the Immigration and Nationality Act to determine
the admissibility of travelers, who are non-U.S. citizens, into the
United States. An investment in the Company, if it became known to
CBP, could have an impact on a non-U.S. shareholder’s admissibility
into the United States and could lead to a lifetime ban on
admission. See “Risk Factors - U.S. border officials could deny
entry of non-U.S. citizens into the U.S. to employees of or
investors in companies with cannabis operations in the United
States and Canada.”
The Company derives 100% of its revenues from the cannabis industry
and specifically the sale of cannabis and cannabis products in the
State of California which industry is currently illegal under U.S.
federal law. Even where the Company’s cannabis-related activities
are compliant with applicable State and local laws, such activities
remain illegal under U.S. federal law. The enforcement of relevant
laws is a significant risk.
Medical cannabis has been protected against enforcement by enacted
legislation from the United States Congress in the form of what is
commonly called the “Rohrabacher-Blumenauer Amendment,” which
prevents federal prosecutors from using federal funds to impede the
implementation of medical cannabis laws enacted at the state-level,
subject to the United States Congress restoring such funding.
Notably, although its sponsors have proposed versions of the
amendment that cover both medical and adult use cannabis laws
enacted at the state-level, the text of the adopted amendment has
always applied to only medical cannabis programs, and has no effect
on pursuit of recreational cannabis activities. The amendment has
historically been passed as an amendment to omnibus appropriations
bills, which by their nature expire at the end of a fiscal year or
other defined term. The current omnibus appropriations bill
continued the protections for the medical cannabis marketplace and
its lawful participants from interference by the U.S. DOJ up and
through the 2022 appropriations deadline of September 30, 2022.
If the Rohrabacher-Blumenauer Amendment language is not extended
beyond September 30, 2022, there can be no assurance that the
federal government will not seek to prosecute cases involving
medical cannabis businesses that are otherwise compliant with state
and local laws. Such potential proceedings could involve
significant restrictions being imposed upon the Company or third
parties, while diverting the attention of key executives. Such
proceedings could have a material adverse effect on the Company,
even if such proceedings were concluded successfully in favor of
the Company.
Violations of any federal laws and regulations could result in
significant fines, penalties, administrative sanctions, convictions
or settlements arising from civil proceedings conducted by either
the federal government or private citizens, or criminal charges,
including, but not limited to, disgorgement of profits, cessation
of business activities or divestiture. This could have a material
adverse effect on the Company, including its reputation and ability
to conduct business, its holding (directly or indirectly) of
medical and adult-use cannabis licenses in the United States, its
financial position, operating results, profitability or liquidity
or the market price of its publicly-traded shares. In addition, it
will be difficult for the Company to estimate the time or resources
that would be needed for the investigation of any such matters or
its final resolution because, in part, the time and resources that
may be needed are dependent on the nature and extent of any
information requested by the applicable authorities involved, and
such time or resources could be substantial.
The
approach to the enforcement of state and
federal cannabis laws may be subject to change or may not proceed
as previously outlined.
As a
result of the conflict between state and federal law regarding
cannabis, investments in cannabis businesses in the U.S. are
subject to inconsistent legislation and regulation. The response to
this inconsistency was addressed in the Cole Memorandum addressed
to all United States district attorneys acknowledging that
notwithstanding the designation of cannabis as a controlled
substance at the federal level in the United States, several
states have enacted laws relating to cannabis for medical
purposes.
The Cole Memorandum outlined certain priorities for the U.S. DOJ
relating to the prosecution of cannabis offenses. In particular,
the Cole Memorandum noted that in jurisdictions that have enacted
laws legalizing cannabis in some form and that have also
implemented strong and effective regulatory and enforcement systems
to control the cultivation, distribution, sale and possession of
cannabis, conduct in compliance with those laws and regulations is
less likely to be a priority at the federal level. Notably,
however, the U.S. DOJ has never provided specific guidelines for
what regulatory and enforcement systems it deems sufficient under
the Cole Memorandum standard.
In light of limited investigative and prosecutorial resources, the
Cole Memorandum concluded that the U.S. DOJ should be focused on
addressing only the most significant threats related to cannabis.
States where medical cannabis had been legalized were not
characterized as a high priority. In March 2017, then newly
appointed Attorney General Jeff Sessions again noted limited
federal resources and acknowledged that much of the Cole Memorandum
had merit; however, he had previously stated that he did not
believe it had been implemented effectively and, on January 4,
2018, former Attorney General Jeff Sessions issued the Sessions
Memorandum, which rescinded the Cole Memorandum. The Sessions
Memorandum rescinded previous nationwide guidance specific to the
prosecutorial authority of United States Attorneys relative to
cannabis enforcement on the basis that they are unnecessary, given
the well-established principles governing federal prosecution that
are already in place. Those principles are included in chapter
9.27.000 of the USAM and require federal prosecutors deciding which
cases to prosecute to weigh all relevant considerations, including
federal law enforcement priorities set by the Attorney General, the
seriousness of the crime, the deterrent effect of criminal
prosecution, and the cumulative impact of particular crimes on the
community.
As a
result of the Sessions Memorandum, federal prosecutors are now free
to utilize their prosecutorial discretion to decide whether to
prosecute cannabis activities despite the existence of
state-level laws that may be inconsistent with federal
prohibitions. No direction was given to federal prosecutors in the
Sessions Memorandum as to the priority they should ascribe to such
cannabis activities, and resultantly, it is uncertain how active
U.S. federal prosecutors will be in relation to such
activities.
As discussed above, should the Rohrabacher-Blumenauer Amendment not
be renewed, there can be no assurance that the federal government
will not seek to prosecute cases involving medical cannabis
businesses that are otherwise compliant with State law.
On November 7, 2018, Mr. Sessions resigned as Attorney General at
the request of President Donald J. Trump. Following Mr. Sessions’
resignation, Matthew Whitaker began serving as Acting United States
Attorney General, and William Barr was eventually appointed to the
role. During his Senate confirmation hearing, Mr. Barr stated that
he disagrees with efforts by states to legalize cannabis but would
not seek to prosecute cannabis companies in states that adopted
legalized cannabis rules under Obama administration policies. He
stated further that he would not upset settled expectations that
have arisen as a result of the Cole Memorandum. Federal enforcement
of cannabis-related activity remained consistent with the
priorities outlined in the Cole Memorandum throughout Attorney
General Barr’s tenure.
In January 2021, Joseph R. Biden Jr. was sworn in as the new
President of the United States. President Biden nominated federal
judge Merrick Garland to serve as his Attorney General. During his
confirmation hearings in the Senate on February 22, 2021, Attorney
General nominee Garland confirmed that he would not prioritize
pursuing cannabis prosecutions in states that have legalized and
that are regulating the use of cannabis, both for medical and adult
use. The Senate confirmed Judge Garland as Attorney General on
March 10, 2021.
However,
unless and until the United States Congress amends the Substances
Act with respect to medical and/or adult-use cannabis (and as to
the timing or scope of any such potential amendments there can be
no assurance), there is a risk that U.S. federal authorities may
enforce current U.S. federal law. If the U.S. federal government
begins to enforce U.S. federal laws relating to cannabis in
states where the sale and use of cannabis is currently legal, or if
existing applicable state laws are repealed or curtailed, the
Company’s business, results of operations, financial condition and
prospects and the Company generally would be materially adversely
affected.
Such
potential proceedings could involve significant restrictions being
imposed upon the Company or third parties, while diverting the
attention of key executives. Such proceedings could have a material
adverse effect on the Company, as well as the Company’s reputation,
even if such proceedings were concluded successfully in favor of
the Company. In the extreme case, such proceedings could ultimately
involve the prosecution of key executives of the Company or the
seizure of corporate assets; however as of the date hereof, the
Company believes that proceedings of this nature are
relatively remote.
There is
no certainty as to how the U.S. DOJ, Federal Bureau of
Investigation and other federal and state government
agencies will handle cannabis matters in the future. The Company
regularly monitors the activities of the current administration in
this regard.
The Company may be subject to restricted access to banking
services in the United States and Canada.
In February 2014, FinCEN issued guidance through the FinCEN
Memorandum (which is not law) with respect to financial
institutions providing banking services to cannabis businesses.
This guidance includes extensive and onerous due diligence
expectations and reporting requirements, and does not provide any
safe harbors or legal defenses from examination or regulatory or
criminal enforcement actions by the U.S. DOJ, FinCEN or other
federal regulators. Thus, many banks and other financial
institutions in the United States choose not to provide banking
services to cannabis-related businesses or rely on this guidance,
which can be amended or revoked at any time by the Biden
administration. In addition to the foregoing, banks may refuse to
process debit card payments, and credit card companies generally
refuse to process credit card payments for cannabis-related
businesses. As a result, the Company may have limited or no access
to banking or other financial services in the United States. The
inability, or limitation of the Company’s ability, to open and
maintain bank accounts, obtain other banking services and/or accept
credit card and debit card payments may make it difficult for the
Company to operate and conduct its business as planned or to
operate efficiently.
Additionally, Canadian banks may potentially refuse to provide
banking services to companies engaged in U.S. cannabis activities
while it is illegal under U.S. federal law.
There are
increasing numbers of high -net worth individuals and family
offices that have made meaningful investments in cannabis companies
and businesses similar to the Company. Although there has been an
increase in the amount of private financing available over the last
several years, there is a limited pool of institutional capital
that is available to cannabis license holders and license
applicants. There can be no assurance that additional financing, if
raised privately, will be available to the Company when needed or
on terms which are commercially reasonable or acceptable to the
Company. The Company’s inability to raise financing to fund capital
expenditures or acquisitions could limit its growth and may have a
material adverse effect upon future profitability.
The
differing regulatory requirements across state
jurisdictions may hinder or otherwise prevent the Company from
achieving efficiencies and economies of scale.
Traditional rules of
investing may prove to be imperfect in the cannabis industry. For
example, while it would be common for investment managers to
purchase equity in companies in different states to reach
economies of scale and to conduct business across state lines, such
an investment thesis may not be feasible in the cannabis industry
because of varying state-by-state legislation. Applicable
regulations in many states may require advance disclosure of and
approval of state regulators to accomplish an investment. As no two
state regulated markets in the U.S. cannabis industry are exactly
the same, doing business across state lines may not be possible or
commercially practicable. As a result, the Company may be limited
to identifying opportunities in individual states, which may have
the effect of slowing the growth prospects of the Company.
The
Company is subject to a multitude of general risks
involving legal, regulatory or other political
change.
The success of the business strategy of the Company depends on the
legality of the cannabis industry. The political environment
surrounding the cannabis industry in general can be volatile and
the regulatory framework across federal, state, and local
jurisdictions remains in flux. To the Company’s knowledge, as of
the date hereof, some form of cannabis has been legalized in 47
States, the District of Columbia, and the territories of Guam, U.S.
Virgin Islands, Northern Mariana Islands and Puerto Rico; however,
the risk remains that a shift in the regulatory or political realm
could occur and have a drastic impact on the industry as a whole,
adversely impacting the Company’s business, results of operations,
financial condition or prospects.
Delays in enactment of new state or federal regulations could
restrict the ability of the Company to reach strategic growth
targets. The growth strategy of the Company is contingent upon
certain federal, state and local regulations being enacted to
facilitate the legalization of medical and adult-use marijuana. If
such regulations are not enacted, or enacted but subsequently
repealed or amended, or enacted with prolonged phase-in periods,
the growth targets of the Company could be negatively impacted, and
thus, the effect on the return of investor capital, could be
detrimental.
The Company is unable to predict with certainty when and how the
outcome of these complex regulatory and legislative proceedings
will affect its business and growth.
Further,
there is no guarantee that state laws legalizing and
regulating the sale and use of cannabis will not be repealed or
overturned, or that local governmental authorities will not limit
the applicability of state laws within their respective
jurisdictions, including prohibiting ownership of cannabis
businesses by public companies. If the federal government begins to
enforce federal laws relating to cannabis in states where the sale
and use of cannabis is currently legal under applicable state laws,
or if existing applicable state laws are repealed or curtailed, the
Company’s business, results of operations, financial condition and
prospects would be materially adversely affected. It is also
important to note that local and city ordinances may strictly limit
and/or restrict disbursement of cannabis in a manner that will make
it extremely difficult or impossible to transact business in that
jurisdiction, which may adversely affect the Company’s continued
operations. Federal actions against individuals or entities engaged
in the cannabis industry or a repeal of applicable cannabis
legislation could adversely affect the Company and its business,
results of operations, financial condition and prospects.
The
Company is also aware that multiple states, local
jurisdictions, and the federal government are considering excise,
gross receipts, canopy and/or other special taxes or fees on
businesses in the cannabis industry. It is a potential yet unknown
risk at this time that other states are in the process of reviewing
such additional fees and taxes. Should such special taxes or fees
be adopted, this could have a material adverse effect upon the
Company’s business, results of operations, financial condition or
prospects.
Overall,
the medical and adult-use cannabis industry is subject to
significant regulatory change at the local, state, and
federal level. The inability of the Company to respond to the
changing regulatory landscape may cause it to not be successful in
capturing significant market share and could otherwise harm its
business, results of operations, financial condition or
prospects.
The
U.S. cannabis industry is a new industry that may not
succeed.
Should the U.S. federal government change course and decide to
prosecute those dealing in medical or adult-use cannabis under
applicable law, there may not be any market for the Company’s
products and services. It is a new industry subject to extensive
regulation, and there can be no assurance that it will grow,
flourish or continue to the extent necessary to permit the Company
to succeed. The Company is treating, and will treat, the cannabis
industry as a deregulating industry with significant unsatisfied
demand for the Company’s products and may adjust its future
operations, product mix and market strategy as the industry
develops and matures.
The Company’s operations in the U.S. cannabis market may
become the subject of heightened scrutiny.
For the reasons set forth above, the Company’s existing operations
in the U.S., and any future operations or investments, may become
the subject of heightened scrutiny by regulators, stock exchanges
and other authorities in Canada and the U.S. As a result, the
Company may be subject to significant direct and indirect
interaction with public officials. There can be no assurance that
this heightened scrutiny will not in turn lead to the imposition of
certain restrictions on the Company’s ability to operate or invest
in the U.S. or any other jurisdiction, in addition to those
described herein.
Given the
heightened risk profile associated with cannabis in the U.S., CDS
Clearing and Depository Services Inc. (“CDS”) may implement
procedures or protocols that would prohibit or significantly
curtail the ability of CDS to settle trades for cannabis companies
that have cannabis businesses or assets in the U.S. On February 8,
2018, following discussions with the Canadian Securities
Administrators and recognized Canadian securities exchanges, the
TMX Group announced the signing of a Memorandum of Understanding
(“TMX MOU”) with the Neo Exchange, the Canadian Securities
Exchange, the Toronto Stock Exchange, and the TSX Venture Exchange.
The TMX MOU outlines the parties’ understanding of Canada’s
regulatory framework applicable to the rules, procedures, and
regulatory oversight of the exchanges and CDS as it relates to
issuers with cannabis-related activities in the U.S. The TMX MOU
confirms, with respect to the clearing of listed securities, that
CDS relies on the exchanges to review the conduct of listed
issuers. As a result, there is no CDS ban on the clearing of
securities of issuers with cannabis-related activities in the U.S.
However, there can be no guarantee that this approach to regulation
will continue in the future. If such a ban were to be implemented,
it would have a material adverse effect on the ability of holders
of Equity Shares to make and settle trades. In particular, Equity
Shares would become highly illiquid, and until an
alternative was implemented, investors would have no ability to
effect a trade of Equity Shares through the facilities of a stock
exchange.
In light of the political and regulatory uncertainty surrounding
the treatment of U.S. cannabis-related activities, including the
rescission of the Cole Memorandum discussed above, on February 8,
2018, the Canadian Securities Administrators revised their
previously released Staff Notice - 51-352 Issuers with U.S.
Marijuana-Related Activities setting out their disclosure
expectations for specific risks facing issuers with
cannabis-related activities in the U.S. The Staff Notice confirms
that a disclosure-based approach remains appropriate for issuers
with U.S. cannabis-related activities. The Staff Notice includes
additional disclosure expectations that apply to all issuers with
U.S. cannabis-related activities, including those with direct and
indirect involvement in the cultivation and distribution of
cannabis, as well as issuers that provide goods and services to
third parties involved in the U.S. cannabis industry. The Company
views the Staff Notice favorably, as it provides increased
transparency and greater certainty regarding the views of its
exchange and its regulator of existing operations and strategic
business plan as well as the Company’s ability to pursue further
investment and opportunities in the Company.
Government
policy changes or public opinion may also result in a significant
influence over the regulation of the cannabis industry in Canada,
the U.S. or elsewhere. A negative shift in the public’s perception
of medical and/or adult-use cannabis in the U.S. or any other
applicable jurisdiction could affect future legislation or
regulation. Among other things, such a shift could cause
U.S. state jurisdictions to abandon initiatives or proposals to
legalize medical and/or adult-use cannabis, thereby limiting the
number of new state jurisdictions into which the Company could
expand. Any inability to fully implement the Company’s expansion
strategy may result in a material adverse effect on the Company’s
business, financial condition, results of operations or
prospects.
Settlement by
Securityholders Resident in the United States may be unavailable or
impaired.
Given the
heightened risk profile associated with cannabis in the United
States, Canadian capital markets participants may be
unwilling to assist with the settlement of trades for U.S. resident
securityholders of companies with operations in the United States
cannabis industry which may prohibit or significantly impair the
ability of securityholders in the United States to trade the Equity
Shares. In the event residents of the United States are unable to
settle trades of the Equity Shares, this may affect the pricing of
such securities in the secondary market, the transparency and
availability of trading prices and the liquidity of these
securities.
Regulatory scrutiny of the Company’s industry may negatively
impact its ability to raise additional capital.
The
Company’s business activities rely on newly established and/or
developing laws and regulations in the various states in
which the Company operates. These laws and regulations are rapidly
evolving and subject to change with minimal notice. Regulatory
changes may adversely affect the Company’s profitability or cause
it to cease operations entirely. The cannabis industry may come
under the scrutiny or further scrutiny by the FDA, FTC, Securities
and Exchange Commission, the U.S. DOJ, or other federal, state or
non-governmental regulatory authorities or self-regulatory
organizations that supervise or regulate the production,
distribution, sale or use of cannabis for medical and/or adult-use
purposes in the U.S. It is impossible to determine the extent of
the impact of any new laws, regulations or initiatives that may be
proposed, or whether any proposals will become law. The regulatory
uncertainty surrounding the Company’s industry may adversely affect
the business and operations of the Company, including without
limitation, the costs to remain compliant with applicable laws and
the impairment of its ability to raise additional capital, create a
public trading market in the U.S. for securities of the Company or
to find a suitable acquirer, which could reduce, delay or eliminate
any return on investment in the Company.
The Company’s investments in the U.S. are subject to
applicable anti-money laundering laws and regulations.
Because
the manufacture, distribution, and dispensation of cannabis remains
illegal under the Substances Act, banks and other financial
institutions providing services to cannabis-related businesses risk
violation of federal anti-money laundering statutes (18 U.S.C. §§
1956 and 1957), the unlicensed money-remitter statute (18 U.S.C. §
1960) and the U.S. Bank Secrecy Act, as amended by Title III
of the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001, the Proceeds of Crime (Money Laundering) and
Terrorist Financing Act (Canada), as amended and the rules and
regulations thereunder, the Criminal Code (Canada) and other
related or similar rules, regulations or guidelines, issued,
administered or enforced by governmental authorities in the United
States and Canada. These statutes can impose significant
criminal liability for engaging in certain financial and monetary
transactions with the proceeds of a “specified unlawful activity”
such as distributing controlled substances which are illegal under
U.S. federal law, including cannabis, and for failing to identify
or report financial transactions that involve the proceeds of
cannabis-related violations of the Substances Act. As a result, a
majority of the United States’ banks and financial institutions
have refused to open bank accounts for the deposit of funds from
businesses involved with the cannabis industry. Others have agreed
to accept deposits from medical cannabis sales, but not
recreational cannabis sales. The inability to open bank accounts
with certain institutions could materially and adversely affect the
business of the Company. See “Risk Factors – The Company may be
subject to restricted access to banking in the United States and
Canada”.
In February 2014, the U.S. Department of the Treasury’s Financial
Crimes Enforcement Network issued the FinCEN Memorandum providing
instructions to banks seeking to provide services to
cannabis-related businesses. The FinCEN Memorandum states that in
some circumstances, it is permissible for banks to provide services
to cannabis-related businesses without risking prosecution for
violation of federal money laundering laws. It refers to
supplementary guidance that Deputy Attorney General Cole issued to
federal prosecutors in the 2014 Cole Memorandum relating to the
prosecution of money laundering offenses predicated on
cannabis-related violations of the Substances Act. It is unclear at
this time whether the current administration will follow the
guidelines of the FinCEN Memorandum.
In the event that any of the Company’s operations, or any proceeds
thereof, any dividends or distributions therefrom, or any profits
or revenues accruing from such operations in the U.S. were found to
be in violation of money laundering legislation or otherwise, such
transactions may be viewed as proceeds of crime under one or more
of the statutes noted above or any other applicable legislation.
This could restrict or otherwise jeopardize the ability of the
Company to declare or pay dividends, effect other distributions or
subsequently repatriate such funds back to Canada. Furthermore,
while there is no current intention by the Company to declare or
pay dividends on the Equity Shares in the foreseeable future, in
the event that a determination was made that the Company’s proceeds
from operations (or any future operations or investments in the
U.S.) could reasonably be shown to constitute proceeds of crime,
the Company may decide or be required to suspend declaring or
paying dividends without advance notice and for an indefinite
period of time.
Any
re-classification of cannabis or changes in U.S. controlled
substance laws and regulations may adversely
affect the Company’s business.
If
cannabis and/or CBD is re-categorized as a Schedule II or lower
controlled substance, the ability to conduct research on the
medical benefits of cannabis would most likely be simpler and more
accessible; however, if cannabis is re-categorized as a Schedule II
or other controlled substance, the resulting re-classification
would result in the requirement for FDA approval if medical claims
are made for the Company’s products such as medical cannabis, and
likely other rules and regulations that could interfere with the
Company’s business. As a result, the manufacture, importation,
exportation, domestic distribution, storage, sale and use of such
products may be subject to a significant degree of regulation by
the Drug Enforcement Administration (“DEA”). In that case, the
Company may be required to be registered (licensed) to perform
these activities and have the security, control, recordkeeping,
reporting and inventory mechanisms required by the DEA to prevent
drug loss and diversion. Obtaining the necessary registrations,
and/or complying with any other rules and regulations related to
the re-scheduling, may result in significant costs and the
delay of the manufacturing or distribution of the Company’s current
or anticipated products. The DEA conducts periodic inspections of
certain registered establishments that handle controlled
substances. Failure to maintain compliance could have a material
adverse effect on the Company’s business, financial condition and
results of operations. The DEA may seek civil penalties, refuse to
renew necessary registrations, or initiate proceedings to restrict,
suspend or revoke those registrations. In certain circumstances,
violations could lead to criminal proceedings.
The Company is subject to risks associated with the CBD
industry.
The cultivation, manufacture, labeling, and distribution of hemp
and hemp-derived CBD products is regulated by various federal,
state, and local agencies. These governmental authorities may
commence regulatory or legal proceedings, which could restrict the
permissible scope of the Company’s products claims or the ability
to sell hemp, CBD isolate, and hemp-derived CBD products in the
future. If the Company’s operations are found to be in violation of
any such applicable laws or regulations, the Company may be subject
to penalties, including, without limitation, civil and criminal
penalties, damages, fines, the curtailment or restructuring of
operations, any of which could adversely affect the ability to
operate the business and financial results. Failure to comply with
FDA requirements may result in the issuance of warning letters,
injunctions, product withdrawals, recalls, product seizures, fines,
and criminal prosecutions. The U.S. Federal Trade Commission
(“FTC”) regulates the advertising of such products and requires
that all product claims be supported by competent and reliable
scientific evidence. Violations of FTC requirements could result in
legal action, including injunctions and orders to return money to
consumers.
The availability of favorable locations may be severely
restricted.
In
California and other states, the local municipality has
authority to choose where any cannabis establishment will be
located. These authorized areas are frequently removed from other
retail operations and subject to additional rules and
regulations.
Because
the cannabis industry remains illegal under U.S. federal law, the
disadvantaged tax status of businesses deriving their income from
cannabis, and the reluctance of the banking industry to support
cannabis businesses, it may be difficult for the Company to locate
and obtain the rights to operate at various preferred locations.
Property owners may violate their lenders’ debt covenants by
leasing to the Company, and those property owners that are willing
to allow use of their facilities may require payment of above fair
market value rents to reflect the scarcity of such locations and
the risks and costs of providing such facilities.
U.S. border officials could deny entry of non-U.S. citizens
into the U.S. to employees of or investors in companies with
cannabis operations in the United States and Canada.
Because
cannabis remains illegal under U.S. federal law, those employed at
or investing in legal and licensed Canadian cannabis companies
could face detention, denial of entry or lifetime bans from the
U.S. for their business associations with U.S. cannabis businesses.
Entry happens at the sole discretion of CBP officers on duty, and
these officers have wide latitude to ask questions to determine the
admissibility of a non-U.S. citizen or foreign national. The
government of Canada has started warning travelers on its website
that previous use of cannabis, or any substance prohibited by U.S.
federal laws, could mean denial of entry to the U.S. Business or
financial involvement in the legal cannabis industry in Canada or
in the United States could also be reason enough for U.S. border
guards to deny entry. On September 21, 2018, CBP released a
statement outlining its current position with respect to
enforcement of the laws of the United States. It stated that
Canada’s legalization of cannabis will not change CBP enforcement
of United States laws regarding controlled substances and because
cannabis continues to be a controlled substance under United States
law, working in or facilitating the proliferation of the legal
marijuana industry in U.S. states where it is deemed legal
or Canada may affect admissibility to the U.S. As a result, CBP has
affirmed that, employees, directors, officers, managers and
investors of companies involved in business activities related to
cannabis in the U.S. or Canada (such as the Company), who are not
U.S. citizens face the risk of being barred from entry into the
United States for life. On October 9, 2018, CBP released an
additional statement regarding the admissibility of Canadian
citizens working in the legal cannabis industry. CBP stated that a
Canadian citizen working in or facilitating the proliferation of
the legal cannabis industry in Canada coming into the U.S. for
reasons unrelated to the cannabis industry will generally be
admissible to the U.S.; however, if such person is found to be
coming into the U.S. for reasons related to the cannabis industry,
such person may be deemed inadmissible.
Business Structure Risks
The
Company may experience unpredictability caused
by the Company’s current capital structure.
Although other Canadian-based companies have dual class or multiple
voting share structures, given the concentration of voting control
that is held indirectly by the Company Founders by virtue of their
Multiple Voting Shares, the Company is not able to predict whether
this control will result in a lower trading price for or greater
fluctuations in the trading price of the Equity Shares or will
result in adverse publicity to the Company or other adverse
consequences.
The Company’s multi-class structure has the effect of concentrating
voting control and the ability to influence corporate matters with
the Company Founders.
The Multiple Voting Shares have 50 votes per share, whereas the
Equity Shares, have one (1) vote per share (other than in respect
of the election of directors of the Company, for which the Limited
Voting Shares do not have any entitlement to vote). Currently, the
Company Founders hold approximately 80.9% of the voting power in
the Company on a non-diluted basis, and approximately 73.3% on a
diluted basis, just based on their ownership of 100% of the
Multiple Voting Shares (without taking into account any Equity
Share they may hold). Accordingly, each of the Company Founders has
significant influence over the management and affairs of the
Company and over all matters requiring shareholder approval,
including the election of directors and significant corporate
transactions. In addition, because of the 50-to-1 voting ratio
between the Multiple Voting Shares and Equity Shares, the holders
of Multiple Voting Shares control a majority of the combined voting
power of the Company’s voting shares even though the Multiple
Voting Shares represent a substantially reduced percentage of the
total outstanding shares of the Company. The concentrated voting
control of the holders of Multiple Voting Shares limits the ability
of the holders of Equity Shares to influence corporate matters for
the foreseeable future, including the election of directors as well
as with respect to the Company’s decisions to amend its share
capital, create and issue additional classes of shares, make
significant acquisitions, sell significant assets or parts of its
business, merge with other companies and/or undertake other
significant transactions. As a result, holders of Multiple Voting
Shares have the ability to influence or control many matters
affecting the Company and actions may be taken that the holders of
Equity Shares may not view as beneficial. The market price of the
Equity Shares could be adversely affected due to the significant
influence and voting power of the holders of Multiple Voting
Shares. Additionally, the significant voting interest of the
holders of Multiple Voting Shares could discourage transactions
involving a change of control, including transactions in which an
investor, as a holder of the Equity Shares, might otherwise receive
a premium for the Equity Shares over the then-current market price,
or discourage competing proposals if a going private transaction is
proposed by one or more holders of Multiple Voting Shares.
The issuance of Preferred Shares (as defined herein) could decrease
earnings and assets available to holders of the Equity Shares and
may decrease the market price of the Equity Shares.
The issuance of Preferred Shares and the terms selected by the
board of directors of the Company (the “Board”) could decrease the
amount of earnings and assets available for distribution to holders
of Equity Shares or adversely affect the rights and powers,
including the voting rights, of the holders of the Equity Shares
without any further vote or action by the holders of the Equity
Shares. The issuance of Preferred Shares, or the issuance of rights
to purchase Preferred Shares, could make it more difficult for a
third-party to acquire a majority of the Equity Shares and thereby
have the effect of delaying, deferring or preventing a change of
control of the Company or an unsolicited acquisition proposal or of
making the removal of management more difficult. Additionally, the
issuance of Preferred Shares may have the effect of decreasing the
market price of the Equity Shares.
Loss of FPI status.
The
Company is currently a “foreign private issuer” (“FPI”) as defined
in Rule 405 under the United States Securities Act of 1933, as
amended (“U.S. Securities Act”) and Rule 3b-4 under the United
States Securities Exchange Act of 1934, as amended. While
the terms of the Multiple Voting Shares and Equity Shares are
intended to avoid such a circumstance, if, as of the last business
day of the Company’s second fiscal quarter for any year, more than
50% of the Company’s outstanding voting securities (as determined
under Rule 405 of the U.S. Securities Act) are directly or
indirectly held of record by residents of the United States, the
Company will no longer meet the definition of an FPI, which may
have adverse consequences on the Company’s ability to raise capital
in private placements or Canadian prospectus offerings. In
addition, the loss of the Company’s FPI status may result in
increased reporting requirements and a substantial increase
in audit, legal and administration costs. These increased costs may
significantly affect the Company’s business, financial condition
and results of operations.
General Regulatory and Legal Risks
The Company may be subject to the risk of civil asset
forfeiture.
Because the cannabis industry remains illegal under U.S. federal
law, any property owned by participants in the cannabis industry
which are either used in the course of conducting such business, or
are the proceeds of such business, could be subject to seizure by
law enforcement and subsequent civil asset forfeiture. Even if the
owner of the property were never charged with a crime, the property
in question could still be seized and subject to an administrative
proceeding by which, with minimal due process, it could be subject
to forfeiture.
The Company may lack access to U.S. bankruptcy
protections.
Because the use of cannabis is illegal under U.S. federal law, many
courts have denied cannabis businesses bankruptcy protections, thus
making it very difficult for lenders to recoup their investments in
the cannabis industry in the event of a bankruptcy. If the Company
were to experience a bankruptcy, there is no guarantee that U.S.
federal bankruptcy protections would be available to the Company’s
U.S. operations, which could have a material adverse effect on the
Company.
The Company may be subject to the risk of an inability to
enforce its contracts.
It is a
fundamental principle of law that a contract will not be enforced
if it involves a violation of law or public policy. Because
cannabis remains illegal at a federal level, judges in
multiple states have on a number of occasions refused to
enforce contracts for the repayment of money when the loan was used
in connection with activities that violate federal law, even if
there is no violation of state law. There remains doubt and
uncertainty that the Company will be able to legally enforce
contracts it enters into if necessary. The Company cannot be
assured that it will have a remedy for breach of contract, which
would have a material adverse effect on the Company.
The Company may be subject to the risk of changes in Canadian
laws or regulations, or a failure to comply with any such laws and
regulations.
The Company is subject to laws and regulations enacted by the
federal and provincial governments of Canada. In particular, the
Company is required to comply with certain Canadian securities law,
income tax law, the rules of the Neo Exchange and other legal and
regulatory requirements. Compliance with, and monitoring of,
applicable laws and regulations may be difficult, time consuming
and costly. Those laws and regulations and their interpretation and
application also may change from time to time and those changes
could have a material adverse effect on the Company’s business,
investments and results of operations. In addition, a failure to
comply with applicable laws or regulations, as interpreted and
applied, could result in a material adverse effect on the Company’s
business, financial condition, results of operations or
prospects.
The Company is subject to general regulatory and licensing
risks.
The Company is subject to a variety of laws, regulations and
guidelines relating to the manufacture, management, transportation,
storage and disposal of cannabis, including laws and regulations
relating to health and safety, the conduct of operations and the
protection of the environment. Achievement of the Company’s
business objectives is contingent, in part, upon compliance with
applicable regulatory requirements and obtaining all requisite
regulatory approvals. Changes to such laws, regulations and
guidelines due to matters beyond the control of the Company may
result in a material adverse effect on the Company’s business,
financial condition, results of operations or prospects.
The
Company is required to obtain or renew further government permits
and licenses for its current and contemplated operations.
Obtaining, amending or renewing the necessary governmental permits
and licenses can be a time-consuming process potentially
involving numerous state and local regulatory agencies, public
hearings and costly undertakings on the part of the Company. As of
April 1, 2022, California will no longer issue provisional
licenses, instead requiring all marijuana businesses to obtain
annual licensure. This is a lengthier process, which will include a
full review under the California Environmental Quality Act
for every facility seeking licensure. The duration and success of
the Company’s efforts to obtain, amend and renew permits and
licenses are contingent upon many variables not within its control,
including the interpretation of applicable requirements implemented
by the relevant permitting or licensing authority. The Company may
not be able to obtain, amend or renew permits or licenses that are
necessary to its operations or to achieve the growth of its
business. Any unexpected delays or costs associated with the
permitting and licensing process could impede the ongoing or
proposed operations of the Company. To the extent any permits or
licenses are not obtained, amended or renewed, or are subsequently
suspended or revoked, the Company may be curtailed or prohibited
from proceeding with ongoing operations or planned development and
commercialization activities. Such curtailment or prohibition may
result in a material adverse effect on the Company’s business,
financial condition, results of operations or prospects.
Many of
the licenses currently held by the Company are subject to
renewal on an annual or periodic basis; however, they are generally
renewed, as a matter of course, if the license holder continues to
operate in compliance with applicable legislation and regulations
and without any material change to its operations. These renewals
are contingent upon the registration holder’s past and continued
ability to meet the statutory and regulatory requirements of the
given program. The Licensing Manager, supported by Compliance
personnel, actively monitor renewal dates for licenses to seek to
ensure that licenses are renewed as and when required. The Company
has implemented a centralized tracking, review, and upkeep system
with respect to license maintenance.
While the Company believes that its compliance controls have been
developed to mitigate the risk of any violations of any licenses
they hold arising, there is no assurance that the Company’s
licenses will be renewed by each applicable regulatory authority in
the future in a timely manner. Any unexpected delays or costs
associated with the licensing renewal process for any of the
licenses held by the Company could impede the ongoing or planned
operations of the Company and have a material adverse effect on the
Company’s business, financial condition, results of operations or
prospects.
The Company may become involved in a number of government or agency
proceedings, investigations and audits. The outcome of any
regulatory or agency proceedings, investigations, audits, and other
contingencies could harm the Company’s reputation, require the
Company to take, or refrain from taking, actions that could harm
its operations or require the Company to pay substantial amounts of
money, harming its financial condition. There can be no assurance
that any pending or future regulatory or agency proceedings,
investigations and audits will not result in substantial costs or a
diversion of management’s attention and resources or have a
material adverse impact on the Company’s business, financial
condition, results of operations or prospects.
The
Company is subject to a comprehensive
California regulatory regime regarding the transfer and grant
of permits and licenses.
Cannabis
business activities are heavily regulated in California. The
Company’s operations are subject to various laws, regulations and
guidelines by governmental authorities, relating to the
manufacture, marketing, management, transportation, storage, sale,
pricing and disposal of medical and recreational marijuana and
cannabis oil, and also including laws and regulations relating to
health and safety, insurance coverage, the conduct of operations
and the protection of the environment. Laws and regulations,
applied generally, grant the Department of Cannabis Control (the
“DCC”) (which DCC is a result of the statutory consolidation of the
former State-level cannabis regulatory bodies: the BCC, CDPH and
CDFA) and local regulatory bodies broad administrative discretion
over the activities of the Company in California, including the
power to limit or restrict business activities as well as impose
additional disclosure requirements on the Company’s products and
services. Government approvals, including state licenses and local
permits, are currently required in connection with the operations
of the Company. To the extent such approvals are required and not
obtained, the Company may be curtailed, delayed, or prohibited from
cultivating, manufacturing, distributing and selling medical or
adult use cannabis in California. Achievement of the Company’s
business objectives is contingent, in part, upon compliance with
regulatory requirements enacted by the DCC and local governmental
authorities and obtaining all regulatory approvals required
from the DCC and local governmental authorities, where necessary,
for the cultivation, manufacturing, distribution and sale of its
cannabis products.
The Company may not be able to obtain or maintain the necessary
licenses, permits, certificates, authorizations or accreditations
to operate its respective business, or may only be able to do so at
great cost. In addition, the Company may not be able to comply
fully with the wide variety of laws and regulations applicable to
the Cannabis industry. The Company will incur ongoing costs and
obligations related to regulatory compliance and obtaining new
licenses. Failure to comply with regulations may lead to possible
sanctions including the revocation or imposition of additional
conditions on licenses to operate the Company’s business, the
suspension or expulsion from the California cannabis market or of
its key personnel, and the imposition of fines and censures. The
inability to obtain or maintain necessary licenses, permits,
certificates, authorizations or accreditations, changes in
regulations, more vigorous enforcement thereof or other
unanticipated events could require extensive changes to the
Company’s operations, increased compliance costs or give rise to
material liabilities, which could have a material adverse effect on
the business, results of operations, financial condition and
prospects of the Company.
The
Company may be subject to regulatory enforcement
action and approvals from the Food and Drug
Administration.
The Company’s cannabis-based products may be supplied to patients
diagnosed with certain medical conditions. However, the Company’s
cannabis-based products are not approved by the FDA as “drugs” or
for the diagnosis, cure, mitigation, treatment, or prevention of
any disease. Accordingly, the FDA may regard any promotion of the
cannabis-based products as the promotion of an unapproved drug in
violation of the Food, Drug and Cosmetic Act (“FDCA”).
In recent years, the FDA has issued letters to a number of
companies selling products that contain CBD oil derived from hemp
warning them that the marketing of their products violates the
FDCA. FDA enforcement action against the Company could result in a
number of negative consequences, including fines, disgorgement of
profits, recalls or seizures of products, or a partial or total
suspension of the Company’s production or distribution of its
products. Any such event could have a material adverse effect on
the Company’s business, prospects, financial condition, and
operating results.
The Company has limited trademark protection.
The Company will not be able to currently register any U.S. federal
trademarks for its cannabis products insofar as producing,
manufacturing, processing, possessing, distributing, selling, and
using cannabis is illegal under the Substances Act. The United
States Patent and Trademark Office will not permit the registration
of any trademark that identifies cannabis products. As a result,
the Company likely will be unable to protect its cannabis product
trademarks beyond the state geographic areas in which it and its
subsidiaries conduct business. The use of its trademarks outside
the states in which they operate by one or more other persons could
have a material adverse effect on the value of such trademarks.
The Company’s operations are subject to various local
approvals, many of which are discretionary local approvals, which
have no set timeline for issuance, which may not issue, and/or
which may be accompanied by conditions which may impact our ability
to operate at full capacity.
The Company’s operations are subject to local discretionary
approvals, which have no set timeline for issuance, and which may
be accompanied by conditions which may impact our ability to
operate at full capacity. Among those approvals are conditional use
permits, which require multiple public hearings before elected
officials, during which both members of the public may comment on
concerns regarding our proposed use, and elected officials may
determine what conditions to impose upon operations. These
conditions can include, but are not limited to, hours of operation,
number of employees permitted on-site, limitations in exterior
lighting, parking requirements, storage requirements, and other
mandates which may alter or eliminate proposed modes of operation.
Once approved, the conditions remain static so long as the use is
not abandoned or expanded, but we cannot provide any assurance that
future expansion of operations or changes in local politics will
not adversely affect the Company’s operations.
Government approvals and permits are currently, and may in the
future, be required in connection with our operations. To the
extent such approvals are required and not obtained, we may be
curtailed or prohibited from our current or proposed production,
manufacturing, or sale of cannabis or cannabis products or from
proceeding with the development of operations of the Company as
currently proposed.
Failure to comply with conditions of operation, or with state and
local law or regulations, as these may change over time, may result
in enforcement actions against the Company, including orders issued
by regulatory or judicial authorities causing operations to cease
or be curtailed, and may include costly corrective measures
requiring capital expenditures, installation of additional
equipment, or remedial actions. We may be required to compensate
those suffering loss or damage by reason of our operations and may
have civil or criminal fines or penalties imposed for violations of
applicable laws or regulations.
Amendments to current laws, regulations and permits governing the
production, manufacturing or sale of cannabis or cannabis products,
or more stringent implementation thereof, could have a material
adverse impact on the Company’s business and cause increases in
expenses, capital expenditures or production or manufacturing costs
or reduction in levels of production or manufacturing costs or
reduction in levels of production, manufacturing or sale or require
abandonment or delays in development.
Local governments continue to be impacted by the effects of the
COVID-19 pandemic, including increased remote work, decreased
staffing, and furloughs or closures of some city services. This may
increase the timeline to obtain the requisite local permitting and
approvals to operate, and may result in an unplanned increase in
the required time to build out a facility or to begin operations.
Some approvals are contingent upon in-person inspections, which
remain difficult to schedule, and inspectors are operating with
large backlogs and reduced working hours. Some planning commissions
and city councils have reduced their meeting schedules, which leads
to crowded agendas and more continuances of public hearings. Each
continuance can create a delay of one month or more in obtaining
the requisite approvals, and will in turn delay commencement of
operations. All of the foregoing local government backlogs and
delays could have a material adverse effect on the business,
results of operations, financial condition and prospects of the
Company.
Failure to comply with applicable environmental laws,
regulations and permitting requirements may result in enforcement
actions against the Company, and civil or criminal fines or
penalties.
The Company’s operations are subject to numerous environmental laws
and regulations in the various jurisdictions in which we operate.
These laws and regulations mandate, among other things, the
maintenance of air and water quality standards and land
reclamation. They also set forth limitations on the generation,
transportation, storage and disposal of solid and hazardous waste.
Such environmental laws and regulations include the California
Environmental Quality Act (“CEQA”) as well as the rules
and regulations promulgated by the California Coastal Commission
(“CCC”) and the decisions of such CCC that may be applicable
to certain facilities of the Company. Environmental legislation is
evolving in a manner which will require stricter standards and
enforcement, increased fines and penalties for non-compliance, more
stringent environmental assessments of proposed projects and a
heightened degree of responsibility for companies and their
officers, directors (or the equivalent thereof) and employees. The
Company cannot provide any assurance that complying with existing
environmental laws and regulations (including receipt of any
required approvals from the CCC) and any future changes to such
environmental laws and regulations, if any, will not adversely
affect the Company’s business, results of operations, financial
condition and prospects.
Government approvals (including under CEQA and at the discretion of
or under the jurisdiction of the CCC) with respect to the issuance
and renewal of permits and licenses may, and in the future, be
required in connection with the Company’s operations. To the extent
such approvals are required and not obtained, the Company may be
curtailed or prohibited from its current or proposed production,
manufacturing or sale of cannabis or cannabis products or from
proceeding with the development of its operations as currently
proposed.
Failure to comply with applicable laws, regulations and permitting
requirements may result in enforcement actions against the Company,
including orders issued by regulatory or judicial authorities
causing operations to cease or be curtailed, and may include costly
corrective measures requiring capital expenditures, installation of
additional equipment, or remedial actions. We may be required to
compensate those suffering loss or damage by reason of the
Company’s operations and may have civil or criminal fines or
penalties imposed for violations of applicable laws or
regulations.
Amendments to current laws, regulations and permits governing the
production, manufacturing or sale of cannabis or cannabis products,
or more stringent implementation thereof, could have a material
adverse impact on the Company’s business, financial conditions and
results of operations, including increases in expenses, capital
expenditures or production or manufacturing costs or reduction in
levels of production, manufacturing or sale of cannabis and
cannabis products or require abandonment or result in delays in the
Company’s development plans.
Business Risks Related to the Cannabis Industry
Scientific
research related to the benefits of cannabis
remains in early stages, is subject to a number of important
assumptions and may prove to be inaccurate.
Research
in Canada, the U.S. and internationally regarding the medical
benefits, viability, safety, efficacy and dosing of cannabis or
isolated cannabinoids remains in the early stages. To the
Company’s knowledge, there have been relatively few clinical trials
on the benefits of cannabis or isolated cannabinoids. Any
statements made in this Shell Company Report concerning the
potential medical benefits of cannabinoids are based on published
articles and reports. As a result, any statements made in this
Shell Company Report are subject to the experimental parameters,
qualifications, assumptions and limitations in the studies that
have been completed.
Although the Company believes that the articles and reports, and
details of research studies and clinical trials that are publicly
available reasonably support its beliefs regarding the medical
benefits, viability, safety, efficacy and dosing of cannabis,
future research and clinical trials may prove such statements to be
incorrect, or could raise concerns regarding and perceptions
relating to cannabis. Given these risks, uncertainties and
assumptions, prospective and current shareholders of the Company
should not place undue reliance on such articles and reports.
Future research studies and clinical trials may draw opposing
conclusions to those stated in this Shell Company Report or reach
negative conclusions regarding the viability, safety, efficacy,
dosing, social acceptance or other facts and perceptions related to
medical cannabis, which may result in a material adverse effect on
the Company’s business, financial condition, results of operations
or prospects.
Competition in the cannabis industry is intense and increased
competition, including by larger and better-financed competitors
and/or those competitors able to operate at a lower cost, could
materially and adversely affect the business, financial condition
and results of operations of the Company.
The Company faces intense competition in the cannabis industry,
some of which comes from companies with longer operating histories
and more financial resources, manufacturing and marketing
experience than the Company. In addition, there is increased
potential that the cannabis industry will undergo consolidation,
creating larger companies with financial resources, manufacturing
and marketing capabilities, and products that will be greater or
have a lower cost of goods than those of the Company. As a result
of this competition, the Company may be unable to maintain its
operations or develop them as currently contemplated on terms it
considers to be acceptable or at all. Increased competition by
larger, better-financed competitors with geographic advantages may
result in a material adverse effect on the Company’s business,
financial condition, results of operations or prospects. Further,
the competition described herein, including competition between a
large number of cannabis products brands owned by a large number of
cannabis industry participants licensed and otherwise (e.g.,
unlicensed cannabis brands reliant on contracted private label and
white label services), may create an environment wherein the
Company may not be able to achieve its brand growth targets,
including because adequate distribution resources are scarce,
unavailable, or non-existent. This condition may depress the price
of the Company’s products and overall profitability.
It may also be the case that the intense competition in the
cannabis industry described herein, and the expected growth in both
the number of viable and well-funded market participants as well as
the number of cannabis brands and cannabis products supported
thereby, will result in downward pressure on the price of cannabis
goods and products. Further, if the number of cannabis consumers
increases, the demand for products will increase and the Company
expects that competition will intensify, as current and future
competitors begin to offer an increasing number of diversified
products into the marketplace to satisfy consumer demand.
Accordingly, the Company may not have sufficient resources to
maintain research and development, marketing, sales and support
efforts on a competitive basis, which could materially and
adversely affect our business, financial condition, and results of
operations or prospects. Increased competition could also
materially and adversely affect the Company’s business, financial
condition, results of operations or prospects.
An
initial surge in demand for cannabis may result in supply shortages
in the short term, while in either the short or the longer term,
supply of cannabis could exceed demand, which may cause a
fluctuation in revenue.
Changes in the U.S. federal legal status of cannabis may result in
an initial surge in demand. As a result of such initial surge,
cannabis companies operating under such changed legal regime may
not be able to produce enough cannabis to meet demand of the
adult-use recreational and medical markets, as applicable. This may
result in lower than expected sales and revenues and increased
competition for sales and sources of supply.
However, in the future on either a short or long-term basis,
cannabis producers may produce more cannabis than is needed to
satisfy the collective demand of the adult-use recreational and
medical markets, as applicable, and they may be unable to export
that oversupply into other markets (either in the context of
interstate, intrastate or international cross-border commerce, as
applicable) where cannabis use is fully legal under all applicable
jurisdictional laws. As a result, the available supply of cannabis
could exceed demand, resulting in a significant decline in the
market price for cannabis. If such supply or price fluctuations
were to occur, companies operating in the cannabis industry may see
revenue and profitability fluctuate materially and their business,
financial condition, results of operations and prospects may be
adversely affected, as could our business, financial condition and
results of operations.
Retail consolidation in the markets in which we participate
may negatively affect our operations and profitability.
Retail customers in our major markets may consolidate, resulting in
fewer customers for our wholesale business. Consolidation among
cannabis retailers also tends to result in larger retail customers
who may seek to leverage their positions to improve their
profitability by demanding improved efficiency, lower pricing,
increased promotional programs, or more specifically tailored
products. In addition, larger retailers generally have the scale to
develop deeper supply chains that permit them to operate with
reduced inventories. Further, many large cannabis retailers own,
support, and develop in-house private label cannabis brands that
those cannabis retailers may treat more favorably as compared to
the cannabis products of the Company. Many such large cannabis
retailers are vertically integrated and therefore have a higher
incentive to create and promote privately labeled cannabis brands.
Retail consolidation and increasing retailer power could adversely
affect our product sales and results of operations. Retail
consolidation also increases the risk that adverse changes in our
customers’ business operations or financial performance will have a
corresponding material and adverse effect on the Company. For
example, if our customers cannot access sufficient funds or
financing, then they may delay, decrease, or cancel purchase orders
of our products, or delay or fail to pay us for previous purchases,
which could materially and adversely affect our product sales,
financial condition, and operating results.
The Company faces competition from the illegal cannabis
market.
The Company continues to face competition from producers and
distributors of cannabis and cannabis products that are unlicensed
and unregulated and operating exclusively in the illegal market.
Such illicit market participants generally produce and sell
cannabis and cannabis products with higher concentrations of active
ingredients, use pesticides, terpenes or other additives which the
Company may not be permitted to use, and/or engage in advertising
and promotion activities from which the Company is prohibited. As
these illegal market participants do not comply with the
regulations governing the cannabis industry, their operations may
also have significantly lower costs than those of the Company. The
perpetuation of the illegal market for cannabis and cannabis
products will continue to cannibalize the Company’s share of the
legal market and have a material adverse effect on the Company’s
business, financial condition, results of operations or prospects,
as well as the public perception of cannabis use.
The Company may be unable to attract and retain
customers.
The Company’s future success depends on its ability to attract and
retain customers. There are many factors which could impact the
Company’s ability to attract and retain customers, including but
not limited to its ability to continually produce desirable and
effective product, the successful implementation of
customer-acquisition plans and the continued growth in its
aggregate number of customers. The failure to acquire and retain
customers would have a material adverse effect on the Company’s
business, financial condition, results of operations or
prospects.
Negative publicity or consumer perception may affect the
success of the Company’s business.
The success of the cannabis industry may be significantly
influenced by the public’s perception of cannabis. Both the medical
and adult-use of cannabis are controversial topics, and there is no
guarantee that future scientific research, publicity, regulations,
medical opinion and public opinion relating to cannabis will be
favorable. The cannabis industry is in its early-stages and is
constantly evolving with no guarantee of viability. The market for
medical and adult-use cannabis is uncertain, and any adverse or
negative publicity, scientific research, limiting regulations,
medical opinions and public opinion (whether or not accurate or
with merit) relating to the consumption of cannabis, whether in
Canada, the U.S. or elsewhere, may have a material adverse effect
on the Company’s business, financial condition, results of
operations, customer base or prospects.
Public perception can be significantly influenced by scientific
research or findings, regulatory investigations, litigation, media
attention and other publicity regarding the consumption of
marijuana products. There can be no assurance that future
scientific research or findings, regulatory investigations,
litigation, media attention or other publicity will be favorable to
the cannabis market or any particular product, or consistent with
earlier publicity. Future research reports, findings, regulatory
investigations, litigation, media attention or other publicity that
are perceived as less favorable than, or that question, earlier
research reports, findings or other publicity could have a material
adverse effect on the demand for adult-use or medical cannabis and
on the business, results of operations, financial condition, cash
flows or prospects of the Company.
Further, adverse publicity reports or other media attention
regarding the safety, efficacy and quality of cannabis in general,
or associating the consumption of adult-use and medical cannabis
with illness or other negative effects or events, could have such a
material adverse effect. There is no assurance that such adverse
publicity reports or other media attention will not arise. Among
other things, a negative shift in the public’s perception of
cannabis in the United States or any other applicable jurisdiction
could cause state jurisdictions to abandon initiatives or proposals
to legalize medical and/or adult-use cannabis, thereby limiting the
number of new state jurisdictions into which the Company could
expand. Any inability to fully implement the Company’s expansion
strategy may have a material adverse effect on the Company’s
business, results of operations or prospects.
Results of future clinical research may negatively impact the
cannabis industry.
Research in Canada, the U.S. and internationally regarding the
medical benefits, viability, safety, efficacy, dosing and social
acceptance of cannabis or isolated cannabinoids (which includes but
is not limited to CBD and THC) remains in early stages. There have
been relatively few clinical trials on the benefits of cannabis or
isolated cannabinoids (such as CBD and THC) and future research and
clinical trials may discredit the medical benefits, viability,
safety, efficacy, and social acceptance of cannabis currently or
could raise concerns regarding, and perceptions relating to,
cannabis. Further, the results of future clinical research or
studies regarding cannabis in general or any component or
cannabinoid thereof may directly or indirectly associate the
consumption of cannabis with illness (including, without
limitation, cancer) or other negative effects or events, all of
which could have such a material adverse effect. Given these risks,
uncertainties and assumptions, prospective purchasers of the
Company’s securities should not place undue reliance on such
articles and reports. Future research studies and clinical trials
may draw opposing conclusions to those stated in this Shell Company
Report or reach negative conclusions regarding the medical
benefits, viability, safety, efficacy, dosing, social acceptance or
other facts and perceptions related to cannabis, which could have a
material adverse effect on the demand for the Company’s products
with the potential to lead to a material adverse effect on the
Company’s business, financial condition, results of operations or
prospects.
Demand for
cannabis and derivative products could be adversely affected and
significantly influenced by scientific research or findings,
regulatory proceedings, litigation, media attention or other
research findings.
The legal cannabis industry is in its early stages of its
development. Consumer perceptions regarding legality, morality,
consumption, safety, efficacy and quality of cannabis are mixed and
evolving and can be significantly influenced by scientific research
or findings, regulatory investigations, litigation, media attention
and other publicity regarding the consumption of medicinal cannabis
products. There can be no assurance that future scientific
research, findings, regulatory proceedings, litigation, media
attention or other research findings or publicity will be favorable
to the medicinal cannabis market or any particular product, or
consistent with earlier publicity. Future research reports,
findings, regulatory proceedings, litigation, media attention or
other publicity that are perceived as less favorable than, or that
question, earlier research reports, findings or publicity, could
have a material adverse effect on the demand for medicinal cannabis
and on Company’s business, results of operations, financial
condition and cash flows. Further, adverse publicity reports or
other media attention regarding cannabis in general or associating
the consumption of cannabis with illness (including, without
limitation, cancer) or other negative effects or events, could have
such a material adverse effect. Public opinion and support for
medicinal cannabis use has traditionally been inconsistent and
varies from jurisdiction to jurisdiction. The Company’s ability to
gain and increase market acceptance of the Company’s business may
require substantial expenditures on investor relations, publicity,
lobbying, strategic relationships and marketing initiatives. There
can be no assurance that such initiatives will be successful and
their failure to materialize into significant demand may have an
adverse effect on Company’s financial condition.
The Company’s products could have unknown side
effects.
If the cannabis and cannabis products the Company sells are not
perceived to have the effects intended by the end user, its
business may suffer and the business may be subject to products
liability or other legal actions. Many of the Company’s products
contain innovative ingredients or combinations of ingredients which
are not currently regulated by the FDA. There is little long-term
data available with respect to efficacy, unknown side effects
and/or interaction with individual human biochemistry, or
interaction with other drugs. Moreover, there is little long-term
data available with respect to efficacy, unknown side effects
and/or its interaction with individual animal biochemistry. As a
result, the Company’s products could have certain side effects if
not taken as directed or if taken by an end user that has certain
known or unknown medical conditions. Further, regardless of whether
the cannabis and/or cannabis products are taken as directed, our
products may have side effects that are completely unanticipated by
the consumer or the Company, which side effects may be unpleasant,
harmful, or dangerous, and potentially result in products liability
claims or other legal actions.
Future research may lead to findings that vaporizers and
related products are not safe for their intended use.
Vaporizers
and related products were recently developed and therefore the
scientific or medical communities have had a very limited
period of time to study the long-term health effects of their use.
Currently, there is limited scientific or medical data on the
safety or efficacy of such products for their intended use and the
medical community is still studying the health effects of the use
of such products, including the long-term health effects. If the
scientific or medical community were to determine conclusively that
use of any or all of these products pose long-term health risks,
market demand for these products and their use could materially
decline. Such a determination could also lead to litigation,
reputational harm and significant regulation. Loss of demand for
the Company’s products, product liability claims and increased
regulation stemming from unfavorable scientific studies on cannabis
vaporizer products could have a material adverse effect on the
Company’s business, results of operations, financial condition or
prospects.
The current controversy surrounding vaporizers and vaporizer
products may materially and adversely affect the market for
vaporizer products and expose the Company to litigation and
additional regulation.
There have been a number of highly publicized cases involving lung
and other illnesses and deaths that appear to be related to
vaporizer devices and/or products used in such devices (such as
vaporizer liquids). Some jurisdictions in Canada and the United
States have already taken steps to prohibit the sale or
distribution of vaporizers, restrict the sale and distribution of
such products or impose restrictions on flavors or other additives
that are used in such vaporizers. This trend may continue,
accelerate or expand. Negative public sentiment may prompt
regulators to decide to further limit or defer the cannabis
industry’s ability to sell cannabis vaporizer products, and may
also diminish consumer demand for such products. The potential
deterioration in the public’s perception of cannabis containing
vaping liquids may result in a reduced market for the Company’s
vaping products. There can be no assurance that the Company will be
able to meet any additional compliance requirements or regulatory
restrictions, or remain competitive in the face of unexpected
changes in market conditions.
Litigation pertaining to vaporizer products is accelerating and
that litigation could potentially expand to include the Company’s
products, which would materially and adversely affect the Company’s
business, financial condition, results of operations or
prospects.
The cannabis industry is difficult to forecast.
The Company must rely largely on its own market research to
forecast sales as detailed forecasts are not generally obtainable
from other sources at this early stage of the cannabis industry. A
failure in the demand for its products to materialize as a result
of competition, technological change or other factors could have a
material adverse effect on the business, results of operations,
financial condition or prospects of the Company.
Reliable data on the medical and adult-use cannabis industry
is not available.
As a
result of recent and ongoing regulatory and policy changes in the
medical and adult-use cannabis industry, the market data available
is very limited and unreliable. Federal and state laws
prevent widespread participation and hinder market research.
Therefore, market research and projections by the Company of
estimated total retail sales, demographics, demand, and similar
consumer research, are based on assumptions from limited and
unreliable market data, and generally represent the personal
opinions of the Company’s management team as of the date of this
Shell Company Report.
The Company may be subject to the risk of constraints on
marketing products.
The
development of the Company’s business and operating results may be
hindered by applicable restrictions on sales and marketing
activities imposed by government regulatory bodies. The regulatory
environment in the U.S. limits cannabis companies’ abilities
to compete for market share in a manner similar to other
industries. If the Company is unable to effectively market its
products and compete for market share, or if the costs of
compliance with government legislation and regulation cannot be
absorbed through increased selling prices for its products, the
Company’s sales and results of operations or prospects could be
adversely affected.
The Company may not be able to continue to produce cannabis
products at scale.
The cannabis industry is, with respect to both adult use and
medicinal markets, in its early stages of development and it is
likely that the Company, and its competitors, likely will need to
produce such products at scale in order to create an adequate value
proposition and return on investment. This is likely to continue to
be the case as the meaning of production “at scale” changes
alongside fast-moving changes in the number of domestic and
international markets that allow commercial cannabis activity
expands, contracts, and otherwise changes. The Company may not be
able to manage its resources or secure new resources such that it
may continue producing cannabis and cannabis products at a scale,
and further there can be no guarantee that Company’s infrastructure
and resources are, or will be in the future, sufficient to produce
cannabis products at a pace and volume, and distribution
infrastructure, that will result in unit economics that generate an
appropriate return on investment to the Company or its
shareholders.
The Company may not be able to successfully develop new
products (including new products that meet consumer preferences),
nor produce them at scale, nor find a market for their
sale.
The cannabis industry is in its early stages of development and the
Company, and its competitors, may seek to introduce new products in
the future. In attempting to keep pace with any new market
developments, the Company may need to expend significant amounts of
capital in order to successfully develop and generate revenues from
new products introduced by the Company. The Company may also be
required to obtain additional regulatory approvals from Health
Canada and any other applicable regulatory authorities, including
but not limited to those in the Unites States, which may take
significant amounts of time. The Company may not be successful in
developing effective and safe new products, bringing such products
to market in time to be effectively commercialized, or obtaining
any required regulatory approvals, which, together with any capital
expenditures made in the course of such product development and
regulatory approval processes, may result in a material adverse
effect on the Company’s business, financial condition, results of
operations or prospects.
The cannabis industry is, with respect to both adult use and
medicinal markets, in its early stages of development and it is
likely that the Company, and its competitors, will seek to
introduce new products in the future, and likely will need to
produce such products at scale in order to create an adequate
return on investment. In attempting to keep pace with any new
market developments, the Company may need to expend significant
amounts of capital in order to successfully develop and generate
revenues from new products introduced by the Company. As well, the
Company may be required to obtain additional regulatory approvals
from local, state, or federal regulators, which may take
significant amounts of time. The Company may not be successful in
developing effective and safe new products, bringing such products
to market in time to be effectively commercialized, or obtaining
any required regulatory approvals, which, together with any capital
expenditures made in the course of such product development and
regulatory approval processes, may have a material adverse effect
on the Company’s business, financial condition and results of
operations. There can be no guarantee that Company’s infrastructure
and resources are, or will be in the future, sufficient to produce
cannabis and cannabis products at a pace and volume, and
distribution infrastructure, that will result in unit economics
that generate an appropriate return on investment to the Company or
its shareholders.
Further, generally speaking with respect to the Company’s cannabis
products, the cannabis industry is in its early stages of
development and there is no certainty regarding any consumer
preference for a particular strain of cannabis, any general
consumer preference for a given concentration of cannabis and/or
one or more cannabinoid within a particular strain of cannabis or
cannabis product, nor is the definition of a cannabis strain widely
decided, regulated or adequately protected by existing federal
intellectual property registrations and laws. Considering the
newness of the cannabis industry, the widespread lack of consumer
education regarding cannabis, and considering the strict and
evolving laws and regulations governing information about the
effects of cannabis products, as well as other marketing and
advertising restrictions, it is reasonable to expect that consumer
preferences for certain types of cannabis products (including
preferences regarding cannabis strains, cannabinoid blends and
profiles, terpene blends and profiles, cannabis strain potency, and
favored modes of consumption, etc.) will vary widely across many
demographics and geographic markets and will change rapidly. There
can be no guarantee that the Company will be able to determine
which cannabis strains, consumption formats, or cannabinoid potency
will prove most popular with consumers at large or in any
particular market, nor is there any guarantee that the Company
would be able to secure the inputs required to produce such
strains, and to produce those strains at scale in the form of a
retailable and profitable cannabis product.
Further, it is not possible to predict the long term or short-term
availability of a given cannabis strain of any kind, which presents
significant challenges in sourcing and producing cannabis strains
that meet the expressed preferences of consumers of any given
market segment. There is no guaranty that the Company will be able
to access or maintain access to a complex portfolio of cannabis
strains necessary to cultivate the types of strains at-scale that
would produce a supply of cannabis flower of the strain type and
concentration necessary to succeed in the competitive cannabis
market. We do not ultimately have control over consumer cannabis
product preferences or how consumer select cannabis products, and
challenges in developing and maintaining desirable cannabis
products (including those of a particular strain or cannabinoid
concentration) may impair the Company’s overall ability to advance
its business strategy and realize on its growth prospects, thereby
having a material adverse effect on the Company’s business,
financial condition, results of operations or prospects.
Risks Related to the Company’s Business
COVID-19 pandemic.
COVID-19 was declared a pandemic by the World Health Organization
on March 11, 2020. The outbreak has caused companies and various
international jurisdictions to impose restrictions such as
quarantines, business closures and travel restrictions. While the
impact of these restrictions did not have a material adverse impact
on the Company’s results of operations for the years ended December
31, 2021 and December 31, 2020, the Company has continued to
monitor closely the evolution of the pandemic. The Company has
attempted to assess the impact of the pandemic by identifying risks
in the following principal areas:
Mandatory
Closure. In response to the pandemic, most states and
localities have deemed cannabis sales to be “essential business”
and made only limited changes (if any) to normal business practices
to prevent the spread of COVID-19. While the Company has and
continues to work closely with state and local regulators to remain
in compliance with COVID-19 guidelines, there is no guarantee
further measures may nevertheless require the Company to shut down
operations in California should the state face a surge of cases for
COVID-19 or any of its variants. The Company’s ability to generate
revenue would be materially impacted by any shut down of its
operations.
Customer
Impact. The Company has implemented several initiatives
prioritizing its medical patients and customers most susceptible to
COVID-19 during the pendency of the COVID-19 outbreak. While the
Company is seeking to implement measures, where permitted, such as
“curbside” sales and delivery, to reduce infection risk to its
customers, regulators may not permit such measures, or such
measures may not prevent a reduction in demand.
Health
and Safety of Patients, Customers, and Employees. In
accordance with the guidance of the Centers of Disease Control and
Prevention (“CDC”), the Company has made essential changes to its
business during the COVID-19 pandemic to promote a healthy and safe
operating environment for all of its patients, customers and
employees, including:
|
● |
frequently sanitizing high-touch
surfaces; |
|
● |
deep cleaning and sanitizing
workstations; |
|
● |
sanitizing or washing hands after
each transaction; |
|
● |
ensuring hand sanitizer is easily
accessible; |
|
● |
suspending all use of paper menus,
demo products, and demo samples; |
|
● |
positioning staff at every other
register when possible; |
|
● |
taking the temperature of store
employees before they begin their shift; |
|
● |
requiring all dispensary staff to
wear face masks; |
|
● |
installed plexi-shields in areas
where patients/customers come face to face with staff (check-in and
at registers where glass doesn’t already exist); and |
|
● |
placed markers on the floor to
dictate 6 feet + of space between patients/customers. |
Supply
Chain Disruption. The
Company relies on third party suppliers for equipment and services
to produce its products and keep its operations going. If its
suppliers are unable to continue operating due to any mandatory
closures or other effects of the pandemic, it may negatively impact
its own ability to continue operating. At this time, the Company
has not experienced any failure to secure critical supplies or
services. However, disruptions in our supply chain may affect our
ability to continue certain aspects of the Company’s operations or
may significantly increase the cost of operating its business and
significantly reduce its margins.
Staffing
Disruption. The Company is, for the time being, implementing
among its staff where feasible “social distancing” measures
recommended by such bodies as the CDC, the Presidential
administration, as well as state and local governments. The Company
has cancelled nonessential travel by employees, implemented remote
or virtual meetings where possible, and permitted all staff who can
work remotely to do so. For those whose duties require them to work
on- site, measures have been implemented to reduce infection risk,
such as reducing contact with customers, mandating additional
cleaning of workspaces and hand disinfection, providing masks and
taking the temperature of employees before they begin their shift.
Nevertheless, despite such measures, The Company may find it
difficult to ensure that its operations remain staffed due to
employees falling ill with COVID-19, becoming subject to
quarantine, or deciding not to come to come to work on their own
volition to avoid infection.
The Company is actively addressing the risk to business continuity
represented by each of the above factors through the implementation
of a broad range of measures throughout its structure and is
re-assessing its response to the COVID-19 pandemic on an ongoing
basis. The above risks individually or collectively, the uncertain
pace of recovery, including the impact of the Delta and Omicron
variants, may have a material impact on the Company’s ability to
generate revenue.
Implementing measures to remediate the risks identified above may
materially increase our costs of doing business, reduce our margins
and potentially result in losses. While the Company is not
currently in financial distress, if its financial situation
materially deteriorates as a result of the impact of the pandemic,
the Company could eventually be unable to meet its obligations to
third parties, which in turn could lead to insolvency and
bankruptcy of the Company.
The Company may not successfully execute its business
strategy.
An
important part of the Company’s business strategy involves
expanding operations in additional U.S. markets, including in
markets where it does not currently operate. The Company may be
unable to pursue this strategy in the future at the desired pace or
at all. The Company may be unable to, among other things, identify
suitable businesses to acquire or invest in, complete acquisitions
on satisfactory terms or obtain the financing required to
complete such acquisitions, successfully expand its infrastructure
and sales force to support growth, achieve satisfactory returns on
acquired businesses or enter into successful business arrangements
for technical assistance or management expertise.
In addition, the process of integrating acquired businesses,
particularly in new markets, may involve unforeseen difficulties,
such as loss of key employees, and may require a disproportionate
amount of management’s attention and financial and other resources.
The Company can give no assurance that it will ultimately be able
to effectively integrate and manage the operations of any acquired
business or realize anticipated synergies. The failure to
successfully integrate the cultures, operating systems, procedures
and information technologies of an acquired business could have a
material adverse effect on the Company’s business, financial
condition or results of operations.
If the Company succeeds in expanding its business, such expansion
may place increased demands on management, operating systems,
internal controls and financial and physical resources. If not
managed effectively, these increased demands may adversely affect
the services provided to customers. In addition, the Company’s
personnel, systems, procedures and controls may be inadequate to
support future operations, particularly with respect to operations
in U.S. states in which it does not currently operate.
Consequently, in order to manage growth effectively, the Company
may be required to increase expenditures to increase its physical
resources, expand, train and manage its employee base, improve
management, financial and information systems and controls or make
other capital expenditures. The Company’s business, financial
condition and results of operations could be adversely affected if
it encounters difficulties in effectively managing the budgeting,
forecasting and other process control issues presented by future
growth.
The Company has a limited operating history.
As a
high-growth enterprise, the Company does not have a history of
profitability. As such, the Company has no immediate prospect of
generating profit from its intended operations. The Company will
therefore be subject to many of the risks common to early-stage
enterprises, including under-capitalization, cash shortages,
excess leverage, limitations with respect to personnel, financial,
and other resources and lack of revenues. There is no assurance
that the Company will be successful in achieving a return on its
shareholders’ investment and the likelihood of success must be
considered in light of the early stage of operations.
The Company is reliant on its management team.
The
success of the Company is dependent upon the ability, expertise,
judgment, discretion, and good faith of its senior
management. While employment agreements or management agreements
are customarily used as a primary method of retaining the services
of key employees, these agreements cannot assure the continued
retention or services of such employees. Any loss of the services
of such individuals could have a material adverse effect on the
Company’s business, operating results, financial condition or
prospects.
News media have reported that U.S. immigration authorities have
increased scrutiny of Canadian citizens who are crossing the
U.S.-Canada border with respect to persons involved in cannabis
businesses in the U.S. There have been a number of Canadians barred
from entering the U.S. as a result of an investment in or act
related to U.S. cannabis businesses. In some cases, entry has been
barred for extended periods of time. Company employees traveling
from Canada to the U.S. for the benefit of the Company may
encounter enhanced scrutiny by U.S. immigration authorities that
may result in the employee not being permitted to enter the U.S.
for a specified period of time. If this happens to the Company
employees, then this may reduce our ability to manage effectively
our business in the U.S.
Certain of the Company’s officers and directors may now be, and all
of them in respect of the Company may in the future become,
affiliated with entities engaged in business activities similar to
those intended to be conducted by the Company and, accordingly, may
have conflicts of interest in allocating their time and determining
to which entity a particular business opportunity should be
presented.
The Company’s officers and directors also may become aware of
business opportunities which may be appropriate for presentation to
the Company and the other entities to which they owe duties. In the
course of their other business activities, the Company’s officers
and directors may owe similar or other duties, and may have
obligations, to other entities or pursuant to other outside
business arrangements, including seeking and presenting investment
and business opportunities. Accordingly, they may have conflicts of
interest in determining to which entity a particular business
opportunity should be presented. These conflicts may not be
resolved in our favor, as the Company’s officers and directors are
not required to present investment and business opportunities to
the Company in priority to other entities with which they are
affiliated or to which they owe duties, and such conflicts may
result in a material adverse effect on the Company’s business,
financial condition, results of operations or prospects.
The Company’s officers, directors, security holders and their
respective affiliates and associates may have interests that
conflict with the Company’s interests.
The Company has not adopted a policy that expressly prohibits its
directors, officers, security holders, affiliates or associates
from having a direct or indirect financial interest in any
investment to be acquired or disposed of by us or in any
transaction to which the Company is a party or has an interest.
Such persons or entities may have a conflict between their
interests and ours, which may result in a material adverse effect
on the Company’s business, financial condition, results of
operations or prospects.
Failure to establish and maintain effective internal control
over financial reporting may result in the Company not being able
to accurately report its financial results, which could result in a
loss of investor confidence and adversely affect the market price
of the Equity Shares.
The Company is responsible for establishing and maintaining
adequate internal control over financial reporting, which is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. GAAP.
Despite the Company’s financial control and management systems,
such internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls
may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate. A failure to prevent or detect errors or misstatements
may result in a decline in the price of the Equity Shares and harm
the Company’s ability to raise capital in the future.
If management of the Company is unable to certify the effectiveness
of its internal controls, or if material weaknesses or significant
deficiencies in its internal controls are identified, such as in
connection with the year ended December 31, 2021, the Company could
be subject to regulatory scrutiny and a loss of public confidence,
which could harm its business. In addition, if the Company does not
maintain adequate financial and management personnel, processes and
controls, it may not be able to accurately report its financial
performance on a timely basis, which could cause a decline in the
price of Equity Shares and harm the Company’s ability to raise
capital.
It is not
expected that the Company’s disclosure controls and procedures and
internal control over financial reporting will prevent all
errors or fraud. A control system, no matter how well designed and
implemented, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met.
Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must
be considered relative to their costs. Due to the inherent
limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues within an
organization are detected. The inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple errors or mistakes. Controls
can also be circumvented by individual acts of certain persons, by
collusion of two or more people or by management override of the
controls. Due to the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and
may not be detected in a timely manner or at all. If the Company
cannot provide reliable financial reports or prevent fraud, its
reputation and operating results could be materially adversely
affected, which could also cause investors to lose confidence in
its reported financial information.
The Company may be subject to the risk of competition from
synthetic production and technological advances.
The
pharmaceutical industry may attempt to dominate the cannabis
industry, and in particular, legal cannabis, through the
development and distribution of synthetic products which emulate
the effects and treatment of organic cannabis. If they are
successful, the widespread popularity of such synthetic products
could change the demand, volume and profitability of the cannabis
industry. This could adversely affect the ability of the Company to
secure long-term profitability and success through the sustainable
and profitable operation of its business. There may be unknown
additional regulatory fees and taxes that may be assessed in the
future that may result in a material adverse effect on the
Company’s business, financial condition, results of operations or
prospects.
The Company may be subject to the risks associated with
fraudulent or illegal activity by its employees, contractors and
consultants.
The Company is exposed to the risk that its employees, independent
contractors and consultants may engage in fraudulent or other
illegal activity. Misconduct by these parties could include
intentional, reckless and/or negligent conduct or disclosure of
unauthorized activities to the Company that violates: (i)
government regulations; (ii) manufacturing standards; (iii) federal
and provincial healthcare fraud and abuse laws and regulations; or
(iv) laws that require the true, complete and accurate reporting of
financial information or data. It may not always be possible for
the Company to identify and deter misconduct by its employees and
other third parties, and the precautions taken by the Company to
detect and prevent this activity may not be effective in
controlling unknown or unmanaged risks or losses or in protecting
the Company from governmental investigations or other actions or
lawsuits stemming from a failure to be in compliance with such laws
or regulations. If any such actions are instituted against the
Company, and it is not successful in defending itself or asserting
its rights, those actions could have a significant impact on the
Company’s business, including the imposition of civil, criminal and
administrative penalties, damages, monetary fines, contractual
damages, reputational harm, diminished profits and future earnings,
and curtailment of the Company’s operations, any of which could
have a material adverse effect on the Company’s business, financial
condition, results of operations or prospects.
Certain events or developments in the cannabis industry more
generally may impact the Company’s reputation.
Damage to
the Company’s reputation can be the result of the actual or
perceived occurrence of any number of events, and could include any
negative publicity, whether true or not. Cannabis has often been
associated with various other narcotics, violence and criminal
activities, the risk of which is that our business might attract
negative publicity. There is also risk that the action(s) of other
participants, companies and service providers in the cannabis
industry may negatively affect the reputation of the industry as a
whole and thereby negatively impact the reputation of the Company.
The increased usage of social media and other web-based tools used
to generate, publish and discuss user-generated content and to
connect with other users has made it increasingly easier for
individuals and groups to communicate and share opinions and views
in regard to the Company and its activities, whether true or not,
and the cannabis industry in general, whether true or not. We do
not ultimately have direct control over how the Company or the
cannabis industry is perceived by others. Reputation loss may
result in decreased investor confidence, increased challenges in
developing and maintaining community relations and an impediment to
the Company’s overall ability to advance its business strategy and
realize on its growth prospects, thereby having a material adverse
effect on the Company’s business, financial condition, results of
operations or prospects.
Third parties with whom the Company may do business may
perceive themselves as being exposed to reputational risk as a
result of their relationship with the Company.
The parties with which the Company may do business may perceive
that they are exposed to reputational risk as a result of the
Company’s cannabis-related business activities. Failure to
establish or maintain business relationships due to reputational
risk arising in connection with the nature of the Company’s
business may result in a material adverse effect on the Company’s
business, financial condition, results of operations or
prospects.
The Company may be subject to advertising and promotional
risk in the event it cannot effectively implement a successful
branding strategy.
The Company’s future growth and profitability may depend on the
effectiveness and efficiency of advertising and promotional costs,
including its ability to (i) create brand recognition for any
products we may develop or sell; (ii) determine appropriate
advertising strategies, messages and media; and (iii) maintain
acceptable operating margins on such costs. There can be no
assurance that advertising and promotional costs will result in
revenues for the Company’s business in the future, or will generate
awareness for any of the Company’s products. In addition, no
assurance can be given that the Company will be able to manage our
advertising and promotional costs on a cost-effective basis.
The
cannabis industry in Canada, including both the medical and
adult-use cannabis markets, is in its early development
stages and restrictions on advertising, marketing and branding of
cannabis companies and products by Health Canada, various medical
associations, other governmental or quasi-governmental bodies or
voluntary industry associations may adversely affect the Company’s
ability to conduct sales and marketing activities and to create
brand recognition, and could potentially result in a material
adverse effect on the Company’s business, financial condition,
results of operations or prospects.
The
cannabis industry in the U.S., including the states and local
authorities thereof, including both the medical and adult-use
cannabis markets, also is in its early development stages,
and restrictions on advertising, marketing and branding of cannabis
companies and cannabis products by various medical associations,
other governmental or quasi-governmental bodies or voluntary
industry associations, as well as private companies (including but
not limited to social media platform providers), may adversely
affect the Company’s ability to conduct sales and marketing
activities and to create brand recognition, and could potentially
result in a material adverse effect on the Company’s business,
financial condition, results of operations or prospects.
The Company is subject to product liability regimes and
strict product recall requirements.
The
Company distributes products designed to be ingested or
otherwise consumed by humans. Accordingly, the Company faces the
risk of exposure to product liability claims, regulatory action and
litigation if any of its business’s products are alleged to have
caused significant loss or injury. In addition, the sale of
cannabis products involves the risk of injury to consumers due to
tampering by unauthorized third parties or product contamination.
Previously unknown adverse reactions resulting from human
consumption of cannabis products alone or in combination with other
medications or substances could occur. The Company may be subject
to various product liability claims, including, among others, that
specific cannabis products caused injury or illness, or include
inadequate warnings concerning possible side effects or
interactions with other substances. A product liability claim or
regulatory action against the Company could result in increased
costs, could adversely affect our reputation with the Company’s
clients and consumers generally, and may result in a material
adverse effect on the Company’s business, financial condition,
results of operations or prospects.
In addition, manufacturers and distributors of products are
sometimes subject to the recall or return of their products for a
variety of reasons, including product defects, such as
contamination, unintended harmful side effects or interactions with
other substances, packaging safety and inadequate or inaccurate
labelling disclosure. To the extent any products are recalled due
to an alleged product defect or for any other reason, the Company
could be required to incur the unexpected expense of the recall and
any legal proceedings that might arise in connection with the
recall. The Company may lose a significant amount of sales and may
not be able to replace those sales at an acceptable margin or at
all. In addition, a product recall may require significant
management attention. Moreover, a recall for any of the foregoing
reasons could lead to decreased demand and could have a material
adverse effect on the Company. Product recalls may lead to
increased scrutiny of operations by applicable regulatory agencies,
requiring further management attention and potential legal fees and
other expenses.
The State of California and local jurisdictions thereof also
regulate cannabis product quality and impose certain product recall
requirements. A product liability claim or regulatory action based
on regulatory non-compliance with cannabis regulations against the
Company could result in increased costs, could adversely affect our
reputation with the Company’s clients and consumers generally, and
may result in a material adverse effect on the Company’s business,
financial condition, results of operations or prospects.
The Company is reliant on third-party suppliers,
manufacturers and contractors.
The Company maintains a full supply chain for the provision of
products and services to the regulated cannabis industry. Due to
the uncertain regulatory landscape for regulating cannabis in
Canada and the U.S., the Company’s third-party suppliers,
manufacturers and contractors may elect, at any time, to decline or
withdraw services necessary for the Company’s operations. Loss of
these suppliers, manufacturers and contractors may result in a
material adverse effect on the Company’s business, financial
condition, results of operations or prospects.
The Company is particularly reliant on one third party
distributor to deliver its products to wholesalers and
retailers.
The Company currently relies primarily on =one third party
distributor to provide substantially all the distribution services
required under applicable laws and regulations to distribute its
products at wholesale and retail, including, without limitation,
transporting the cannabis products to the Company’s wholesale and
retail customers, as well as the required testing of cannabis
products. The Company’s relationship with such third-party
distributor is governed by a master services agreement. The Company
thereby is exposed to the inherent risks associated with relying on
one third party service provider in a function as critical as
distribution, including logistical problems, supply chain
disruptions, delays, loss, or theft of product, and increased
shipping and insurance costs, all with little chance of securing
adequate services from an alternative distributor. Any delay in
transporting the product, breach of security or loss of product, or
breach of the master services agreement with such distributor, or
general failure of such distributor as an ongoing concern, could
have a material adverse effect on the Company’s business, financial
performance and results of operations. Further, any breach of
security and loss of product during transport could affect the
Company’s status as a licensed operator of commercial cannabis
activity in each applicable jurisdiction. If the sole distributor
does not successfully carry out its contractual obligations or
terminates or suspends their contractual arrangements with the
Company, or if there is a delay or interruption in the distribution
of the Company’s products or if the distributor damages the
Company’s products, it could negatively impact Company’s revenue,
reputation, and regulatory good standing. In addition, any damage
to the Company’s products, such as product spoilage, could expose
the Company to potential product liability, damage our reputation
and the reputation of the Company’s brands, or otherwise harm the
Company’s business.
The Company is reliant on key inputs.
The
cannabis business is dependent on a number of key inputs and their
related costs including raw materials and supplies related to
growing operations, as well as electricity, water and other local
utilities. Any significant interruption or negative change in the
availability or economics of the supply chain for key inputs could
materially impact the business, financial condition, results of
operations or prospects of the Company. Some of these inputs may
only be available from a single supplier or a limited group of
suppliers. If a sole source supplier was to go out of business, the
Company might be unable to find a replacement for such source in a
timely manner or at all. If a sole source supplier were to be
acquired by a competitor, that competitor may elect not to sell to
the Company in the future. Any inability to secure required
supplies and services or to do so on appropriate terms could have a
materially adverse impact on the business, financial condition,
results of operations or prospects of the Company.
The Company may not be able to achieve certain production
cost targets for cultivated cannabis.
The Company’s revenues are in a large part derived from the
production, sale, and distribution of cannabis. The cost of
production, sale, and distribution of cannabis is a critically
important metric for the Company’s production targets and overall
financial forecast, and is dependent on a number of key inputs and
their related costs, including equipment and supplies, labor and
raw materials related to our growing operations, as well other
overhead costs such as electricity, water, and utilities. Further,
it is the case that due to supply chain inefficiencies or increased
costs of inputs, or any other reason, the Company may not be able
to reach its desired production cost targets at its cultivation and
other production facilities, which cost targets are expressed as a
certain cost per pound of cannabis cultivated and made available
for downstream processing. Further, it is also the case that if the
cost per pound of cannabis cultivated does not decrease from its
current level and/or the Company is not able to otherwise manage
production costs in the broader context of its total spend, the
Company will not be able to achieve its cannabis product production
price targets nor its overall financial targets.
Any significant interruption or negative change in the availability
or economics of the supply chain for key inputs, including an
inability to secure required supplies and services or to do so on
appropriate, reasonable terms, or any failure of the Company to
meet its production cost targets, could materially and adversely
impact our business, financial condition, and the results of our
operations. This includes any change in the selling price of
products set by the applicable marketplace in a particular state or
locality. There is currently no established market price for
cannabis and the price of cannabis is affected by numerous factors
beyond our control. Any price decline (of which there have been
many over the last several quarters) may have a material adverse
effect on our business, financial condition and operations.
The Company is reliant on equipment and skilled
labor.
The ability of the Company to compete and grow is dependent on it
having access, at a reasonable cost and in a timely manner, to
skilled labor, equipment, parts and components. No assurances can
be given that the Company will be successful in maintaining its
required supply of skilled labor, equipment, parts and components.
It is also possible that the final costs of the major equipment
contemplated by the Company’s capital expenditure plans may be
significantly greater than anticipated by the Company’s management,
and may be greater than funds available to the Company, in which
circumstance the Company may curtail, or extend the timeframes for
completing, its capital expenditure plans. This may result in a
material adverse effect on the Company’s business, financial
condition, results of operations or prospects.
Service
providers could suspend or withdraw services
to the Company.
As a
result of any adverse change to the approach in enforcement of
United States cannabis laws, adverse regulatory or political
change, additional scrutiny by regulatory authorities, adverse
change in public perception in respect of the consumption of
cannabis or otherwise, third-party service providers to the Company
could suspend or withdraw their services, which may have a material
adverse effect on the Company’s business, revenues, operating
results, financial condition or prospects.
The Company may not be able to manage its inventory, nor
secure adequate cannabis processing and inventory storage
capacity.
The Company needs to maintain adequate inventory levels to be able
to deliver products to distributors on a timely basis. Our
inventory supply depends on our ability to correctly estimate
demand for our products. Our ability to estimate demand for our
products is imprecise, particularly for new products, seasonal
promotions and new markets. If we materially underestimate demand
for our products or are unable to maintain sufficient inventory of
raw materials, we might not be able to satisfy demand on a
short-term basis. If we overestimate distributor or retailer demand
for our products, we may end up with too much inventory, resulting
in higher storage costs and storage capacity issues, increased
trade spend and the risk of inventory spoilage. If we fail to
manage our inventory to meet demand, we could damage our
relationships with our distributors and retailers and could delay
or lose sales opportunities, which would unfavorably impact our
future sales and adversely affect our operating results. In
addition, if the inventory of our products held by our distributors
and retailers is too high, they will not place orders for
additional products, which would also unfavorably impact our sales
and adversely affect our operating results.
More broadly, as the Company continues to grow and scale, it may
face certain barriers to securing facilities to process its raw
cannabis materials into consumer-packaged goods, and/or store
cannabis products. The barriers may come in the form of limited
access to facilities within a desired local jurisdiction, which
access to such jurisdictions already is severely constrained in the
U.S. given the very few numbers of local jurisdictions that
currently allow commercial cannabis activity, and then only in
certain defined areas and subject to certain rules and regulations.
Access to such space is further constrained given the dearth of
commercial property for sale that would meet the zoning and
specifications for a commercial cannabis processing and storage
facility, and the general deficit of properties available for lease
given the illegality of cannabis under federal law. It is possible
and even likely that the Company will encounter one or all such
barriers to successfully managing its inventory and creating
cannabis products as it continues to scale, including continued
expansion of its cultivation facilities and capacity.
The Company may be subject to the risk of
litigation.
The Company may become party to litigation from time to time in the
ordinary course of business which could adversely affect its
business. Should any litigation in which the Company becomes
involved be determined against the Company, such a decision could
adversely affect the Company’s ability to continue operating and/or
the market price for the Equity Shares. Even if the Company is
involved in litigation and wins, litigation can redirect
significant Company resources.
The Company may be subject to risks related to the protection
and enforcement of intellectual property rights and may become
subject to allegations that the Company is in violation of
intellectual property rights of third parties.
The ownership and protection of intellectual property rights may be
a significant aspect of the Company’s future success, particularly
with respect to protections for cultivation processes and
technologies. The Company may rely on trade secrets, technical
know-how and proprietary information that are not protected by
patents or trademarks to maintain its competitive position. The
Company tries to protect its intellectual property by entering into
confidentiality agreements with parties that have access to it,
such as the Company’s partners, collaborators, employees and
consultants. Any of these parties may breach these agreements and
we may not have adequate remedies for any specific breach. In
addition, trade secrets and technical know-how, which are not
protected by patents, may otherwise become known to or be
independently developed by competitors, in which event the Company
could be materially adversely affected.
Unauthorized parties may attempt to replicate or otherwise obtain
and use the Company’s products, trade secrets, technical know-how
and proprietary information. Policing the unauthorized use of the
Company’s future intellectual property rights could be difficult,
expensive, time-consuming and unpredictable, as may be enforcing
these rights against unauthorized use by others. Identifying
unauthorized use of intellectual property rights is difficult as
the Company may be unable to effectively monitor and evaluate the
products being distributed by its competitors, including parties
such as unlicensed dispensaries and cultivators, and the processes
used to produce such products. In addition, in any infringement
proceeding, some or all of the Company’s future trademarks, patents
or other intellectual property rights or other proprietary
know-how, or arrangements or agreements seeking to protect the same
for the benefit of the Company, may be found invalid,
unenforceable, anti-competitive or not infringed. An adverse result
in any litigation or defense proceedings could put one or more of
the Company’s future trademarks, patents or other intellectual
property rights at risk of being invalidated or interpreted
narrowly. Any or all of these events could result in a material
adverse effect on the Company’s business, financial condition,
results of operations or prospects.
In addition, other parties may claim that the Company’s products
infringe on their proprietary and perhaps patent-protected rights.
Such claims, whether or not meritorious, may result in the
expenditure of significant financial and managerial resources,
legal fees, injunctions, temporary restraining orders and/or
require the payment of damages. As well, the Company may need to
obtain licenses from third parties who allege that the Company has
infringed on their lawful rights. However, such licenses may not be
available on terms acceptable to the Company or at all. In
addition, the Company may not be able to obtain or utilize on terms
that are favorable to it, or at all, licenses, or other rights with
respect to intellectual property that it does not own.
Further, certain intellectual property protections (including but
not limited to federal trademark and patent protection in the
United States) are not available to business that conduct or are
associated with cannabis, or may not be available to such cannabis
businesses. Therefore, the Company may not be able to secure
traditional protections for its intellectual property and such
failure to secure intellectual property rights could result in a
material adverse effect on the Company’s business, financial
condition, results of operations or prospects.
The Company may be subject to risks related to information
technology systems, including cyber-attacks.
The Company’s operations depend, in part, on how well it and its
suppliers protect networks, equipment, information technology
systems and software against damage from a number of threats,
including, but not limited to, cable cuts, damage to physical
plants, natural disasters, intentional damage and destruction,
fire, power loss, hacking, computer viruses, vandalism and theft.
The Company’s operations also depend, in part, on the timely
maintenance, upgrade and replacement of networks, equipment, IT
systems and software, as well as pre-emptive expenses to mitigate
the risks of failures. Any of these and other events could result
in information system failures, delays and/or increase in capital
expenses. The failure of information systems or a component of
information systems could, depending on the nature of any such
failure, adversely impact the Company’s reputation and results of
operations. The Company’s risk and exposure to these matters cannot
be fully mitigated because of, among other things, the evolving
nature of these threats. As a result, cyber security and the
continued development and enhancement of controls, processes and
practices designed to protect systems, computers, software, data
and networks from attack, damage or unauthorized access may become
a priority to ensure the ongoing success and security of the
business. As cyber threats continue to evolve, the Company may be
required to expend additional resources to continue to modify or
enhance protective measures or to investigate and remediate any
security vulnerabilities.
The Company may be subject to risks related to security
breaches.
Given the nature of the Company’s product and its lack of legal
availability outside of channels approved by certain state
governments of the United States, as well as the concentration of
inventory in its facilities, despite meeting or exceeding all
legislative security requirements, there remains a risk of
shrinkage as well as theft. A security breach at the Company’s
facilities could expose the Company to additional liability and to
potentially costly litigation, increase expenses relating to the
resolution and future prevention of these breaches and may deter
potential patients from choosing the Company’s products.
In addition, the Company collects and stores personal information
about its patients and customers and is responsible for protecting
that information from privacy breaches. A privacy breach may occur
through procedural or process failure, information technology
malfunction, or deliberate unauthorized intrusions. Theft of data
for competitive purposes, particularly patient and customer lists,
and preferences, is an ongoing risk whether perpetrated via
employee collusion or negligence or through deliberate
cyber-attack. Any such theft or privacy breach would have a
material adverse effect on the Company’s business, financial
condition and results of operations or prospects.
The Company may be subject to risks related to high bonding
and insurance coverage.
There is a risk that a greater number of state regulatory agencies
will begin requiring entities engaged in certain aspects of the
business or industry of legal cannabis to post a bond or
significant fees when applying, for example, for a dispensary
license or renewal as a guarantee of payment of sales and franchise
tax. The Company is not able to quantify at this time the potential
scope for such bonds or fees in the states in which it currently or
may in the future operate. Any bonds or fees of material amounts
could have a negative impact on the ultimate success of the
Company’s business.
The Company’s business is subject to a number of risks and hazards
generally, including adverse environmental conditions, accidents,
labor disputes, collective bargaining and unionization on behalf of
labor groups, and changes in the regulatory environment. Such
occurrences could result in damage to assets, personal injury or
death, environmental damage, delays in operations, monetary losses,
and possible legal liability.
Although the Company maintains insurance to protect against certain
risks in such amounts as it considers to be reasonable, its
insurance does not cover all the potential risks associated with
its operations. The Company may also be unable to maintain
insurance to cover these risks at economically feasible premiums.
Insurance coverage may not continue to be available or may not be
adequate to cover any resulting liability. Moreover, insurance
against risks such as environmental pollution or other hazards
encountered in the operations of the Company is not generally
available on acceptable terms. The Company might also become
subject to liability for pollution or other hazards which may not
be insured against or which the Company may elect not to insure
against because of premium costs or other reasons. Losses from
these events may cause the Company to incur significant costs that
could have a material adverse effect upon its business, results of
operations, financial condition, or prospects.
The Company may be subject to transportation
risks.
The Company’s business involves, both directly and indirectly, the
production, sale and distribution of cannabis products. Due to the
perishable nature of such products, the Company depends on fast and
efficient direct and third-party transportation services to
distribute its product. Any prolonged disruption of third-party
transportation services could have an adverse effect on the
Company. Rising costs associated with the third-party
transportation services used by the Company to ship its products
may also adversely impact the business of the Company.
The Company’s share price may be vulnerable to rising energy
costs.
The Company’s business involves the production of cannabis products
which consumes considerable energy, making the Company vulnerable
to rising energy costs. Rising or volatile energy costs may
adversely impact the business of the Company and its ability to
operate profitably.
The Company is subject to risks inherent in an agricultural
business.
The
Company’s business involves the growing of cannabis, which is an
agricultural product. As such, the business may be subject to the
risks inherent in the agricultural business, such as insects, plant
diseases, unpredictable weather and climate conditions and
similar agricultural risks. Even when grown indoors under
climate-controlled conditions monitored by trained personnel, there
can be no assurance that natural elements, such as insects and
plant diseases, will not have a material adverse effect on the
production of cannabis products and on the Company’s business,
financial condition, results of operations or prospects of the
Company.
Management of growth may prove to be difficult.
The Company may be subject to growth-related risks including
capacity constraints and pressure on its internal systems and
controls. The ability of the Company to manage growth effectively
will require it to continue to implement and improve its
operational and financial systems and to expand, train and manage
its employee base. The inability of the Company to deal with this
growth may result in a material adverse effect on the Company’s
business, financial condition, results of operations or
prospects.
The Company may be subject to the risks of
leverage.
It is anticipated that the Company will continue to utilize
leverage in connection with the Company’s investments in the form
of secured or unsecured indebtedness. Although the Company will
seek to use leverage in a manner it believes is prudent, such
leverage will increase the exposure of an investment to adverse
economic factors such as downturns in the economy or deterioration
in the condition of the investment. If the Company defaults on
secured indebtedness, the lender may foreclose and the Company
could lose its entire investment in the security of such loan. If
the Company defaults on unsecured indebtedness, the terms of the
loan may require the Company to repay the principal amount of the
loan and any interest accrued thereon in addition to heavy
penalties that may be imposed. Because the Company may engage in
financings where several investments are cross-collateralized,
multiple investments may be subject to the risk of loss. As a
result, the Company could lose its interest in performing
investments in the event such investments are cross-collateralized
with poorly performing or nonperforming investments.
In
addition to leveraging the Company’s investments, the Company may
borrow funds or obtain credit lines in its own name for
various purposes and may withhold or apply from distributions
amounts necessary to repay such borrowings. The interest expense
and such other costs incurred in connection with such borrowings
may not be recovered by income from investments purchased by the
Company. If investments fail to cover the cost of such borrowings,
the value of the investments held by the Company would decrease
faster than if there had been no such borrowings. Additionally, if
the investments fail to perform to expectation, the interests of
shareholders in the Company could be subordinated to such leverage,
which will compound any such adverse consequences.
The Company may undertake future acquisitions or
dispositions, which bear inherent risks.
Material acquisitions, dispositions and other strategic
transactions involve a number of risks, including: (i) potential
disruption of the Company’s ongoing business; (ii) distraction of
management; (iii) the Company may become more financially
leveraged; (iv) the anticipated benefits and cost savings of those
transactions may not be realized fully or at all or may take longer
to realize than expected; (v) increased scope and complexity of the
Company’s operations; and (vi) loss or reduction of control over
certain of the Company’s assets. Additionally, the Company may
issue additional Equity Shares in connection with such
transactions, which would generally dilute the Company’s existing
shareholders and their indirect holdings in the Company.
The presence of one or more material liabilities of an acquired
company that are unknown to the Company at the time of acquisition
could have a material adverse effect on the business, results of
operations, prospects and financial condition of the Company. A
strategic transaction may result in a significant change in the
nature of the Company’s business, operations and strategy. In
addition, the Company may encounter unforeseen obstacles or costs
in implementing a strategic transaction or integrating any acquired
business into the Company’s operations.
Risks related to the difficulty of attracting and retaining
personnel.
The Company’s success depends to a significant degree upon its
ability to attract, retain and motivate highly skilled and
qualified personnel. Failure to attract and retain necessary
technical personnel, sales and marketing personnel and skilled
management could adversely affect the Company’s business. If the
Company fails to attract, train and retain sufficient numbers of
these highly qualified people, its prospects, business, financial
condition and results of operations will be materially and
adversely affected.
Co-investment risk in terms of control over the Company’s
investments.
The Company may co-invest in one or more investments with certain
strategic investors and/or other third parties through joint
ventures or other entities, which parties in certain cases may have
different interests or superior rights to those of the Company.
Although it is our intent to retain control and other superior
rights over the Company’s investments, under certain circumstances
it may be possible that the Company relinquishes such rights over
certain of its investments and, therefore, may have a limited
ability to protect its position therein. In addition, even when the
Company does maintain a control position with respect to its
investments, the Company’s investments may be subject to typical
risks associated with third-party involvement, including the
possibility that a third-party may have financial difficulties
resulting in a negative impact on such investment, may have
economic or business interests or goals that are inconsistent with
those of the Company, or may be in a position to take (or block)
action in a manner contrary to the Company’s objectives. The
Company may also, in certain circumstances, be liable for the
actions of its third-party partners or co-investors. Co-investments
by third parties may or may not be on substantially the same terms
and conditions as the Company, and such different terms may be
disadvantageous to the Company.
Liabilities arising from the Company’s website
accessibility.
Internet
websites are visible by people everywhere, not just in
jurisdictions where the activities described therein are considered
legal. As a result, to the extent the Company sells services or
products via web-based links targeting only jurisdictions in which
such sales or services are compliant with continuously
evolving state laws, the Company may face legal action in other
jurisdictions which are not the intended object of any of the
Company’s marketing efforts for engaging in any web-based activity
that results in sales into such jurisdictions deemed illegal under
applicable laws.
Certain remedies may be limited to the Company.
Pursuant
to its governing documents, the Company and the shareholders of the
Company may be prevented from recovering damages for alleged errors
or omissions made by the members of the Board and its officers. The
Company’s governing documents also provide that the Company will,
to the fullest extent permitted by law, indemnify members of the
Board and its officers for certain liabilities incurred by them by
virtue of their reasonable actions or inactions on behalf of
the Company.
The Company may have difficulty enforcing judgments and
effecting service of process on directors and officers.
The directors and officers of the Company reside outside of Canada.
Most or all of the assets of such persons are located outside of
Canada. Therefore, it may not be possible for the Company’s
shareholders to collect or to enforce judgments obtained in
Canadian courts predicated upon the civil liability provisions of
applicable Canadian securities laws against such persons. Moreover,
it may not be possible for Company shareholders to effect service
of process within Canada upon such persons.
Past performance is not indicative of future
results.
The prior
investment and operational performance of the Company is not
indicative of the future operating results of the Company. There
can be no assurance that the historical operating results achieved
by the Company will be achieved in subsequent periods, and
the Company’s performance may be materially different.
Financial projections may prove materially inaccurate or
incorrect.
Any Company financial estimates, projections and other
forward-looking information or statements included in this Shell
Company Report were prepared by the Company without the benefit of
reliable historical industry information or other information
customarily used in preparing such estimates, projections and other
forward-looking information or statements. Such forward-looking
information or statements are based on assumptions of future events
that may or may not occur, which assumptions may not be disclosed
in this Shell Company Report. Shareholders should inquire of the
Company and become familiar with the assumptions underlying any
estimates, projections or other forward-looking information or
statements. Projections are inherently subject to varying degrees
of uncertainty and their achievability depends on the timing and
probability of a complex series of future events. There is no
assurance that the assumptions upon which these projections are
based will be realized. Actual results may differ materially from
projected results for a number of reasons including increases in
operation expenses, changes or shifts in regulatory rules,
undiscovered and unanticipated adverse industry and economic
conditions, and unanticipated competition. Accordingly,
shareholders should not rely on any projections to indicate the
actual results the Company might achieve.
The Company may not pay dividends.
It is not intended that the Company will pay any dividends on the
Equity Shares in the foreseeable future. Dividends paid by the
Company would be subject to multiple jurisdictional taxes and,
potentially, withholdings.
The Company may be subject to credit risk, and there is
substantial doubt about its ability to continue as a going
concern.
Credit risk is the risk that the counterparty to a financial
instrument fails to meet its contractual obligations, resulting in
a financial loss to us. We have credit risk exposure based on the
balance of our cash, accounts receivable, subscriptions receivable,
and taxes recoverable. There are no assurances that our
counterparties or customers will meet their contractual obligations
to us.
The Company has incurred net losses from time to time since its
inception and it has identified conditions and events that raise
substantial doubt about its ability to continue as a going concern.
The Company is party to a senior term loan credit facility, which
credit facility may not be sufficient to support the ongoing
operations of the Company. The Company remains a growth-stage
company with a limited operating history. There can be no assurance
that the Company will have sufficient capital resources to continue
as a going concern or that significant losses will not occur in the
near future or that the Company will be profitable in the future.
The Company may need to seek additional financing, and there is no
guarantee that the Company will have access to such additional
capital through any type of financing, in large part due to the
federal illegality of commercial cannabis activity under federal
law and the ongoing compliance burdens associated with financing a
cannabis company. There can be no assurance that the Company will
continue to generate any revenues or achieve profitability. Our
continued operations are dependent ultimately on our ability to
achieve and maintain profitability and positive cash flow from our
operations.
These circumstances create substantial doubt as to the ability of
the Company to meet its obligations as they come due and,
accordingly, the appropriateness of the use of accounting
principles applicable to the Company as a going concern. The
Company’s ability to continue as a going concern is dependent upon
its ability to fund the repayment of existing borrowings, secure
additional financing and to generate positive cash flows from
operations.
Market and Economy Risks
The Company may be vulnerable to currency exchange
fluctuations.
Due to the Company’s present operations in the United States, and
its intention to continue future operations outside Canada, the
Company is exposed to significant currency fluctuations. Recent
events in the global financial markets have been coupled with
increased volatility in the currency markets. All or substantially
all of the Company’s revenue is earned in U.S. dollars, but a
portion of its operating expenses are incurred in Canadian dollars.
Fluctuations in the exchange rate between the U.S. dollar and the
Canadian dollar may have a material adverse effect on the Company’s
business, financial position or results of operations or
prospects.
The Company may be subject to market price volatility
risks.
The market price of the Equity Shares may be subject to wide
fluctuations in response to many factors, including variations in
the operating results of the Company, divergence in financial
results from analysts’ expectations, changes in earnings estimates
by stock market analysts, changes in the business prospects for the
Company, general economic conditions, legislative changes, and
other events and factors outside of the Company’s control. In
addition, stock markets have from time to time, including very
recently, have experienced extreme price and volume fluctuations,
which, as well as general economic and political conditions, could
adversely affect the market price for the Equity Shares.
There may be restrictions on the market for the Equity
Shares.
Notwithstanding that the Equity Shares are listed on the Neo
Exchange, various regulatory regimes in the United States forbid
the transfer of such Equity Shares in quantities that exceed
published thresholds without receiving advanced approval of the
state regulators. Failure to obtain approval may result in the
Company’s licenses and permits in that state being revoked,
cancelled or non-renewed.
There may be a limited market for the Equity
Shares.
Notwithstanding that
the Equity Shares are listed on the Neo Exchange and
over-the-counter in the United States on the OTCQX, there can be no
assurance that an active and liquid market for such Equity Shares
will be maintained and a Company Shareholder may find it difficult
to resell any securities of the Company.
Subsequent offerings will result in dilution to holders of
the Equity Shares.
The Company may sell additional equity securities in subsequent
offerings (including through the sale of securities convertible
into Equity Shares or other equity securities) and may issue
additional Equity Shares or other securities of the Company or
other equity securities to finance acquisitions, operations, or
other projects. The size of future issuances of Equity Shares or
other equity securities (or of securities convertible into Equity
Shares or other equity securities) nor the effect, if any, that
future issuances and sales of such securities will have on the
market price of the Equity Shares can be predicted at this time.
Any transaction involving the issuance of previously authorized but
unissued Equity Shares, securities convertible into Equity Shares,
or other equity securities and convertible debt securities of the
Company would result in dilution to holders of Equity Shares.
Exercises of issued and outstanding Warrants may also result in
dilution to the holders of Equity Shares.
Increased levels of volatility or a rapid destabilization of
global economic conditions could have a material adverse effect on
the business and operations of the Company.
Global financial conditions have been characterized by increased
volatility, with numerous financial institutions having either gone
into bankruptcy or having to be rescued by government authorities,
as well as a result of the COVID-19 virus pandemic and the recent
Russian invasion of Ukraine. Global financial conditions could
suddenly and rapidly destabilize in response to existing and future
events, including the COVID-19 virus pandemic or the recent Russian
invasion of Ukraine, among other things, as government authorities
may have limited resources to respond to existing or future crises.
Global capital markets have continued to display increased
volatility in response to global events, including the COVID-19
virus pandemic and the recent Russian invasion of Ukraine. Future
crises may be precipitated by any number of causes, including
natural disasters, epidemics (such as the COVID-19 virus pandemic),
geopolitical instability and war (such as the recent Russian
invasion of Ukraine), changes to energy prices or sovereign
defaults. Any sudden or rapid destabilization of global economic
conditions could negatively impact the Company’s ability to obtain
equity or debt financing or make other suitable arrangements to
finance its operations. If increased levels of volatility continue
or in the event of a rapid destabilization of global economic
conditions, including as a result of the COVID-19 virus pandemic or
the recent Russian invasion of Ukraine, it may result in a material
adverse effect on the Company and the trading price of the
Company’s securities could be adversely affected.
Fluctuations in the cost and availability of key inputs
(including raw materials and energy), equipment, labor, and
transportation could cause production delays, supply chain
disruptions, and/or increase Company’s overall costs.
The price and availability of key components used to manufacture
and distribute Company’s products has been increasing and may
continue to fluctuate significantly. In addition, the cost of labor
within Company or at Company’s third-party vendors and supply chain
partners could increase significantly due to regulation or
inflationary pressures. Additionally, the cost of logistics and
transportation fluctuates in large part due to the price of oil,
and availability can be limited due to geopolitical and economic
issues. Any fluctuations in the cost and availability of any of the
raw materials, packaging, or other sourcing or transportation costs
required to support Company’s products or operations (such as due
to the COVID-19 virus pandemic or the recent Russian invasion of
Ukraine) could harm Company’s gross margins and its ability to meet
customer demand. If the Company is unable to successfully mitigate
a significant portion of these product cost increases or
fluctuations, the Company’s operations, targets, and overall
profitability could be harmed.
The Company’s business is dependent on a number of key inputs and
their related costs including raw materials, packaging materials
and supplies related to Company’s growing operations, as well as
electricity, water, and other local utilities. Any significant
interruption or negative change in the availability or economics of
the supply chain for key inputs (such as due to the COVID-19 virus
pandemic or the recent Russian invasion of Ukraine) could
materially impact the Company’s business, financial condition, and
operating results. Any inability to secure required supplies and
services or to do so on appropriate terms could have a materially
adverse impact on the Company’s business, financial condition, and
operating results. The Company’s production operations consume
considerable energy for heat and carbon dioxide production and are
vulnerable to rising energy costs. Energy costs have shown recent
volatility, which has and may continue to adversely impact the
Company’s business. Should the cost of energy rise, and should the
Company face difficulties in sustaining price increases to offset
the impact of increasing fuel costs, gross profit margins could be
adversely impacted.
In addition, the Company’s production operations consume
considerable energy, making it vulnerable to rising energy costs
and power outages. Rising or volatile energy costs may adversely
impact the Company’s business, and Company’s operations could be
significantly affected by a prolonged power outage.
The Company’s ability to compete and grow will be dependent on
having access, at a reasonable cost and in a timely manner, to
skilled labor, equipment, parts, and components. No assurances can
be given that the Company will be successful in maintaining the
required supply of skilled labor, equipment, parts, and components.
Such manifold supply chain failures and inefficiencies, including
the Company’s inability to manage them, may result in a number of
negative outcomes including, without limitation, an unexpected
increase in inventory that grows obsolete or otherwise unusable, as
well as higher costs of production and distribution across the
Company’s various business verticals including, without limitation,
its business of wholesaling and retailing certain cannabis products
and goods. This could have a material adverse effect on the
Company’s financial results and operations. It is also possible
that any expansion plans contemplated by the Company may cost more
than anticipated, in which circumstance the Company may curtail, or
extend timeframes for completing the expansion plans. This could
have a material adverse effect on our financial results and
operations.
Certain conditions or events could disrupt the Company’s
supply chains, disrupt operations, and increase operating
expenses.
Conditions or events including, but not limited to, the following
could disrupt the Company’s supply chains and in particular its
ability to effectively manage its supply chains (internal and
external), deliver its products, interrupt operations at its
facilities, increase operating expenses, resulting in loss of
sales, delayed performance of contractual obligations or require
additional expenditures to be incurred: (i) extraordinary weather
conditions or natural disasters such as hurricanes, tornadoes,
floods, fires, extreme heat, earthquakes, etc.; (ii) a local,
regional, national or international outbreak of a contagious
disease, including the COVID-19 coronavirus, Middle East
Respiratory Syndrome, Severe Acute Respiratory Syndrome, H1N1
influenza virus, avian flu, or any other similar illness could
result in a general or acute decline in economic activity; (iii)
political instability, social and labor unrest, war or terrorism,
including the recent conflict between Russia and Ukraine; (iv)
interruptions in the availability of basic commercial and social
services and infrastructure including power and water shortages,
and shipping and freight forwarding services including via air,
sea, rail and road; (v) delays and unavailability of supply chain
partners for certain critical inputs, including overseas suppliers;
(vi) product recalls for certain product inputs or cannabis
products themselves, either domestically or abroad; and (vii) port
closures due to changes in economic, governance, or social
activity, policy, or stability, including, without limitation, a
labor shortage or strike.
The Company’s ability to effectively manage such risks to its
internal and external supply chain, including, without limitation,
the ability to manage, predict, and forecast costs and resources,
is material to Company’s ability to compete and grow. No assurances
can be given that the Company will be successful in this respect,
and such manifold supply chain failures and inefficiencies,
including the Company’s inability to manage them, may result in a
number of negative outcomes including, without limitation, an
unexpected increase in inventory that grows obsolete or otherwise
unusable, as well as higher costs of production and distribution
across the Company’s various business verticals including, without
limitation, its business of wholesaling and retailing certain
cannabis products and goods. This could have a material adverse
effect on the Company’s financial results and operations.
Environmental Risks
The Company may be subject to significant environmental
regulations and risks.
The Company’s operations are subject to environmental regulation in
the various jurisdictions in which it operates. These regulations
mandate, among other things, the maintenance of air and water
quality standards and land reclamation. They also set forth
limitations on the generation, transportation, storage and disposal
of solid and hazardous waste. Environmental legislation is evolving
in a manner which will require stricter standards and enforcement,
increased fines and penalties for non-compliance, more stringent
environmental assessments of proposed projects and a heightened
degree of responsibility for companies and their officers,
directors (or the equivalent thereof) and employees. There is no
assurance that future changes in environmental regulation, if any,
will not adversely affect the Company’s operations.
Government
approvals and permits are currently, and may in the future, be
required in connection with the Company’s operations. To the extent
such approvals are required and not obtained, the Company may be
curtailed or prohibited from its production of cannabis or
cannabis products or from proceeding with the development of its
operations as currently contemplated.
Failure to comply with applicable laws, regulations and permitting
requirements may result in enforcement actions thereunder,
including orders issued by regulatory or judicial authorities
causing operations to cease or be curtailed, and may include
corrective measures requiring capital expenditures, installation of
additional equipment, or remedial actions. The Company may be
required to compensate those suffering loss or damage by reason of
its operations and may have civil or criminal fines or penalties
imposed for violations of applicable laws or regulations.
Amendments to current laws, regulations and permits governing the
production of medical marijuana, or more stringent implementation
thereof, could have a material adverse impact on the Company and
cause increases in expenses, capital expenditures or production
costs or reduction in levels of production or require abandonment
or delays in development.
The Company may be subject to unknown environmental
risks.
There can be no assurance that the Company will not encounter
hazardous conditions at the facilities where it operates its
businesses, such as asbestos, lead or leaks of hazardous substances
from underground storage tanks, in excess of expectations that may
delay the development of its businesses. Upon encountering a
hazardous condition, work at the facilities of the Company may be
suspended. The presence of other hazardous conditions may require
significant expenditure of the Company’s resources to correct the
condition. Such conditions could have a material impact on the
investment returns of the Company.
Tax Risks
U.S. and Canadian tax residence of the Company.
The Company is treated as a U.S. corporation for U.S. federal
income tax purposes under section 7874 of the Code. and therefore
subject to U.S. federal income tax on its worldwide income. For
Canadian tax purposes, however, the Company is treated as a
Canadian resident company (as defined in the Income Tax Act
(Canada) (“Tax Act”)) for Canadian federal income tax purposes.
Consequently, the Company is subject to income tax both in Canada
and the U.S.
The deduction of certain expenses of the Company may be
restricted.
Section 280E of the Code generally prohibits businesses from
deducting or claiming tax credits with respect to expenses paid or
incurred in carrying on any trade or business if such trade or
business (or the activities which comprise such trade or business)
consists of trafficking in controlled substances (within the
meaning of Schedule I and II of the Substances Act) which is
prohibited by U.S. federal law or the law of any state in which
such trade or business is conducted. Section 280E of the Code
currently applies to businesses operating in the cannabis industry,
irrespective of whether such businesses are licensed and operating
in accordance with applicable state laws. The application of
Section 280E of the Code generally causes such businesses to pay
much higher effective U.S. federal income tax rates than similar
businesses in other industries due to the loss of certain
deductions and credits. The impact of Section 280E of the Code on
the effective tax rate of a cannabis business generally depends on
how large the ratio of non-deductible expenses is to the business’s
total revenues. The Company is currently subject to Section 280E of
the Code and consequently, Section 280E of the Code may adversely
affect the Company’s profitability and, in fact, may cause the
Company to operate at a loss. While recent legislative proposals,
if enacted into law, could eliminate or diminish the application of
Section 280E of the Code to cannabis businesses, the enactment of
any such law is uncertain and until any changes in federal law, it
is anticipated that the Company will continue to be subject to
Section 280E of the Code.
Dividends paid by the Company may be subject to withholding
tax.
It is unlikely that the Company will pay any dividends on the
Equity Shares in the foreseeable future. However, dividends
received by holders who are residents of Canada for purposes of the
Tax Act will be subject to U.S. withholding tax. Any such dividends
may not qualify for a reduced rate of withholding tax under the
Canada-U.S. Tax Convention (as defined below) as amended. In
addition, a foreign tax credit or a deduction in respect of foreign
taxes may not be available.
Dividends received by U.S. Holders (as defined below) will not be
subject to U.S. withholding tax but will be subject to Canadian
withholding tax. Dividends paid by the Company will be
characterized as U.S. source income for purposes of the foreign tax
credit rules under the Code. Accordingly, U.S. shareholders
generally will not be able to claim a credit for any Canadian tax
withheld unless, depending on the circumstances, they have an
excess foreign tax credit limitation due to other foreign source
income that is subject to a low or zero rate of foreign tax.
Dividends received by shareholders that are neither Canadian nor
U.S. shareholders will be subject to U.S. withholding tax and will
also be subject to Canadian withholding tax. These dividends may
not qualify for a reduced rate of U.S. withholding tax under any
income tax treaty otherwise applicable to a shareholder of the
Company, subject to examination of the relevant treaty. These
dividends may however qualify for a reduced rate of Canadian
withholding tax under any income tax treaty otherwise applicable to
a shareholder of the Company, subject to examination of the
relevant treaty.
As a cannabis business, the Company is generally subject to
unfavorable tax treatment under the Internal Revenue
Code.
Tax risk is the risk of changes in the tax environment that would
have a material adverse effect on the Company’s business, results
of operations, and financial condition. Currently, state licensed
marijuana businesses are assessed a comparatively high effective
federal tax rate due to Section 280E of the Code, which prohibits
businesses from deducting certain expenses associated with
trafficking controlled substances (within the meaning of Schedule I
and II of the Substances Act). The IRS has invoked Section 280E of
the Code in tax audits against various cannabis businesses in the
U.S. that are permitted under applicable state laws. Although the
IRS issued a clarification allowing the deduction of certain
expenses, the scope of such items is interpreted very narrowly, and
the bulk of operating costs and general administrative costs are
not permitted to be deducted. While there are currently several
pending cases before various administrative and federal courts
challenging these restrictions, there is no guarantee that these
courts will issue an interpretation of Section 280E of the Code
favorable to cannabis businesses. Given these facts, the impact of
any such challenge cannot be reliably estimated; however, it may be
significant to the financial condition and/or the overall
operations of the Company.
If the Company’s tax positions were to be challenged by federal,
state, local or foreign tax jurisdictions, the Company may not be
wholly successful in defending its tax filing positions. The
Company’s records reserves for unrecognized tax benefits based on
its assessment of the probability of successfully sustaining tax
filing positions. The Company’s management exercises significant
judgment when assessing the probability of successfully sustaining
the Company’s tax filing positions, and in determining whether a
contingent tax liability should be recorded and, if so, estimating
the amount. If the Company’s tax filing positions are successfully
challenged, payments could be required that are in excess of
reserved amounts, or the Company may be required to reduce the
carrying amount of its net deferred tax asset, either of which
could be significant to the Company’s financial condition or
results of operations.
High
state and local taxes on cannabis businesses and cannabis products
and associated compliance costs may adversely affect the Company’s
business.
Certain states impose significant excise taxes and other taxes on
products sold at licensed cannabis dispensaries, which taxes in
some states exceed 15%, and throughout the cannabis supply chain.
Local jurisdictions typically impose additional taxes on cannabis
products. Furthermore, we incur significant costs complying with
state and local laws and regulations. It is the case that
significant tax reforms favorable to the cannabis industry have
been discussed or drafted at the local, state, and/or federal
level, but rarely if ever are such favorable reforms passed into
law or otherwise adopted and put into effect. Collectively,
federal, state and local taxes do and likely will continue to place
a substantial burden on the Company’s revenue which could have a
material adverse effect on the Company’s business. The Company
notes that despite lobbying and general support for lowering such
high taxes on cannabis businesses and cannabis products and/or
introducing reforms that would reduce the tax burdens of cannabis
industry participants, and particularly in a high tax state like
California, such statements should not be relied upon or taken as
likely forecasts of future legislative, administrative, regulatory,
or policy decision by the applicable authorities. This is the case
despite any popular sentiment or industry consensus or even
statements from regulatory or legislative authorities suggesting or
claiming forthcoming changes to the way cannabis businesses and
cannabis products are taxed.
Changes in the Company’s effective tax rates may impact the
Company’s results of operations.
The Company is subject to taxes in the U.S. and other
jurisdictions. Tax rates in these jurisdictions may be subject to
significant change due to economic and/or political conditions. A
number of other factors may also impact our future effective tax
rate including:
| ● |
the jurisdictions in which profits
are determined to be earned and taxed; |
| ● |
the resolution of issues arising
from tax audits with various tax authorities; |
| ● |
changes in valuation of our
deferred tax assets and liabilities; |
● increases in expenses not deductible for tax purposes,
including deductions limited by Section 280E of the Code and
write-offs of acquired intangibles and impairment of goodwill in
connection with acquisitions;
| ● |
changes in availability of tax
credits, tax holidays, and tax deductions; |
| ● |
changes in share-based
compensation; and |
| ● |
changes in tax laws or the
interpretation of such tax laws and changes in generally accepted
accounting principles. |
Although the Company believes its income tax liabilities are
reasonably estimated and accounted for in accordance with
applicable laws and principles, an adverse resolution by one or
more taxing authorities could have a material impact on the results
of the Company’s operations.
Dividends received by U.S. Holders (as defined below) will not be
subject to U.S. withholding tax but will be subject to Canadian
withholding tax. Dividends paid by the Company will be
characterized as U.S. source income for purposes of the foreign tax
credit rules under the Code. Accordingly, U.S. shareholders
generally will not be able to claim a credit for any Canadian tax
withheld unless, depending on the circumstances, they have an
excess foreign tax credit limitation due to other foreign source
income that is subject to a low or zero rate of foreign tax.
Dividends received by shareholders that are neither Canadian nor
U.S. shareholders will be subject to U.S. withholding tax and will
also be subject to Canadian withholding tax. These dividends may
not qualify for a reduced rate of U.S. withholding tax under any
income tax treaty otherwise applicable to a shareholder of the
Company, subject to examination of the relevant treaty. These
dividends may however qualify for a reduced rate of Canadian
withholding tax under any income tax treaty otherwise applicable to
a shareholder of the Company, subject to examination of the
relevant treaty.
The Company may be subject to net operating loss
limitations.
Section 382 of the Code contains rules that limit for U.S. federal
income tax purposes the ability of a corporation that undergoes an
“ownership change” to utilize its net operating losses (and certain
other tax attributes) existing as of the date of such ownership
change. Under these rules, a corporation is treated as having had
an “ownership change” if there is more than a 50% increase in stock
ownership by one or more “5 percent shareholders,” within the
meaning of Section 382 of the Code, during a rolling three-year
period. The Business Combination resulted in an ownership change of
the Company (or its predecessor) for purposes of Section 382 of the
Code. However, the Company currently does not have any material net
operating loss carry forwards or other tax attribute carry
forwards, that would be subject to limitation under Section 382 of
the Code.
Risk of U.S. tax classification of the Company as a U.S. Real
Property Holding Company.
The Company is treated as a U.S. domestic corporation for U.S.
federal income tax purposes under section 7874(b) of the Code. As a
result, non-U.S. shareholders may be subject to U.S. federal income
tax upon a disposition of their Equity Shares depending on whether
the Company is classified as a United States real property holding
corporation (a “USRPHC”) under the Code. It is not expected that
the Company will be a USRPHC, but we do not intend to seek a ruling
request or other written guidance of its status as a non-USRPHC
from the IRS. If the Company were to be considered a USRPHC,
Non-U.S. shareholders may be subject to U.S. federal income tax on
any gain associated with the disposition of their Equity
Shares.
Conflicts
Certain of the directors and executive officers of the Company are
officers and directors of, or are associated with, other public and
private companies. Such associations may give rise to conflicts of
interest with the Company from time to time. The BCBCA requires,
among other things, that the directors and executive officers of
the Company act honestly and in good faith with a view to the best
interest of the Company, to disclose any personal interest which
they may have in any material contract or transaction which is
proposed to be entered into with the Company and, in the case of
directors, to abstain from voting as a director for the approval of
any such contract or transaction. To the extent that conflicts of
interest arise, such conflicts are required to be resolved in
accordance with the provisions of the BCBCA.
Item 4. Information on the
Company.
A. History and Development of the Company.
Name and Incorporation
We were formerly known as Mercer Park, were incorporated under
the Business Corporations Act (British Columbia) on
April 16, 2019. We are a vertically integrated cannabis
company that operates in the state of California. We, through our
subsidiaries cultivate, manufacture, and distribute cannabis bulk
flower and trim to wholesalers and consumer packaged goods to
third-party retail stores in the state of California. We also own
and operate retail cannabis stores in the state of California. Our
subordinate voting shares, restricted voting shares and limited
voting shares (collectively, the “Equity Shares”), and common share
purchase warrants are listed on the Neo Exchange Inc. (the “Neo
Exchange”), trading under the symbols “GLAS.A.U” and “GLAS.WT.U”,
respectively. The Equity Shares and common share purchase warrants
also trade on the OTCQX in the United States under the symbols
GLASF and GHBWF, respectively. Our head office and principal
address is 3645 Long Beach Boulevard, Long Beach, California 90807.
Our registered office in Canada is 2200 HSBC Building 885 West
Georgia Street, Vancouver, British Columbia, Canada V6C 3E8 and its
telephone number is (604) 691-6100. Kyle Kazan is our agent for
service in the United States and his address is 3645 Long Beach
Boulevard, Long Beach, California 90807.
Business Combination Transaction
On January 31, 2020, pursuant to the Business Combination
Agreement, and various securities exchange agreements), a roll-up
transaction (“Roll-Up”) was consummated whereby the assets and
liabilities of a combined group of investment fund entities were
merged with and into GH Group, Inc., formerly known as
California Cannabis Enterprises, Inc. (“GH Group”), whereby GH
Group survived the merger and now owns and controls the assets from
such merged out entities.
On June 29, 2021, Mercer Park, listed on the Neo Exchange in
Canada, consummated the Business Combination pursuant to the
Business Combination Agreement, pursuant to which Mercer Park
indirectly acquired 100% of the common equity interests of GH
Group, which included all outstanding Class A and Class B
common shares and certain Series A preferred shares (the
“Preferred Shares”) of GH Group. In addition, Mercer Park assumed
all outstanding common share purchase warrants and Preferred Shares
purchase warrants and assumed or exchanged or caused to be
exchanged all qualified incentive stock options of GH Group. The
Business Combination was effectuated by a reverse merger of an
indirect subsidiary of Mercer Park with GH Group, with GH Group as
the surviving entity, and GH Group becoming our majority-owned
indirect subsidiary. As a result of the Business Combination, GH
Group’s shareholders became the controlling shareholders of Mercer
Park, which changed its name to Glass House Brands Inc. concurrent
with the closing of the Business Combination.
Upon closing of the Business Combination, Mercer Park indirectly
acquired all of the issued and outstanding securities of GH Group
with the exception of some of GH Group’s Preferred Shares, in
exchange for an aggregate of our 50,151,101 Equity Shares
(which total includes, on an as-exchanged basis, Equity Shares
issuable upon exchange of outstanding exchangeable shares (the
“Exchangeable Shares”) of our subsidiary, MPB Acquisition Corp.
(“MPB”)). We also issued 4,754,979 Multiple Voting Shares
to certain founders of GH Group. In
addition, 28,489,500 of the common share purchase
warrants previously issued and outstanding in the capital of Mercer
Park were assumed and remain outstanding. Of
the 50,151,101 Equity Shares (inclusive of Exchangeable
Shares on an as-exchanged basis) noted
above, 731,369 Exchangeable Shares are held in escrow
pending any final working capital adjustments.
Additionally, 1,008,975 Equity Shares issued to the
previous sponsor of Mercer Park are subject to a contractual
lock-up with us. These shares are to be released from the lock-up
restrictions based upon the amount of cash raised by us from
certain debt and equity financings through June 2023.
Acquisitions
iCANN Acquisition
On January 1, 2021, GH Group completed an acquisition of 100%
of the equity interests of iCANN, a licensed retail cannabis
company located in Berkeley, California. Pursuant to the terms of
the merger agreement between a subsidiary of GH Group and iCANN, GH
Group (i) elected to convert earlier issued convertible notes
with principal amount of $2,000,000 and accrued interest of $45,321
into equity interests of iCANN; (ii) paid $400,000 in cash to
four holders of iCANN equity interests: (iii) issued 7,511,725
Series A common shares to holders of iCANN equity interests;
and (iv) issued an additional 500,000 Series A common
shares to brokers and consultants, or the cash equivalent for
certain non-accredited investors. All such Series A common
shares were exchanged on closing of the Business Combination for
Exchangeable Shares based on a value of $10.00 per Exchangeable
Share and pursuant to a value formula as set out in the Business
Combination Agreement.
Element 7 Acquisition and Litigation
Effective February 23, 2021, GH Group entered into a Merger
and Exchange Agreement (the “E7 Merger Agreement”) with Element 7
CA, LLC (“E7”) whereby GH Group had the right, subject to
satisfactory completion of due diligence and other conditions, to
obtain all of the membership or equity interests held by E7 in
seventeen holding companies that hold the rights to in-process
state and local cannabis retail licenses or license applications,
some of which are partially owned. In addition, GH Group entered
into a License Development and Consulting Agreement (the “E7
License Agreement”, and together with the E7 Merger Agreement, the
“E7 Agreements”) with E7 to provide certain retail consulting
services to develop and obtain up to thirty-four cannabis retail
licenses in exchange for the payment of certain fees set forth in
the E7 License Agreement. In November 2021, GH Group terminated the
E7 Agreements based on a breach of contractual terms, and as of
December 31, 2021, GH Group had converted certain pre-closing
financing payment and consulting fees into notes receivable in the
amount of $2,274,167. As of September 30, 2022 and December 31,
2021, the notes receivable was fully reserved by the Company. As of
December 31, 2021, the Company had received membership or equity
interests in one entity out of seventeen entities that were
contractually committed to be transferred under the E7 Merger
Agreement.
On November 4, 2021, GH Group filed a lawsuit in the Superior Court
for the County of Los Angeles, Central District (Case No.
21STCV40401) against E7 and its principals and owners Josh Black
and Robert “Bobby” DiVito (together, “Element 7”) for a variety of
claims, including fraud and breach of contract and demanded
performance under the E7 Agreements.
The court proceeding was subsequently withdrawn by the Company
without prejudice, and on March 13, 2022, GH Group entered into an
agreement with American Patriot Brands, Inc. (“APB”) to jointly
file suit against Element 7 to enforce the transfer of
contractually committed licenses (the “Joint Litigation
Agreement”). GH Group and APB jointly refiled a complaint against
Element 7 in the County of Los Angeles, Central District (Case No.
22STCV09323) (the “Element 7 Proceeding”). If either GH Group or
APB is successful in the Element 7 Proceeding, we expect to have a
path to achieve transfer of the existing licenses at issue.
Under the terms of the Joint Litigation Agreement, GH Group will
pay all legal fees for GH Group and APB’s joint litigation against
Element 7. GH Group will have the option to purchase any license or
licensed entity interests recovered by APB from Element 7 that were
included in the E7 Merger Agreement, that have either a state or
local permit and a valid lease, or a have a local permit that is
without a real property site but is in a competitive license
jurisdiction, in each case at a valuation of $750,000 per license
or licensed entity, paid in Equity Shares at the 10-day volume
weighted average price calculated as of the date of such purchase.
In addition, under the Joint Litigation Agreement, GH Group also
has the right of first refusal to purchase any other licenses or
licensed entity outside of the foregoing groups, and the right to
terminate the Joint Litigation Agreement at any time.
Financing Transactions
GH Group Financing
Between January 30, 2020 and January 5, 2021, GH Group
issued $22,599,844 in convertible debt (the “Convertible Debt”)
bearing 8% interest per annum (4% of which was paid in cash and 4%
of which was accrued and was to be automatically converted upon a
$10,000,000 equity raise at the greater of a 20% discount or a
$250,000,000 valuation cap). The Convertible Debt converted upon
the completion of the GH Group Financing described below.
In June 2021, GH Group completed an equity financing in the
United States for gross proceeds of $12,530,963.39 (the “GH Group
Financing”). Investors in the GH Group Financing received, for each
$1.27 invested or for each $0.8246932 of outstanding convertible
promissory notes converted, one (1) preferred share of GH
Group (the “GH Group Preferred Shares”) and one (1) warrant
(the “GH Group Warrants”) to purchase a Class A common share
of GH Group at an exercise price equal to the fair market value of
one Class A common share of GH Group as of the date of
issuance of such GH Group Warrant. The completion of the GH Group
Financing triggered the conversion of the outstanding amount of the
convertible debt. Upon closing of the Business Combination, some of
the issued outstanding GH Group Preferred Shares were exchanged for
Exchangeable Shares based on a value of $10.00 per Exchangeable
Share and pursuant to a value formula as set out in the Business
Combination Agreement, and each GH Group Warrant was exchanged for
a Warrant to purchase a number of Equity Shares equal to
(i) the number of shares of GH Group that were issuable upon
exercise of such GH Group Warrant immediately prior to the closing
of the Business Combination divided by the applicable exchange
ratio.
Mercer Park Private Placement
On June 29, 2021, in conjunction with the completion of the
Business Combination, Mercer Park completed a private placement of
$85 million of non-voting shares of Mercer Park Brand
Pipe Inc., a wholly owned subsidiary of Mercer Park (the
“Private Placement Shares”) at a price of $10.00 per Private
Placement Share (the “Mercer Park Private Placement”). Canaccord
Genuity Corp. (“Canaccord”), the underwriter in respect of Mercer
Park’s initial public offering and the sole agent in respect of the
Mercer Park Private Placement, subscribed for $4.9 million of
Private Placement Shares under the Mercer Park Private Placement,
which subscription was funded by Canaccord directing to Mercer Park
an equal amount from the non-discretionary portion of deferred
underwriting fees paid by Mercer Park to Canaccord in connection
with the closing of the Business Combination. Under the terms of
the Mercer Park Private Placement, Canaccord was entitled to a 4.0%
commission on the sale of the Private Placement Shares, other than
in connection with the sale of Private Placement Shares to certain
president’s list subscribers. In addition, a subscriber under the
Mercer Park Private Placement that subscribed for $20.1 million of
Private Placement Shares was transferred 223,333 free-trading
Equity Shares by Mercer for no additional consideration in order
make the effective price of such subscription $9.00 per Private
Placement Share. Pursuant to the Business Combination, the Private
Placement Shares were exchanged for Equity Shares on a one-for-one
basis. The funds from the Mercer Park Private Placement were used
to fund the Company’s growth strategy, for working capital and for
general corporate purposes.
Additional Information
Additional
information relating to us is available on SEDAR
at www.sedar.com and on our website at
www.glasshousebrands.com. The Securities and Exchange
Commission (the “SEC”) maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and
information statements, and other information regarding issuers
that file electronically with the SEC.
B. Business Overview.
We were incorporated in 2018, combining cultivation – an
approximately 150,000 sq. ft. Carpinteria, California greenhouse
facility (“Casitas”) – with manufacturing – an approximately 22,000
sq. ft. extraction and manufacturing facility in Lompoc, California
(the “CMS Asset”) – and retail – Bud and Bloom, a California
corporation with a cannabis dispensary located in Santa Ana,
California and The Pottery, a California corporation with a
cannabis dispensary located in Los Angeles, California, which also
at such time controlled an approximately 10,000 sq. ft. indoor
cultivation operation on site.
In 2019, we expanded our retail presence to include one of the
three (3) dispensary permits in Santa Barbara, California,
under our “Farmacy” brand and established an omnichannel retail
approach with web-based ordering capabilities and delivery
optionality. At the same time, we strengthened our consumer
packaged goods (“CPG”) brand-building and brand acquisition
capabilities with an investment in brand-building around its “Glass
House Farms” brand and the launch of the Forbidden Flowers brand in
partnership with an actress. On January 1, 2021, we completed
the acquisition of a fourth (4th) dispensary, iCANN, LCC
d/b/a Farmacy Berkeley (“iCANN” or “Farmacy Berkeley”).
In 2020, we expanded our cultivation footprint by over 300% with an
approximately 355,000 sq. ft. cultivation facility in Padaro,
California. Our manufacturing capacity was also scaled alongside
the cultivation expansion. During this time, sales of Glass House
Farms products grew at market-leading rates, positioned as a “best
in category,” attractively priced everyday brand, and a premium
line of flower, Grower’s Choice by Glass House Farms, was launched.
In November 2020, Glass House Farms became the second-largest
cannabis flower brand in California according to data from BDS
Analytics5. In December 2020, the brand held onto
its number two spot.
We also added additional brands and form factors to our offerings
to complement the strong positioning in the flower segment enjoyed
by Glass House Farms. In edibles and topicals, we benefit from a
partnership with a well-known cannabis activist and entrepreneur
under its cannabis wellness brand “Mama Sue”.
Through these activities, we established the foundation for our
ultimate strategy to create a leading California cannabis brand
company through a fully vertically integrated commercial cannabis
company engaged in all licensed verticals: (i) cultivation;
(ii) manufacturing; (iii) distribution; and
(iv) retail. We strive to provide customers with consistently
high-quality products across a range of trusted and recognizable
brands.
5 BDS Analytics (2020). Sales in December 2020.
Available at: https://www.BDSA.com.
Cultivation
Our cultivation strategy focuses on marrying nature and technology
to seek to produce premier-quality cannabis indoors in greenhouses
specifically designed to optimize quality and yields while
minimizing inputs and environmental impact. We use the sun, the
climate and advanced technology to conduct precision
agriculture.
As of Q1 2021, our greenhouse cultivation is conducted in two
facilities in Santa Barbara County, California, Casitas and Padaro,
totalling over 500,000 sq. ft. of indoor greenhouse area.
Each of the Casitas and Padaro facilities were cut flower
greenhouses prior to our taking over the properties and were
transitioned to cannabis use by us. The Casitas facility includes
more than 150,000 sq. ft. of greenhouse footprint with on site
propagation, nursery, flowering canopy, drying and on site
processing. It originally started under the California Proposition
215 regulatory structure and was used as the model facility for the
creation of the Santa Barbara County cannabis ordinance and tax
plan. It underwent a full retrofit by us, including the addition of
new growing systems, fertigation, photoperiod lights, automated
light deprivation curtains, and upgraded climate control
technology. We followed up the Casitas project with its Padaro
facility acquisition, which tripled our cultivation footprint while
increasing canopy planting efficiency by over 350% through the use
of an innovative rolling tray system. We retrofitted the Padaro
facility with significantly improved efficiency, lower cost per sq.
ft. costs and improved operating processes. The Padaro property was
the very first fully licensed and entitled cannabis facility in the
Santa Barbara Coastal area. GH Group’s Santa Barbara- based
greenhouse operations were substantially expanded in 2020. Facility
upgrades to the Padaro location were fully completed in Q3 2020,
allowing 100% of GH Group’s 306,595 sq. ft. of licensed greenhouse
canopy to be operational at the start of Q4 2020, up from 205,287
square feet in July 2020 (a 49% expansion). In 2020, we
produced 410,000 wet pounds of cannabis biomass from both of its
Santa Barbara based greenhouse operations, up 226% from 126,000 wet
pounds in 2019, and we expect to produce over 750,000 wet pounds of
cannabis biomass in 2021.
The Southern California climate, with over 280 days of sun per
year, minimizes the need for supplemental electric lighting to
drive yields, while moderate ambient temperatures and humidity
levels drastically reduce climate control expenses and narrow pest
pressures. Our flower is predominantly sun-grown in “light
deprivation” greenhouses, with supplemental lighting used only for
photoperiod control of flowering schedules, so as to allow for the
maximum number of harvests per year on a “perpetual harvest”
model.
An additional 10,000 sq. ft. of indoor non-greenhouse cultivation
is conducted in the Los Angeles location through The Pottery.
In order to maintain high quality cultivation outputs, our
cultivation team employs IPM, an ecosystem-based strategy to
control pests and associated crop damage through techniques such as
biological controls including the use of beneficial insects and
habitat control and manipulation. The use of IPM requires constant
and careful monitoring of plant health by our team of IPM
specialists who continuously monitor plant growth, pest pressure,
habitat and other relevant factors and take active and pre-emptive
steps to prevent issues from arising.
Our cultivation expertise reflects the culmination of years of
operating experience and specialized input from cannabis,
agriculture, technology, business, manufacturing and scientific
experts, allowing us to grow high-quality cannabis at a low cost.
Our cultivation management team has a combined 100+ years of
greenhouse experience. We won the 2020 Cannabis & Tech
Today Sustainable Leadership Award for stewardship in connection
with its stewardship of local community initiatives.
Cultivation Performance
As of December 31, 2020, our total greenhouse licensed
cultivation canopy was approximately 390,000 sq. ft., with
production capacity of approximately 800,000 wet pounds and 100,000
to 150,000 dry pounds per year. Our ability to grow productively at
scale has resulted in lower unit production costs. During 2020, we
scaled up our operating footprint by over three (3) times its
prior footprint, which increased production of dry pounds by 150%
and drove down production costs per pound, from $185/lb in 2019 to
$127/lb in 2020.
Cultivation Licenses
Padaro Licenses
The applicable licenses for cultivation/processing issued by the
California Department of Food and Agriculture (“CDFA”) are held by
K&G Flowers, LLC and G&K Produce, LLC (each of which is a
wholly owned subsidiary of GH Group), respectively, as described in
the table below.
|
|
|
|
Expiration/Renewal |
|
|
License
Holder |
Address |
Permit/License
No. |
Date
(MM/DD/YY) |
License
Type |
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001702 |
11/22/21 |
Adult-Use-Nursery |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001703 |
11/22/21 |
Adult-Use-Processor |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001652 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001633 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001624 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001622 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001599 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001589 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001582 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001700 |
01/02/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001696 |
01/02/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001695 |
01/02/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001683 |
01/02/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001678 |
01/02/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001664 |
01/02/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
G&K
Produce, LLC |
3480
Via Real |
CCL18-0001655 |
01/02/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001673 |
11/22/21 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001670 |
11/22/21 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001668 |
11/22/21 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001667 |
11/22/21 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001665 |
11/22/21 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001649 |
11/22/21 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001647 |
11/22/21 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001660 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001657 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001654 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001635 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001630 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001629 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
|
K&G
Flowers, LLC |
3480
Via Real |
CCL18-0001628 |
02/20/22 |
Adult-Use-Small
Mixed-Light Tier 1 |
|
|
Carpinteria,
CA |
|
|
|
|
|
93013 |
|
|
|
Casitas Licenses
The applicable licenses for cultivation/processing issued by the
CDFA are held by Mission Health Associates, Inc. (a wholly
owned subsidiary of GH Group), as described in the table below. The
applicable license for distribution/transportation issued by the
California Bureau of Cannabis Control (“BCC”) is held by Mission
Health Associates, Inc., as described in the table below.
|
|
|
|
Expiration/Renewal |
|
|
License
Holder |
Address |
Permit/License
No. |
Date
(MM/DD/YY) |
License
Type |
|
Mission
Health |
5601
Casitas Pass |
CCL18-0001009 |
06/07/21 |
Medicinal-Nursery |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
|
Mission
Health |
5601
Casitas Pass |
C13-0000080-LIC
(BCC) |
07/08/21 |
Medicinal
- Distributor/Transport Only |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
|
Mission
Health |
5601
Casitas Pass |
CCL18-0003034 |
03/25/22 |
Medicinal-Processor |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
|
Mission
Health |
5601
Casitas Pass |
CCL18-0000498 |
03/15/22 |
Medicinal-Small
Mixed-Light Tier 1 |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
|
Mission
Health |
5601
Casitas Pass |
CCL18-0000503 |
03/15/22 |
Medicinal-Small
Mixed-Light Tier 1 |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
|
Mission
Health |
5601
Casitas Pass |
CCL18-0000512 |
03/11/22 |
Medicinal-Small
Mixed-Light Tier 1 |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
|
Mission
Health |
5601
Casitas Pass |
CCL18-0000510 |
03/11/22 |
Medicinal-Small
Mixed-Light Tier 1 |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
|
Mission
Health |
5601
Casitas Pass |
CCL18-0000509 |
03/11/22 |
Medicinal-Small
Mixed-Light Tier 1 |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
|
Mission
Health |
5601
Casitas Pass |
CCL18-0000506 |
03/11/22 |
Medicinal-Small
Mixed-Light Tier 1 |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
|
Mission
Health |
5601
Casitas Pass |
CCL18-0000505 |
03/11/22 |
Medicinal-Small
Mixed-Light Tier 1 |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
|
Mission
Health |
5601
Casitas Pass |
CCL18-0000502 |
03/11/22 |
Medicinal-Small
Mixed-Light Tier 1 |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
|
Mission
Health |
5601
Casitas Pass |
CCL18-0000500 |
03/11/22 |
Medicinal-Small
Mixed-Light Tier 1 |
|
Associates, Inc. |
Road
Carpinteria, |
|
|
|
|
|
CA
93013 |
|
|
|
The Pottery Licenses
The applicable license for cultivation/processing issued by the
CDFA is held by The Pottery, as described in the table below. The
applicable licenses for distribution/transportation issued by BCC
are held by The Pottery Inc., as described in the table below. The
Pottery, Inc. is co-owned by an unrelated third party, TLMD
Holdings, LLC.
|
|
|
|
|
Expiration/Renewal |
|
|
License
Holder |
Address |
Permit/License
No. |
Date
(MM/DD/YY) |
License
Type |
|
The
Pottery Inc. |
5042 |
Venice
Blvd. |
CCL18-0000935 |
04/01/21 |
Adult-Use-Specialty Indoor |
|
|
Los
Angeles, CA |
|
|
|
|
|
90019 |
|
|
|
|
The
Pottery Inc. |
5042 |
Venice
Blvd. |
C11-0000726-LIC (BCC) |
07/08/21 |
Adult-Use &
Medicinal – Distributor License |
|
|
Los
Angeles, CA |
|
|
|
|
|
90019 |
|
|
|
Manufacturing and Distribution
Our Lompoc CMS Asset is a roughly 22,000 sq. ft. property
purpose-built to convert cannabis biomass into CPG, located less
than a four-hour drive from both the San Francisco Bay Area and Los
Angeles, and about one hour’s drive from GH Group’s cultivation
facilities. The CMS Asset holds a Type 7 cannabis manufacturing
license which enables it to conduct all manufacturing, extraction,
infusion, conversion, and packaging processes legal in the State of
California, ranging from physical, “solventless” extraction
processes to volatile solvent extraction and remediation methods.
This allows the facility the optionality to produce a wide variety
of cannabis products.
The CMS Asset also holds a Type 11 cannabis distribution license,
which activates the facility as a distribution hub for the GH
Group’s California operations. Given the logistical issues that the
state framework can engender as a result of testing, quarantine and
distribution regulations, this license can simplify some of the
supply chain challenges faced by an operator of our scale relying
on third-party distribution services.
The City of Lompoc levies 0% city tax on cannabis manufacturing and
distribution activities, substantially better than the 2-10% tax
charged by most other jurisdictions where such activities are
permitted at all.
On February 1, 2020, we acquired a licensed concentrates and
extractions business in financial distress that was subsequently
disposed of in its entirety on March 3, 2021.
CMS Asset
The CMS Asset facility was renovated in collaboration with
extraction and manufacturing professionals with substantial
combined experience in the category of extraction and manufacturing
and in creating such facilities. Operational efficiency at scale
and process optionality were core to the design philosophy
implemented in anticipation of an evolving landscape for both
cannabis product trends and extraction and manufacturing
technologies. To this end, extensive HVAC systems, thorough access
management controls, and intensive safety protocols were
implemented to enable safe and compliant volatile-solvent
extraction capability at large scale, and even the layout of the
facility itself creates workflow efficiency while also enhancing
safety. Products in process move through the facility in an
optimized flow. Walls are treated with antimicrobial and antifungal
coatings to seek to ensure product purity and safety. Deep freezer
capacity has been maximized to enable large-scale “live” extraction
processes, which use cannabis plants flash-frozen upon harvest as
their raw material. The power supply has been upgraded to support
production far in excess of foreseeable output, and office space
has been updated to enable better facility management.
Options for products that can be produced at the facility cover a
broad range of cannabis manufactured goods, from cannabis-infused
foods and beverages to “dabbable” concentrates.
Manufacturing and Distribution Licenses
The applicable license for manufacture issued by the California
Department of Public Health, Manufactured Cannabis Safety Branch is
held by CA Manufacturing Solutions LLC (a wholly owned subsidiary
of ours), as described in the table below. The applicable license
for distribution issued by BCC is held by CA Manufacturing
Solutions LLC, as described in the table below.
|
|
|
|
Expiration/Renewal |
|
|
License
Holder |
Address |
Permit/License
No. |
Date
(MM/DD/YY) |
License
Type |
|
CA
Manufacturing |
1637
W. Central |
CDPH-10002412 |
04/12/21 |
Annual
Manufacturing |
|
Solutions
LLC |
Ave.
Lompoc, CA |
|
|
License
– Adult and |
|
|
93436 |
|
|
Medicinal
Cannabis |
|
|
|
|
|
Products |
|
|
|
|
|
Type
7: Volatile |
|
|
|
|
|
Solvent
Extraction |
|
CA
Manufacturing |
1637
W. Central |
C11-0000031-LIC (BCC) |
04/30/21 |
Adult-Use & |
|
Solutions
LLC |
Ave.
Lompoc, CA |
|
|
Medicinal
– Distributor |
|
|
93436 |
|
|
License |
Wholesale Sales
In addition to sending cultivated biomass to the CMS Asset for
manufacture, we also sell our biomass on various wholesale
markets.
|
WHOLESALE - BULK BIOMASS |
|
Q1 |
|
|
Q2 |
|
|
Q3 |
|
|
Q4 |
|
|
TOTAL |
|
|
Number of Bulk Customers |
|
|
14 |
|
|
|
21 |
|
|
|
18 |
|
|
|
19 |
|
|
|
36 |
|
|
Total Revenue |
|
$ |
2.4 |
|
|
$ |
6.5 |
|
|
$ |
6.6 |
|
|
$ |
8.4 |
|
|
$ |
23.9 |
|
|
Average Revenue per Customer |
|
$ |
0.1 |
|
|
$ |
0.3 |
|
|
$ |
0.3 |
|
|
$ |
0.4 |
|
|
$ |
0.7 |
|
|
Top 5 customers (% of sales) |
|
|
68.8 |
% |
|
|
80.6 |
% |
|
|
83.2 |
% |
|
|
78.3 |
% |
|
|
69.1 |
% |
|
Top 10 customers (% of sales) |
|
|
92.1 |
% |
|
|
93.0 |
% |
|
|
96.7 |
% |
|
|
94.9 |
% |
|
|
83.5 |
% |
Dollar figures in above table are expressed in millions and each
quarter refers to the applicable quarter of the 2020 financial
year.
Further, we have a wholesale business selling branded consumer
packaged goods to distributors and retailers in the State of
California. In December 2020, the Glass House Farms brand was
the second highest grossing flower brand in California according to
BDS.6
WHOLESALE – OWNED BRANDS
Consumer Packaged Goods |
|
Q1 2020 |
|
|
Q2 2020 |
|
|
Q3 2020 |
|
|
Q4 2020 |
|
|
Total |
|
|
Cumulative Points of Distribution |
|
|
|
|
|
|
64 |
|
|
|
151 |
|
|
|
239 |
|
|
|
273 |
|
|
|
273 |
|
|
Revenue by Brand |
|
|
100.0 |
% |
|
$ |
1.3 |
|
|
$ |
2.2 |
|
|
$ |
3.5 |
|
|
$ |
6.2 |
|
|
$ |
13.2 |
|
|
Glass House Farms |
|
|
71.4 |
% |
|
|
0.4 |
|
|
|
1.4 |
|
|
|
2.5 |
|
|
|
5.2 |
|
|
|
9.5 |
|
|
Other |
|
|
28.6 |
% |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.4 |
|
|
|
1.2 |
|
|
Revenue by Category |
|
|
100.0 |
% |
|
$ |
1.3 |
|
|
$ |
2.2 |
|
|
$ |
3.5 |
|
|
$ |
6.2 |
|
|
$ |
13.2 |
|
|
Flower |
|
|
71.4 |
% |
|
|
0.5 |
|
|
|
1.4 |
|
|
|
2.8 |
|
|
|
5.0 |
|
|
|
9.7 |
|
|
Concentrates |
|
|
19.3 |
% |
|
|
0.7 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
1.8 |
|
|
Pre-rolls |
|
|
9.3 |
% |
|
|
- |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
0.9 |
|
|
Vape |
|
|
19.3 |
% |
|
|
- |
|
|
|
0.4 |
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.7 |
|
|
Other |
|
|
9.3 |
% |
|
|
0.1 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
Dollar figures in above table are expressed in millions.
Combined wholesale revenue for the three-months and twelve-months
ended December 31, 2020 was $14.6 million and $37.1 million,
respectively. Annually, combined wholesale revenue increased 147%
from $15 million for the twelve-months ended December 31,
2019.
Cumulatively, Q4 2020 wholesale revenue grew 45% from $10.1 million
in Q3 2020. Revenue from wholesale sales of biomass increased by
29%, from $6.5 million in Q3 2020 to $8.4 million in Q4 2020.
Revenue from wholesale sales of CPG increased by 72%, from $3.6
million in Q3 2020 to $6.2 million in Q4 2020.
We rely on a single large distributor to provide the bulk of our
wholesale sales, which provided approximately 99% of its wholesale
revenue in 2020 and has provided approximately 84% of its year to
date wholesale sales. We are currently negotiating an exclusive
contract for distribution for an initial one (1)-year term with its
major distributor. Although we are not dependent on this
relationship, a change in the status of the distributor or the
relationship is likely to cause a material impact until we can
develop relationships with alternative distributors to carry its
goods.
Each of the following licensed facilities are responsible for more
than 10% of our gross revenue: Casitas, Padaro, Farmacy SB, and Bud
and Bloom.
6 BDS Analytics (2020). Sales in December 2020.
Available at: https://www.BDSA.com.
Brand, Product and Marketing
The creation of dominant, extensible CPG products and brands is our
strategic mission. While many cannabis businesses prioritized brand
building and customer acquisition before securing a reliable
product flow, we believe that in a consumer-focused CPG space,
consistent delivery of high-quality product at an attractive price
point is a first principle, and a prerequisite for any other
activity.
As production quantity has increased and our products have become
more widely distributed, we have been pleased to receive
recognition for its improved product quality from cannabis-friendly
media outlets such as LA Weekly, to cannabis influencers and
connoisseur cannabis reviewers such as Respect My
Region7.
We do not aim to create a consumer-facing corporate-umbrella brand,
but instead takes a “House of Brands” approach, with a portfolio of
brand assets constructed on consumer data, consumer segmentation,
analysis and insights.
We have taken care to segment its consumer and product types so as
to cover a broad swath of the market, from new cannabis users to
connoisseurs, across a range of use cases, product formats, and
price points. Glass House Farms, our flagship brand, provides
best-in-class, affordable cannabis flower products for everyday
consumption. Its product range includes eighth-ounce flower jars,
quarter-ounce smalls bags, 1g single pre-roll joints, five
half-gram pre-roll multipacks, and Grower’s Choice, its premium
“cream of the crop” line of eighth-ounce flower jars. Forbidden
Flowers, our brand collaboration with an actress, highlights a
sensual cannabis style and cannabis’ capacity to enable
self-knowledge and self-expression. Its lines of eighth-ounce
flower jars and two-packs of colorful half-gram pre-roll joints use
strains complementing the Forbidden Flowers brand positioning,
specifically fruit-forward in flavor and relaxing in effects.
Retail
We have operational dispensaries in Santa Barbara, Santa Ana, Los
Angeles and Berkeley, California. We use clean, minimalistic retail
space with a focus on local sourcing and sustainably grown
cannabis. Our staff has substantial knowledge on the health and
wellness benefits of cannabis, as well as our focus on educating
customers on responsible adult-use, including understanding
appropriate dosing.
We offer a curated selection of high quality cannabis products in a
variety of price tiers, servicing the wide range of the community.
The product selection will specifically promote local and
sustainably cultivated cannabis through sourcing of brands that are
local to the retail facility and a focus on educating customers on
the importance of supporting the local economy by purchasing
locally grown cannabis. Our motto is “Local Farms, Local People,
Local Values”. This ethos is woven into purchasing decisions and
illustrates our prioritization of locally cultivated and
manufactured products.
We intend to curate what it believes to be the best selection of
cannabis products from the following categories: flower, edibles,
topicals, sublinguals and concentrates. Unlike many cannabis
retailers that emphasize high-THC levels in their products, product
curation is a specialty of ours and focuses on educating customers,
seeking to match needs and desires with appropriate products to
provide optimal experiences. This de-emphasis on high-THC helps
customers understand the many benefits of a wide range of
cannabinoids, including CBD, CBN and THCV, which in many cases may
better fulfill the customers’ need states.
7 See Respect My Region (2021). The Farmacy is Committed
to Providing a Service Over Sales Experience for Santa Barbara’s
Cannabis Community. Available at:
https://www.respectmyregion.com/the-farmacy-dispensary-santa-barbara/;
Respect My Region (2021). Papaya Punch Strain Review Featuring
Glass House Farms Grower’s Choice Cannabis in California. Available
at:
https://www.respectmyregion.com/papaya-punch-review-glass-house-farms-growers-choice/;
Respect My Region (2021). The Runtz Strain Review Featuring El
Blunto from Downtown Los Angeles and Glass House Farms from Santa
Barbara. Available at:
https://www.respectmyregion.com/runtz-strain-el-blunto-glass-house-
farms/; Respect My Region (2021). Flo White Strain Review Featuring
the Grower’s Choice Line from Glass House Farms in California.
Available at:
https://www.respectmyregion.com/glass-house-farms-flo-white-review/;
Respect My Region (2021). Do-Si-Do Strain Review Featuring Glass
House Farms in California. Available at:
https://www.respectmyregion.com/glass-house-farms-do-si-dos/;
Respect My Region (2021). The GMO Strain Review Featuring Glass
House Farms in California. Available at:
https://www.respectmyregion.com/gmo-strain-glass- house-farms/;
Respect My Region (2021). The Midnight Thorneberry Strain Review
Featuring Glass House Farms. Available at:
https://www.respectmyregion.com/bella-thorne-midnight-thorneberry-joint/;
Respect My Region (2020). Mac 1 Strain Review Featuring El Blunto
and Glass House Farms in California. Available at:
https://www.respectmyregion.com/mac-1-glass-house-farms-el-blunto/.
Retail Locations
We currently offer online payment processing, as well as in store
pickup and home delivery services for adult-use and medicinal-use
customers at all locations.
Farmacy SB
The Farmacy SB is located at 128 W Mission Street, Santa Barbara,
California. It was first licensed adult-use retail storefront to
open in the City of Santa Barbara. GH Group secured one (1) of
only three (3) storefront permits from the City of Santa
Barbara, after an exhaustive merit-based selection process. Over 60
applicants applied, and the Farmacy SB’s application was one of the
highest scored applications. The Farmacy SB was selected for a
license due to its compatibility with the surrounding neighborhood,
local hiring commitment, employee benefit plans, dedication to
compliance and design.
As an example of our contribution to and partnership with the local
community. We have sponsored a popular “Neighbor Deal” program that
encourages its customers to shop at nearby businesses by offering
discounted product if they show a same day receipt. In this manner,
the Farmacy SB has also enhanced the quality of the surrounding
neighborhood and built positive relationships with neighboring
businesses.
The Farmacy SB was voted by local residents as the Best Cannabis
Dispensary in 2020.8
2000 De La Vina LLC (a wholly owned subsidiary of ours) leases the
property located at 128 W. Mission Street, Santa Barbara,
California 93101 from Edwin Begg, Trustee for the Susan Miratti
Trust, consisting of approximately 1,342 sq. ft. in a single
building. Farmacy SB, Inc. leases the property located at
117-B W. Mission Street, Santa Barbara, California 93101 from
Martin Morales, Trustee of the Morales Family Trust, consisting of
approximately 1,690 sq. ft. of office space. 2000 De La Vina LLC
intends to purchase both properties once the current owners obtain
final approval for any required environmental remediation actions,
if any, from the required regulatory bodies.
Farmacy SB Licenses
The applicable license for retail issued by BCC is held by Farmacy
SB, Inc. (a wholly owned subsidiary of ours), as described in
the table below.
|
License
Holder |
Address |
Permit/License
No. |
Expiration/Renewal
Date (MM/DD/YY) |
License
Type |
|
Farmacy
SB, Inc. |
128
W. Mission Street Santa Barbara, CA 93101 |
C10-0000293-
LIC (BCC) |
06/25/21 |
Adult-Use &
Medicinal – Retailer License |
8Santa Barbara Independent (2020). Best of Santa Barbara
2020 -Cannabis Dispensary. Available at:
https://www.independent.com/2020/10/14/best-of-santa-barbara-2020-living-well/.
Farmacy Berkeley
Farmacy Berkeley is located at 3243 Sacramento St, Berkeley,
California and has been in operation since 2019. The Farmacy
Berkeley strives to bring together cannabis advocates who share a
consistent commitment to sustainably produced cannabis products
delivered in a welcoming, inviting, and open
environment.9
Farmacy Berkeley Licenses
The applicable license for retail issued by BCC is held by Farmacy
Berkeley (a wholly owned subsidiary of ours), as described in the
table below.
|
License
Holder |
Address |
Permit/License
No. |
Expiration/Renewal
Date (MM/DD/YY) |
License
Type |
|
Farmacy
Berkeley |
3243
Sacramento Street Berkeley, CA 94702 |
C10-0000506-
LIC (BCC) |
07/24/21 |
Adult-Use &
Medicinal – Retailer License |
The Pottery
The Pottery is located at 5042 Venice Blvd, Los Angeles,
California, includes both cultivation and a retail dispensary and
has been in operation since 2018. This property is in a high
traffic area and is comprised of a 21,000 sq. ft. lot with a 12,000
sq. ft. building. It is centrally located between Beverly Hills,
Hollywood, Santa Monica and downtown Los Angeles. Approximately
one-third of the facility’s building area is dedicated to The
Pottery’s retail shop, while the remaining functions as an indoor
cannabis cultivation facility.
The Pottery strives to bring together cannabis enthusiasts from
within their local community and create a space that is a
welcoming, energetic, and an inclusive environment. The Pottery
delivers to a number of nearby cities including Santa Monica,
Culver City and West Hollywood. The Pottery also holds a license
for the distribution of cannabis goods which enables it to package
the flower grown onsite.
The Pottery License
The applicable license for retail issued by BCC is held by The
Pottery Inc. (a wholly owned subsidiary of ours), as described in
the table below.
|
License
Holder |
Address |
Permit/License
No. |
Expiration/Renewal
Date (MM/DD/YY) |
License
Type |
|
The
Pottery Inc. |
5042
Venice Blvd, Los Angeles, CA 90019 |
C11-0000389-
LIC (BCC) |
07/08/21 |
Adult-Use &
Medicinal Retailer License |
Bud and Bloom
Bud and Bloom, located at 1327 East St Gertrude PlaceSanta Ana,
California, has been in operation since 2016.
In addition to being staffed with knowledgeable wellness advisors,
Bud and Bloom has actively sought to develop strong relationships
with the local community, including local senior centers, which
allows the business to cater to a diverse clientele. Bud and Bloom
was awarded the accolades of Top 10 Most Beautiful Dispensaries in
America by Leafly in 2017.10
9East Bay Express (2021). Best of The East Bay 2021 –
Reader’s Picks: Best Cannabis Delivery. Available at:
https://eastbayexpress.com/readers-picks-cannabis/.
Bud and Bloom Licenses
The applicable license for retail issued by BCC is held by Bud and
Bloom, as described in the table below.
|
License
Holder |
Address |
Permit/License
No. |
Expiration/Renewal
Date (MM/DD/YY) |
License
Type |
|
Bud
and Bloom |
1327
St. Gertrude Place E. Santa Ana, CA 92705 |
C10-0000044-
LIC (BCC) |
05/09/21 |
Adult-Use &
Medicinal – Retailer License |
Information Technology & Inventory Management
We have an information technology infrastructure that prioritizes
security, compliance, business process support, customer-facing
technology, operational systems, data insights, and business
intelligence. We use Treez, a third-party software platform, to
serve as its inventory management system (“IMS”) and data
warehouse. Our IMS supports company-wide operations including sales
and point-of-sale transactions, customer data management,
production, inventory management, pricing, order management,
accounting, finance and purchasing. Our IMS also serves as a data
warehouse, allowing for daily inventory management.
We also use our IMS for weekly cycle counts across all retail and
storage locations. Our IMS allows for comprehensive reporting on
all stages of inventory within the Company. All personally
identifiable information is required to be stored and maintained by
us in compliance with the California Consumer Privacy
Act.
In addition to its IMS, we participate in California’s track and
trace system (METRC).
Our websites are its primary customer-facing technology for online
customer transactions in its growing direct-to-consumer business.
We work with Stronghold to enable bank-to-bank transfers for
secure, contactless electronic payments from direct-to-consumer
customers.
We intend to continue to implement and use leading tools and
technologies that allow it to support and promote growth in its
business.
Banking & Processing
We and all of our affiliated entities have accounts with the
largest bank headquartered in the greater Los Angeles area. We
selected this bank because it is also a subsidiary of one of the
largest banks in the United States, which is expected to be helpful
as we scale our operations. We currently accept cash and debit
cards for sales in the retail locations and cash for sales to
direct-to-consumer customers. We also have a relationship with
Stronghold to allow direct-to-consumer customers to prepay using a
debit card.
Competitive Conditions
We are vertically integrated, we compete on multiple fronts, from
manufacturing to retail to delivery, and experiences competition in
each of these areas. From a retail perspective, we compete with
other licensed retailers and delivery companies in the geographies
where retail and delivery services are located. These other
retailers range from small local operators to more significant
operators with a presence throughout the State of California and
other states in the United States. From a product perspective, we
compete with other manufactures of brands for shelf space in non-GH
Group owned dispensaries throughout California. Similar to certain
competitors in the retail space, we compete with manufacturers
ranging in size from small local operators to significant operators
with a larger presence. Indirectly, we compete with the illicit
market, including many illegal dispensaries.
10 Leafly (2017). Top 10 Most Beautiful Dispensaries in
America. Available at:
https://www.leafly.com/news/lifestyle/beautiful-marijuana-
dispensary-designs-and-layouts.
Environmental Protection Requirements
Although a number of environmental restrictions apply to us, they
are of a general nature and often tied to limitations on land use
and do not affect ongoing operations. The environmental regulations
that do affect operations generally relate to natural resource use,
such as water use permits, wastewater management, energy
generation, and air pollution limitations. Although these
regulations limit the scope of potential operations, such financial
and operational obligations related to such regulations do not have
a material impact on our financial position or operations as
currently conducted.
Seasonality
Not applicable.
Legal and Regulatory Matters
The United States federal government regulates drugs through the
Controlled Substances Act (21 U.S.C.§ 811), which places controlled
substances, including marijuana (defined as all parts of the plant
cannabis sativa L. containing more than 0.3 percent
tetrahydrocannabinol (“THC”)), in a schedule. Marijuana (also
referred to as cannabis) is classified as a Schedule I drug. Under
United States federal law, a Schedule I drug or substance has a
high potential for abuse, no accepted medical use in the United
States, and a lack of accepted safety for the use of the drug under
medical supervision. The United States Food and Drug Administration
has not approved marijuana as a safe and effective drug for any
indication.
In the United States, marijuana is largely regulated at the State
level. State laws regulating cannabis are in direct conflict with
U.S. federal law, which makes cannabis use and possession federally
illegal. Although certain states authorize medical or adult-use
cannabis production and distribution by licensed or registered
entities, under U.S. federal law, the possession, use, cultivation,
and transfer of cannabis and any related drug paraphernalia is
illegal and any such acts are criminal acts under federal law. The
Supremacy Clause of the United States Constitution establishes that
the United States Constitution and federal laws made pursuant to it
are paramount and, in case of conflict between federal and State
law, the federal law shall apply.
Under President Barack Obama, the U.S. administration attempted to
address the inconsistencies between federal and state regulation of
cannabis in a memorandum sent by then-Deputy Attorney General James
Cole to all United States Attorneys in August 2013 (the “Cole
Memorandum”). The Cole Memorandum acknowledged that notwithstanding
the designation of cannabis as a controlled substance at the
federal level in the United States, several States had enacted laws
relating to cannabis for medical and recreational purposes. In
March 2017, then newly-appointed Attorney General Jeff
Sessions, a long-time opponent of State-regulated medical and
recreational cannabis, noted limited federal resources and
acknowledged that much of the Cole Memorandum had merit; however,
he had previously stated that he did not believe it had been
implemented effectively.
On January 4, 2018, former U.S. Attorney General Jeff Sessions
issued a memorandum to U.S. district attorneys which rescinded
previous guidance from the U.S. Department of Justice specific to
cannabis enforcement in the United States, including the Cole
Memorandum. With the Cole Memorandum rescinded, U.S. federal
prosecutors were given discretion in determining whether to
prosecute cannabis related violations of U.S. federal law, subject
to budgetary constraints. On November 7, 2018,
Mr. Sessions tendered his resignation as Attorney General at
the request of then President Donald Trump. Following
Mr. Sessions’ resignation, Matthew Whitaker began serving as
Acting United States Attorney General, until February 14,
2019, when William Barr was appointed as the United States Attorney
General. During his Senate confirmation hearing, Mr. Barr
stated that he disagrees with efforts by States to legalize
marijuana, but would not pursue marijuana companies in States that
legalized marijuana under Obama administration policies. He stated
further that he would not upset settled expectations that had
arisen as a result of the Cole Memorandum. Federal enforcement of
cannabis-related activity remained consistent with the priorities
outlined in the Cole Memorandum throughout Attorney General Barr’s
tenure.
On January 20, 2021, Joseph R. Biden Jr. was sworn in as the
new President of the United States. During his campaign, he stated
a policy goal to decriminalize possession of cannabis at the
federal level. However, he has not publicly supported the full
legalization of cannabis. It is unclear how much of a priority
decriminalization may be for President Biden’s administration.
President Biden nominated federal judge Merrick Garland to serve as
his Attorney General. During his confirmation hearings in the
Senate on February 22, 2021, Attorney General nominee Garland
confirmed that he would not prioritize pursuing cannabis
prosecutions in States that have legalized and that are regulating
the use of cannabis, both for medical and adult use. The Senate
confirmed Judge Garland as Attorney General on March 10,
2021.
There is no guarantee that State laws legalizing and regulating the
sale and use of cannabis will not be repealed or overturned, or
that local governmental authorities will not limit the
applicability of State laws within their respective jurisdictions.
Unless and until the United States Congress amends the Controlled
Substances Act with respect to medical and/or adult-use cannabis
(and as to the timing or scope of any such potential amendments
there can be no assurance), there is a risk that U.S. federal
authorities may enforce current U.S. federal law. If the U.S.
federal government were to begin to enforce U.S. federal laws
relating to cannabis in States where the sale and use of cannabis
is currently legal, or if existing applicable State laws are
repealed or curtailed, BRND’s target business, results of
operations, financial condition and prospects and the Company would
likely be materially adversely affected.
In light of the political and regulatory uncertainty surrounding
the treatment of U.S. cannabis-related activities, including the
rescission of the Cole Memorandum discussed above, on
February 8, 2018, the Canadian Securities Administrators
published Staff Notice 51-352 (Revised) – Issuers with U.S.
Marijuana-Related Activities (“Staff Notice 51-352”)
setting out the Canadian Securities Administrators’ disclosure
expectations for specific risks facing issuers with
cannabis-related activities in the United States. Staff Notice
51-352 includes additional disclosure expectations that apply to
all issuers with U.S. cannabis-related activities, including those
with direct and indirect involvement in the cultivation and
distribution of cannabis, as well as issuers that provide goods and
services to third parties involved in the U.S. cannabis
industry.
Our involvement in the U.S. cannabis market may subject it to
heightened scrutiny by regulators, stock exchanges, clearing
agencies and other U.S. and Canadian authorities. There can be no
assurance that this heightened scrutiny will not in turn lead to
the imposition of certain restrictions on our ability to operate in
the U.S. or any other jurisdiction. We have received and continue
to receive legal input regarding (i) compliance with
applicable State regulatory frameworks, and (ii) potential
exposure and implications arising from U.S. federal law in certain
respects. We receives such input on an ongoing basis but does not
have a formal legal opinion on such matters.
C. Organizational structure.
Our organizational structure is attached as Exhibit 8.1 to
this Shell Company Report.
D. Property, plant and equipment.
The Company possesses (i) an aggregate of approximately
550,000 sq. ft. in two operating greenhouse facilities in
unincorporated Santa Barbara county that both include associated
processing facilities, (ii) a volatile and non-volatile
manufacturing and distribution facility in Lompoc, California, and
(iii) an additional non-volatile manufacturing facility in
Long Beach, California. The Company owns three (3) operating
retail dispensaries in Santa Barbara, Santa Ana and Berkeley,
California and partially owns and manages a fourth located in Los
Angeles, California that includes a specialty indoor cultivation
facility.
2000 De La Vina LLC (a wholly owned subsidiary of GH Group) leases
the property located at 128 W. Mission Street, Santa Barbara,
California 93101 from Edwin Begg, Trustee for the Susan Miratti
Trust, consisting of approximately 1,342 sq. ft. in a single
building. Farmacy SB, Inc. leases the property located at
117-B W. Mission Street, Santa Barbara, California 93101 from
Martin Morales, Trustee of the Morales Family Trust, consisting of
approximately 1,690 sq. ft. of office space. 2000 De La Vina LLC
intends to purchase both properties once the current owners obtain
final approval for any required environmental remediation actions,
if any, from the required regulatory bodies.
Our head office is located at 3645 Long Beach Blvd., Long Beach,
California, USA.
Item 4A. Unresolved Staff
Comments.
Not applicable.
Item 5. Operating and Financial
Review and Prospects.
A. Operating results.
The following are the results of our operations for the years ended
December 31, 2020, 2019 and 2018:
| |
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
Revenue, Net |
|
$ |
48,259,601 |
|
|
$ |
16,941,426 |
|
|
$ |
8,967,286 |
|
|
Cost of Goods Sold |
|
|
29,519,143 |
|
|
|
8,461,551 |
|
|
|
3,749,373 |
|
|
Gross Profit |
|
|
18,740,458 |
|
|
|
8,479,875 |
|
|
|
5,217,913 |
|
| Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative |
|
|
18,637,477 |
|
|
|
9,354,591 |
|
|
|
3,094,857 |
|
|
Sales and Marketing |
|
|
1,489,664 |
|
|
|
912,842 |
|
|
|
143,216 |
|
|
Professional Fees |
|
|
2,040,004 |
|
|
|
5,196,993 |
|
|
|
1,913,865 |
|
|
Depreciation and Amortization |
|
|
2,576,263 |
|
|
|
1,455,780 |
|
|
|
767,567 |
|
|
Total Expenses |
|
|
24,743,408 |
|
|
|
16,920,206 |
|
|
|
5,919,505 |
|
|
Loss from Operations |
|
|
(6,002,950 |
) |
|
|
(8,440,331 |
) |
|
|
(701,592 |
) |
| Other
Expense (Income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
2,179,137 |
|
|
|
636,762 |
|
|
|
597,427 |
|
|
Interest Income |
|
|
(115,572 |
) |
|
|
(443,523 |
) |
|
|
(308,591 |
) |
|
Loss on Investments |
|
|
2,126,112 |
|
|
|
1,147,968 |
|
|
|
166,059 |
|
|
Loss (Income) on Change in Fair Value of Derivative
Liabilities |
|
|
251,663 |
|
|
|
- |
|
|
|
- |
|
|
Other Expense (Income), Net |
|
|
(203,345 |
) |
|
|
(19,419 |
) |
|
|
(202,397 |
) |
|
Total Other Expense |
|
|
4,237,995 |
|
|
|
1,321,788 |
|
|
|
252,498 |
|
| Loss
from Operations Before Provision for Income Taxes |
|
|
(10,240,945 |
) |
|
|
(9,762,119 |
) |
|
|
(954,090 |
) |
|
Provision for Income Taxes |
|
|
6,418,533 |
|
|
|
972,520 |
|
|
|
357,352 |
|
| Net
Loss |
|
|
(16,659,478 |
) |
|
|
(10,734,639 |
) |
|
|
(1,311,442 |
) |
|
Net Income (Loss) Attributable to Non-Controlling Interest |
|
|
- |
|
|
|
(511,465 |
) |
|
|
211,396 |
|
|
Net Loss Attributable to Shareholders / Members of GH Group |
|
$ |
(16,659,478 |
) |
|
$ |
(10,223,174 |
) |
|
$ |
(1,522,838 |
) |
Revenue
2020
Revenue for the year ended December 31, 2020 was $48.3
million, which represents an increase of $31.3 million or 185% from
$16.9 million for the year ended December 31, 2019. Revenue
growth in 2020 was primarily driven by an increase in cannabis
production from our second greenhouse cultivation facility, which
commenced operations in Q1 2020 and expanded operational canopy
from approximately 113,000 square feet at the end of
December 2019, to over 390,000 square feet by the 2020. Our
cannabis retail dispensaries also contributed to year over year
revenue growth, with a full year of operations in 2020 versus less
than 6 months of operations in 2019.
2019
For the year ended December 31, 2019, revenue was $16.9
million, which represents an increase of $8.0 million or 89% from
$9.0 million for the year ended December 31, 2018. Revenue
growth in 2019 was primarily driven by an increase in cannabis
production from our first greenhouse cultivation facility, which
operated at full capacity throughout 2019, and at partial capacity
in 2018 while we ramped up operations. We began retail operations
in Q3 2019, opening one store and acquiring another, which also
increased revenue from the prior year.
2018
For the year ended December 31, 2018, revenue was $9.0
million. Revenues during 2018 consisted primarily of bulk biomass
sales produced from our first greenhouse cultivation facility.
Cost of Goods Sold
2020
For the year ended December 31, 2020, cost of goods sold was $
29.5 million, which represents an increase of $21.1 million or 249%
from the prior year amount of $8.5 million. Cost increases were
primarily attributable to our expanding cannabis cultivation
operation which grew over 300% from the prior year. Our cannabis
dispensaries also contributed to year over year cost increases,
with a full year of operations in 2020 and less than 6 months of
operations in 2019.
2019
For the year ended December 31, 2019, cost of goods sold was
$8.5 million, which represents an increase of $4.7 million or 126%
from the prior year amount of $3.7 million. Cost increases were
primarily due to our grow operations being fully operational
throughout 2019 and only partially operational in 2018. We began
retail operations in Q3 2019, opening one store and acquiring
another, which also increased cost of goods sold from the prior
year.
2018
For the year ended December 31, 2018, cost of goods sold was
$3.7 million. Our cost of goods sold is a direct result of our grow
operations during 2018.
General and Administrative
2020
For the year ended December 31, 2020, general and
administrative expenses was $18.6 million, which represents an
increase of $9.3 million or 99% from the prior year amount of $9.4
million. General and administrative cost increases are primarily
attributable to headcount additions required to support operational
expansion initiatives and include stock-based compensation, salary
expenses, employee benefits, selling costs and incidental expenses
related to corporate, cultivation and retail operations.
2019
For the year ended December 31, 2019, general and
administrative expenses was $9.4 million, which represents an
increase of $6.3 million or 202% from the prior year amount of $3.1
million. General and administrative cost increases are primarily
attributable to headcount additions required to support operational
expansion initiatives and include stock-based compensation, salary
expenses, employee benefits, selling costs and incidental expenses
related to corporate, cultivation and retail operations.
2018
For the year ended December 31, 2018, general and
administrative expenses was $ 3.1 million. General and
administrative expenses include stock-based compensation, salary
expenses, employee benefits, selling costs and incidental expenses
related to corporate, cultivation and retail operations.
Sales & Marketing
2020
For the year ended December 31, 2020, sales and marketing
expenses was $1.5 million, which represents an increase of $0.6
million or 63% from the prior year amount of $0.9 million. Our
cannabis dispensaries contributed to year over year cost increases,
with a full year of operations in 2020 and less than 6 months of
operations in 2019. Sales and marketing expenses include
advertising and promotions in various media outlets.
2019
For the year ended December 31, 2019, sales and marketing
expenses was $0.9 million, which represents an increase of $0.8
million or 537% from the prior year amount of $0.1 million.
Marketing expenses increased year over year to support our retail
operations, which began Q3 2019.
2018
For the year ended December 31, 2018, we incurred $0.1 million
of sales and marketing expenses for general advertising and
promotions in various media outlets.
Professional Fees
2020
For the year ended December 31, 2020, professional fees were
$2.0 million, which represents a decrease of $3.2 million or 61%
from the prior year amount of $5.2 million. The decrease from 2019
was a result of the preparatory work performed in 2019 for business
combinations, mergers and acquisitions. During 2020, we
deliberately curtailed the use of consultants.
2019
For the year ended December 31, 2019, professional fees were
$5.2 million, which represents an increase of $3.3 million or 172%
from the prior year amount of $1.9 million. The increase from 2018
is a direct result of our merger and acquisition activity, capital
raises, preparatory work required for business combinations
executed in 2020 and to support operational expansion
initiatives.
2018
For the year ended December 31, 2018, professional fees were $
1.9 million. Professional fees in 2018 represent fees paid to part
time operational and accounting consultants and for legal and
advisory fees.
Other Expense
2020
For the year ended December 31, 2020, net other expenses were
$4.2 million, which represents a increase of $2.9 million or 221%
from the prior year amount of $1.3 million. The increase from 2019
was a result of the increase in interest expense from our debt
incurred during 2020 and an increase in our unrealized losses on
our equity method investments.
2019
For the year ended December 31, 2019, net other expenses were
$1.3 million, which represents an increase of $1.0 million or 323%
from the prior year amount of $0.3 million. The increase from 2018
was primarily a result of the increase in our unrealized losses on
our equity method investments.
2018
For the year ended December 31, 2018, net other expenses were
$0.3 million. Net other expenses in 2018 is primarily represented
by interest expense ($0.6 million), offset by interest income of
$0.3 million from our notes receivables.
B. Liquidity and capital resources.
Overview
Historically, our primary source of liquidity has been capital
contributions made by equity investors and debt issuances. We
expect to generate positive cash flow from its operations going
forward and expects such positive cash flow to be its principal
source of future liquidity. In the event sufficient cash flow is
not available from operating activities, we may continue to raise
equity or debt capital from investors in order to meet liquidity
needs.
Financial Condition
Cash Flows
The following table summarizes our consolidated statement of cash
flows from continuing operations for the year end
December 31:
| |
|
2020 |
|
|
2019 |
|
|
2018 |
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES |
|
$ |
(7,697,679 |
) |
|
$ |
(3,434,706 |
) |
|
$ |
(909,209 |
) |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(7,719,045 |
) |
|
|
(15,788,070 |
) |
|
|
(14,845,042 |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
17,320,089 |
|
|
|
8,080,108 |
|
|
|
23,873,520 |
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
1,903,366 |
|
|
|
(11,142,668 |
) |
|
|
8,119,269 |
|
|
Cash and Cash Equivalents, Beginning of Period |
|
|
2,631,886 |
|
|
|
13,774,554 |
|
|
|
5,655,285 |
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
4,535,251 |
|
|
$ |
2,631,886 |
|
|
$ |
13,774,554 |
|
Cash Flow Provided by Operating Activities
2020
Cash used in operating activities totaled $ 7.7 million in 2020.
This was primarily driven by the net loss incurred of $16.7 million
during the year, increases in accounts receivable ($3.5 million)
and buildup of inventory ($3.8 million) resulting from increased
operations. The use of cash in operations was offset by the
increase in trade payables and accrued liabilities ($1.9 million),
increase in income taxes payable ($3.9 million), increases in
deferred tax liabilities, net ($1.3 million) and non-cash expense
from interest capitalized to notes payable ($ 1.1 million),
share-based compensation ($2.5 million), accretion of debt
discounts on loans ($1.1 million), loss on equity method
investments ($2.1 million) and depreciation and amortization ($2.6
million).
2019
Cash used in operating activities totaled $3.4 million in 2019.
This was primarily driven by the net loss incurred of $10.8 million
during the year as a result from increased operations. The use of
cash in operations was offset by the increase in trade payables and
accrued liabilities ($3.2 million) and non-cash expense from
share-based compensation ($1.9 million), unrealized loss on equity
method investments ($1.1 million) and depreciation and amortization
($1.5 million).
2018
Cash used in operating activities totaled $0.9 million in 2018.
This was primarily driven by the net loss incurred of $1.4 million
during the year, increases in accounts receivable ($0.5 million)
and buildup of inventory ($0.8 million) resulting from increased
operations. The use of cash in operations was offset by non-cash
expense from share-based compensation ($0.8 million) and
depreciation and amortization ($0.8 million).
Cash Flow Provided by (Used in) Investing Activities
2020
Cash used in investing activities totaled $ 7.7 million in 2020.
This was primarily driven by the purchase of property and equipment
($3.9 million) purchase of investments ($2.9 million) and issuance
of notes receivables ($1.1 million).
2019
Cash used in investing activities totaled $15.8 million in 2019.
This was primarily driven by the purchase of property and equipment
($5.7 million), purchase of investments ($5.1 million), issuance of
notes receivables ($3.5 million) and cash paid for an acquisition
($1.9 million).
2018
Cash used in investing activities totaled $14.8 million in 2018.
This was primarily driven by the purchase of property and equipment
($12.7 million) and the purchase of investments ($3.2 million).
Cash outflows from investing activities were offset by repayments
on notes receivables during the year ($1.1 million).
Cash Flow Provided by (Used in) Financing Activities
2020
Cash provided by financing activities totaled $17.3 million in
2020. This was primarily driven by cash proceeds from the issuance
of notes and convertible notes payable during the year ($18.4
million) which was offset by payments on notes payable ($1.1
million).
2019
Cash provided by financing activities totaled $8.1 million in 2019.
This was primarily driven by cash proceeds from the issuance of
notes payable during the year ($1.7 million), cash contributions
from investors ($8.1 million) offset by payments of notes payable
during the year ($0.9 million).
2018
Cash provided by financing activities totaled $23.9 million in
2018. This was primarily driven by cash proceeds from the issuance
of notes and convertible notes payable during the year ($9.9
million), cash contributions from investors ($16.4 million) offset
by payments of distributions to shareholders during the year ($2.0
million).
As previously noted, our primary source of liquidity has been
capital contributions and debt capital made available from
investors. We expect to generate positive cash flow from its
operations going forward and expects such positive cash flow to be
its principal source of future liquidity. In the event sufficient
cash flow is not available from operating activities, we may
continue to raise equity capital from investors in order to meet
liquidity needs. We do not have any committed sources of financing,
nor significant outstanding capital expenditure commitments.
Contractual Obligations
We have contractual obligations to make future payments, including
debt agreements and lease agreements from third parties and related
parties.
The following table summarizes such obligations as of
December 31, 2020:
| |
2021 |
|
2022 |
|
2023 - 2024 |
|
After 2024 |
|
Total |
|
|
Notes Payable from Third Parties and Related Parties |
$ |
601,187 |
|
$ |
- |
|
$ |
2,189,264 |
|
$ |
22,839,551 |
|
$ |
25,630,002 |
|
|
Leases obligations |
|
731,354 |
|
|
745,094 |
|
|
1,526,302 |
|
|
1,231,207 |
|
|
4,233,957 |
|
|
Total Contractual Obligations |
$ |
1,332,541 |
|
$ |
745,094 |
|
$ |
3,715,566 |
|
$ |
24,070,758 |
|
$ |
29,863,959 |
|
Transactions with Related Parties
Reposition Debt Transactions
Reposition Investments, LLC, a Texas limited liability company
(“Reposition”) and an affiliate of our shareholder, agreed to make
a $1,000,000 unsecured bridge loan to us at an interest rate of 8%
per annum to fund us until the initial close of senior notes
offering, pursuant to that certain promissory note, dated as of
January 24, 2020, issued by us in favor of Reposition. In
February 2020, we executed and delivered to Reposition, and
Reposition accepted, documentation in substantially the form of the
approved senior secured convertible notes to cancel and reissue the
bridge note as part of the senior convertible notes offering.
Accordingly, as of December 31, 2020, the Reposition bridge
note is no longer outstanding, and Reposition’s senior convertible
note balance of $1,000,000 principal balance is included as a
component of convertible notes noted above. As of December 31,
2020 and 2019, no amounts were due under the original notes.
Magu Farm Lenders Debt Transactions
In 2018, Magu Farm LLC issued approximately $9,925,000 in secured
promissory notes convertible into equity interests in Magu
Investment Fund (collectively, the “Magu Farm Convertible Notes”)
to certain lenders who are affiliates of our shareholders
(collectively, the “Magu Farm Lenders,” and individually, a “Magu
Farm Lender”).
On October 7, 2019, Magu Farm LLC and Magu Investment Fund
notified each Magu Farm Lender of Magu Investment Fund’s intention
to merge with and into us at the closing of a roll-up transaction
(the “Roll-Up”). Subsequent to such notification, effective as of
October 7, 2019, each Magu Farm Lender other than Kings Bay
Investment Company Ltd., a Cayman Islands company (“KBIC”), entered
into a letter agreement pursuant to which such Magu Farm Lender,
among other things, (a) converted its respective Magu Farm
Convertible Note with an aggregate value of $8,000,000 into equity
interests in Magu Investment Fund and (b) agreed to terminate
both the co-lending agreement and its respective security interest
as defined in the agreement. All accrued and unpaid interest were
paid prior to conversion. KBIC balance which was not converted
remained. Effective as of March 1, 2020, KBIC assigned the
note (the “Kings Bay Note”) to Kings Bay Capital Management Ltd., a
Cayman Islands company (“KBCM”).
Effective as of April 10, 2020, KBCM and us entered into an
assignment, novation and note modification agreement and a security
agreement, pursuant to which, among other things, (a) the
company assumed all of Magu Farm LLC’s rights, duties, liabilities
and obligations under the Kings Bay Note, (b) the Kings Bay
Note was modified, among other things, such that KBCM has the right
to convert the Kings Bay Note into Class A Shares at the same
conversion price accorded to the other Magu Farm Lenders, and
(c) the obligations under the Kings Bay Note were secured by a
pledge of our subsidiaries’ securities but expressly subordinated
to the holders of the senior convertible notes. As a result of the
modification, we recorded an loss on extinguishment of debt due to
modification for approximately $389,000 which is included as a
component of other income, net in the accompanying consolidated
statement of operations. As of December 31, 2020 and 2019, the
balance due to KBCM is $2,189,264 and $1,925,000, respectively.
Graham S. Farrar Living Trust – Related Party
On October 5, 2019, G&H Supply Company LLC issued a
promissory note in the original principal amount of $315,000 in
favor of the Graham S. Farrar Living Trust established
February 2, 2000 (the “Farrar Trust”), an affiliate of Graham
Farrar (the “Original G&H / Farrar Note”). Effective as of
February 20, 2020, we executed and delivered to the Farrar
Trust, and the Farrar Trust accepted, documentation in
substantially the form of the approved forms of note offering
documents to cancel and reissue the loan evidenced by the Original
G&H / Farrar Note as part of the convertible debt offering. As
of December 31, 2020 and 2019, the balance of these notes was
$0, and $316,262, respectively.
BFP Debt Transactions
In connection with the Incubation, Beach Front Properties, LLC, a
California limited liability company (“BFP”), advanced to Magu
Capital loans in the aggregate principal amount of $400,000 (the
“BFP Loans”), which BFP Loans were documented by that certain
promissory note dated as of June 7, 2017 and that certain
promissory note dated as of March 22, 2018 (together, the “BFP
Notes”), and the remaining monetary portion of the BFP Loans was
not previously documented but intended by BFP and Magu Capital to
be advanced under the same terms as set forth in the BFP Notes.
Magu Capital used the proceeds of the BFP Loans to pay certain of
our expenses. Effective as of June 30, 2020: (a) Magu
Capital assigned to us, we assumed and Magu Capital was released
from, all of Magu Capital’s rights, duties and obligations under
the BFP Loans; and (b) we executed and delivered to BFP, and
BFP accepted, documentation in substantially the form of the
approved convertible debt offering.
Incubation Services
Effective January 1, 2019, we and Magu Capital LLC, a
California limited liability company (“Magu Capital”), entered into
a services and incubation agreement (the “Services and Incubation
Agreement”), pursuant to which Magu Capital agreed to perform
certain advisory and business “incubation” services for us (and
incur certain fees and expenses on behalf of us as part of and as
performance for such services) (collectively, the “Incubation”) in
consideration of our agreement to issue to Magu Capital, upon a
date certain following the closing of the Roll-Up as reasonably
determined by our board of directors, a warrant to purchase a fixed
number of Class A Shares at an agreed upon strike price and no
later than three years following the grant date.
On July 23, 2020, we issued to Magu Capital a warrant to
purchase exercise shares (the “Magu Capital Warrant”), in full
satisfaction of our obligations under the Services and Incubation
Agreement to compensate Magu Capital for the Incubation. The value
of the warrants was fair valued at approximately $ 427,000. We
recorded a gain on extinguishment of the liability in the amount of
approximately $573,000 which is recorded as a component of other
income in the accompanying consolidated statement of operations.
The balance due to Magu Capital as of December 31, 2020 and
2019 was $0 and$1,773,879, respectively and is included as a
component of accounts payable and accrued liabilities in the
consolidated and combined balance sheet.
Issuance of Class B Shares for Management Services
In January 2020, we as part of the roll up and
re-organization: (a) issued to APP Investment Advisors LLC, a
California limited liability company (“APP Investment Advisors”),
an affiliate of certain significant shareholders, 9,047,226 shares
of our Class B common stock (“Class B Shares”), in
exchange for certain management services rendered by APP Investment
Advisors for AP Investment Fund; and (b) issued to Magu
Capital, an affiliate of certain significant shareholders,
23,248,044 Class B Shares, in exchange for certain management
services rendered by Magu Capital for CA Brand Collective, Magu
Investment Fund and MG Padaro Fund.
Asset Management Fees
We have an agreement with certain related parties which provide
asset management services. Fees are paid quarterly. For the year
ended December 31, 2020, 2019 and 2018, we incurred expenses
of approximately $0, $822,000 and $590,000, respectively.
C. Research and development, patents and
licenses, etc.
None.
D. Trend information.
Unless otherwise disclosed elsewhere in this Shell Company Report,
we are not aware of any trends, uncertainties, demands, commitments
or events that are reasonably likely to have a material adverse
effect on our revenues, income, profitability, liquidity or capital
resources, or that caused the disclosed financial information to be
not necessarily indicative of future operating results or financial
conditions.
E. Critical Accounting Estimates.
Use of Estimates
The preparation of the consolidated and combined financial
statements in accordance with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities at the dates of the consolidated and
combined financial statements and the reported amounts of total net
revenue and expenses during the reporting period. We regularly
evaluate significant estimates and assumptions related to the
consolidation or non-consolidation of variable interest entities,
estimated useful lives, depreciation of property and equipment,
amortization of intangible assets, inventory valuation, share-based
compensation, business combinations, goodwill impairment,
long-lived asset impairment, purchased asset valuations, fair value
of financial instruments, compound financial instruments,
derivative liabilities, deferred income tax asset valuation
allowances, incremental borrowing rates, lease terms applicable to
lease contracts and going concern. These estimates and assumptions
are based on current facts, historical experience and various other
factors that we believe to be reasonable under the circumstances,
the results of which form the basis for making judgments about the
carrying values of assets and liabilities and the recording of
revenue, costs and expenses that are not readily apparent from
other sources. The actual results we experience may differ
materially and adversely from these estimates. To the extent there
are material differences between the estimates and actual results,
our future results of operations will be affected.
Estimated Useful Lives and Depreciation of Property and
Equipment
Depreciation of property and equipment is dependent upon estimates
of useful lives which are determined through the exercise of
judgment. The assessment of any impairment of these assets is
dependent upon estimates of recoverable amounts that take into
account factors such as economic and market conditions and the
useful lives of assets.
Estimated Useful Lives and Amortization of Intangible
Assets
Amortization of intangible assets is dependent upon estimates of
useful lives and residual values which are determined through the
exercise of judgment. Intangible assets that have indefinite useful
lives are not subject to amortization and are tested annually for
impairment, or more frequently if events or changes in
circumstances indicate that they might be impaired. The assessment
of any impairment of these assets is dependent upon estimates of
recoverable amounts that take into account factors such as economic
and market conditions.
Impairment of Long-Lived Assets
For purposes of the impairment test, long-lived assets such as
property, plant and equipment and definite-lived intangible assets
are grouped with other assets and liabilities at the lowest level
for which identifiable independent cash flows are available (“asset
group”). We review long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying value of an
asset may not be recoverable. In order to determine if assets have
been impaired, the impairment test is a two-step approach wherein
the recoverability test is performed first to determine whether the
long-lived asset is recoverable. The recoverability test (Step 1)
compares the carrying amount of the asset to the sum of its future
undiscounted cash flows using entity- specific assumptions
generated through the asset’s use and eventual disposition. If the
carrying amount of the asset is less than the cash flows, the asset
is recoverable and an impairment is not recorded. If the carrying
amount of the asset is greater than the cash flows, the asset is
not recoverable and an impairment loss calculation (Step 2) is
required. The measurement of the impairment loss to be recognized
is based on the difference between the fair value and the carrying
value of the asset group. Fair value can be determined using a
market approach, income approach or cost approach. The cash flow
projection and fair value represents management’s best estimate,
using appropriate and customary assumptions, projections and
methodologies, at the date of evaluation. The reversal of
impairment losses is prohibited.
Leased Assets
We adopted Audit Standards Update (“ASU”) 2016-02, “Leases (Topic
842)” (“ASC 842”) using the full retrospective approach, which
provides a method for recording existing leases at adoption using
the effective date as its date of initial application. Accordingly,
we have recorded our leases at our inception. We elected the
package of practical expedients provided by ASC 842, which forgoes
reassessment of the following upon adoption of the new standard:
(1) whether contracts contain leases for any expired or
existing contracts, (2) the lease classification for any
expired or existing leases, and (3) initial direct costs for
any existing or expired leases. In addition, we elected an
accounting policy to exclude from the balance sheet the
right-of-use assets and lease liabilities related to short-term
leases, which are those leases with a lease term of twelve months
or less that do not include an option to purchase the underlying
asset that we are reasonably certain to exercise.
We apply judgment in determining whether a contract contains a
lease and if a lease is classified as an operating lease or a
finance lease. We apply judgement in determining the lease term as
the non-cancellable term of the lease, which may include options to
extend or terminate the lease when it is reasonably certain that we
will exercise that option. All relevant factors that create an
economic incentive for it to exercise either the renewal or
termination are considered. We reassess the lease term if there is
a significant event or change in circumstances that is within our
control and affect our ability to exercise or not to exercise the
option to renew or to terminate. In adoption of ASC 842, we applied
the practical expedient which applies hindsight in determining the
lease term and assessing impairment of right-of-use assets by using
its actual knowledge or current expectation as of the effective
date. We also applied judgment in allocating the consideration in a
contract between lease and non-lease components. It considers
whether we can benefit from the right-of-use asset either on its
own or together with other resources and whether the asset is
highly dependent on or highly interrelated with another right
of-use asset. Lessees are required to record a right of use asset
and a lease liability for all leases with a term greater than
twelve months. Lease liabilities and their corresponding
right-of-use assets are recorded based on the present value of
lease payments over the expected remaining lease term. The
incremental borrowing rate is determined using estimates which are
based on the information available at commencement date and
determines the present value of lease payments if the implicit rate
is unavailable.
Income Taxes
Deferred tax assets and liabilities are recorded for the estimated
future tax effects of temporary differences between the tax basis
of assets and liabilities and amounts reported in the combined
balance sheet. Effects of enacted tax law changes on deferred tax
assets and liabilities are reflected as adjustments to tax expense
in the period in which the law is enacted. Deferred tax assets may
be reduced by a valuation allowance if it is deemed more likely
than not that some or all of the deferred tax assets will not be
realized.
We follow accounting guidance issued by the Financial Accounting
Standards Board (“FASB”) related to the application of accounting
for uncertainty in income taxes. Under this guidance, we assess the
likelihood of the financial statement effect of a tax position that
should be recognized when it is more likely than not that the
position will be sustained upon examination by a taxing authority
based on the technical merits of the tax position, circumstances,
and information available as of the reporting date.
Convertible Instruments
We evaluate and accounts for conversion options embedded in our
convertible instruments in accordance with ASC 815, “Accounting for
Derivative Instruments and Hedging Activities”. Professional
standards generally provide three criteria that, if met, require
companies to bifurcate conversion options from their host
instruments and account for them as free standing derivative
financial instruments. These three criteria include circumstances
in which (a) the economic characteristics and risks of the
embedded derivative instrument are not clearly and closely related
to the economic characteristics and risks of the host contract,
(b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not remeasured at
fair value under otherwise applicable generally accepted accounting
principles with changes in fair value reported in earnings as they
occur and (c) a separate instrument with the same terms as the
embedded derivative instrument would be considered a derivative
instrument. Professional standards also provide an exception to
this rule when the host instrument is deemed to be
conventional as defined under professional standards as “The
Meaning of Conventional Convertible Debt Instrument”.
We account for convertible instruments (when we determined that the
embedded conversion options should not be bifurcated from their
host instruments) in accordance ASC 470, “Accounting for
Convertible Securities with Beneficial Conversion Features”, as
those professional standards pertain to “Certain Convertible
Instruments”. Accordingly, we record, when necessary, discounts to
convertible notes for the intrinsic value of conversion options
embedded in debt instruments based upon the differences between the
fair value of the underlying common stock at the commitment date of
the note transaction and the effective conversion price embedded in
the note. Debt discounts under these arrangements are amortized
over the term of the related debt to their earliest date of
redemption. We also record when necessary deemed dividends for the
intrinsic value of conversion options embedded in preferred shares
based upon the differences between the fair value of the underlying
common stock at the commitment date of the note transaction and the
effective conversion price embedded in the note. ASC 815-40
provides that generally, if an event is not within the entity’s
control could or require net cash settlement, then the contract
shall be classified as an asset or a liability.
Derivative Liabilities
We evaluate our agreements to determine if such instruments have
derivatives or contain features that qualify as embedded
derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
Consolidated Statements of Operations. In calculating the fair
value of derivative liabilities, we use a valuation model when
Level 1 inputs are not available to estimate fair value at each
reporting date. The classification of derivative instruments,
including whether such instruments should be recorded as
liabilities or as equity, is evaluated at the end of each reporting
period. Derivative instrument liabilities are classified in the
Consolidated Balance Sheets as current or non-current based on
whether or not net-cash settlement of the derivative instrument
could be required within twelve months of the Consolidated Balance
Sheets date.
Business Combinations
Business combinations are accounted for using the acquisition
method. The consideration transferred in a business combination is
measured at fair value at the date of acquisition. Acquisition
related transaction costs are expensed as incurred and included in
the consolidated and combined statements of operations.
Identifiable assets and liabilities, including intangible assets,
of acquired businesses are recorded at their fair value at the date
of acquisition. When we acquire control of a business, any
previously held equity interest also is remeasured to fair value.
The excess of the purchase consideration and any previously held
equity interest over the fair value of identifiable net assets
acquired is goodwill. If the fair value of identifiable net assets
acquired exceeds the purchase consideration and any previously held
equity interest, the difference is recognized in the Consolidated
and combined Statements of Operations immediately as a gain on
acquisition.
Contingent consideration is measured at its acquisition-date fair
value and included as part of the consideration transferred in a
business combination. We allocate the total cost of the acquisition
to the underlying net assets based on their respective estimated
fair values. As part of this allocation process, we identify and
attribute values and estimated lives to the intangible assets
acquired. These determinations involve significant estimates and
assumptions regarding multiple, highly subjective variables,
including those with respect to future cash flows, discount rates,
asset lives, and the use of different valuation models, and
therefore require considerable judgment. Our estimates and
assumptions are based, in part, on the availability of listed
market prices or other transparent market data. These
determinations affect the amount of amortization expense recognized
in future periods. We base our fair value estimates on assumptions
we believes to be reasonable but are inherently uncertain.
Contingent consideration that is classified as equity is not
remeasured at subsequent reporting dates and its subsequent
settlement is accounted for within equity. Contingent consideration
that is classified as an asset or a liability is remeasured at
subsequent reporting dates in accordance with ASC 450,
“Contingencies”, as appropriate, with the corresponding gain or
loss being recognized in earnings in accordance with ASC 805.
Share-Based Compensation
We have a share-based compensation plan comprised of stock options
(“Options”) and stock appreciation rights (“SARs”). Options provide
the right to the purchase of one Series A Common share per
option. Stock appreciation rights provide the right to receive cash
from the exercise of such right based on the increase in value
between the exercise price and the fair market value of our
Series A Common shares at the time of exercise. We have issued
both incentive stock options and non-qualified stock options.
We account for our share-based awards in accordance with ASC
Subtopic 718-10, “Compensation – Stock Compensation,” which
requires fair value measurement on the grant date and recognition
of compensation expense for all share-based payment awards made to
employees and directors, including restricted share awards. For
stock options, we estimate the fair value using a closed option
valuation (Black-Scholes) model. When there are market-related
vesting conditions to the vesting term of the share-based
compensation, we use a valuation model to estimate the probability
of the market-related vesting conditions being met and will record
the expense. The fair value of restricted share awards is based
upon the quoted market price of the common shares on the date of
grant. The fair value is then expensed over the requisite service
periods of the awards, net of estimated forfeitures, which is
generally the performance period and the related amount is
recognized in the consolidated and combined statements of
operations.
The fair value models require the input of certain assumptions that
require our judgment, including the expected term and the expected
share price volatility of the underlying share. The assumptions
used in calculating the fair value of share-based compensation
represent management’s best estimates, but these estimates involve
inherent uncertainties and the application of judgment. As a
result, if factors change resulting in the use of different
assumptions, share-based compensation expense could be materially
different in the future. In addition, we are required to estimate
the expected forfeiture rate and only recognize expense for those
shares expected to vest. If the actual forfeiture rate is
materially different from management’s estimates, the share-based
compensation expense could be significantly different from what we
have recorded in the current period.
Financial Instruments
Measurement
All financial instruments are required to be measured at fair value
on initial recognition, plus, in the case of a financial asset or
financial liability not at FVTPL, transaction costs that are
directly attributable to the acquisition or issuance of the
financial asset or financial liability. Transaction costs of
financial assets and financial liabilities carried at FVTPL are
expensed in profit or loss. Financial assets and financial
liabilities with embedded derivatives are considered separately
when determining whether their cash flows are solely payment of
principal and interest. Financial assets that are held within a
business model whose objective is to collect the contractual cash
flows, and that have contractual cash flows that are solely
payments of principal and interest on the principal outstanding are
generally measured at amortized cost at the end of the subsequent
accounting periods. All other financial assets including equity
investments are measured at their fair values at the end of
subsequent accounting periods, with any changes taken through
profit and loss or other comprehensive income (irrevocable election
at the time of recognition). For financial liabilities measured
subsequently at FVTPL, changes in fair value due to credit risk are
recorded in other comprehensive income.
Fair Value
We apply fair value accounting for all financial assets and
liabilities and non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements
on a recurring basis. We define fair value as the price that would
be received from selling an asset or paid to transfer a liability
in an orderly transaction between market participants at the
measurement date. When determining the fair value measurements for
assets and liabilities that are required to be recorded at fair
value, we consider the principal or most advantageous market in
which we would transact and the market-based risk measurements or
assumptions that market participants would use in pricing the asset
or liability, such as risks inherent in valuation techniques,
transfer restrictions and credit risk. Fair value is estimated by
applying the following hierarchy, which prioritizes the inputs used
to measure fair value into three levels and bases the
categorization within the hierarchy upon the lowest level of input
that is available and significant to the fair value
measurement:
Level 1 – Quoted prices in active markets for identical assets or
liabilities.
Level 2 – Observable inputs other than quoted prices in active
markets for identical assets and liabilities, quoted prices for
identical or similar assets or liabilities in inactive markets, or
other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically
reflect management’s estimate of assumptions that market
participants would use in pricing the asset or liability.
Impairment
We assess all information available, including on a forward-looking
basis the expected credit loss associated with our assets carried
at amortized cost. The impairment methodology applied depends on
whether there has been a significant increase in credit risk. To
assess whether there is a significant increase in credit risk, we
compare the risk of a default occurring on the asset at the
reporting date with the risk of default at the date of initial
recognition based on all information available, and reasonable and
supportive forward-looking information. For accounts receivable
only, we apply the simplified approach as permitted by ASU 2016-13,
“Financial Instruments - Credit Losses (Topic 326): Measurement of
Credit Losses on Financial Instruments.” The simplified approach to
the recognition of expected losses does not require us to track the
changes in credit risk; rather, we recognize a loss allowance based
on lifetime expected credit losses at each reporting date from the
date of the trade receivable.
Expected credit losses are measured as the difference in the
present value of the contractual cash flows that are due to us
under the contract, and the cash flows that we expect to receive.
We assess all information available, including past due status,
credit ratings, the existence of third-party insurance, and
forward-looking macro-economic factors in the measurement of the
expected credit losses associated with its assets carried at
amortized cost. We measure expected credit loss by considering the
risk of default over the contract period and incorporates
forward-looking information into its measurement.
Changes in Accounting Policies Including Adoption
In December 2019, the FASB issued ASU 2019- 12, “Simplifying
the Accounting for Income Taxes” which eliminates certain
exceptions related to the approach for intra-period tax allocation,
the methodology for calculating income taxes in an interim period
and the recognition of deferred tax liabilities for outside basis
differences. It also clarifies and simplifies other aspects of the
accounting for income taxes. ASU 2019-12 is effective for fiscal
years beginning after December 15, 2020, and interim periods
within those fiscal years. We are currently evaluating the adoption
date and impact, if any, adoption will have on our consolidated and
combined financial position and consolidated and combined results
of operations.
In January 2020, the FASB issued ASU 2020-01,
“Investments—Equity Securities (Topic 321)”, “Investments— Equity
Method and Joint Ventures (Topic 323)”, and “Derivatives and
Hedging (Topic 815)”, which is intended to clarify the interaction
of the accounting for equity securities under Topic 321 and
investments accounted for under the equity method of accounting in
Topic 323 and the accounting for certain forward contracts and
purchased options accounted for under Topic 815. ASU 2020-01 is
effective for us beginning January 1, 2021. We are currently
evaluating the adoption date and impact, if any, adoption will have
on our consolidated and combined financial position and
consolidated and combined results of operations.
In August 2020, the FASB issued ASU 2020-06, “Debt — Debt
With Conversion and Other Options (Subtopic 470-20)” and
“Derivatives and Hedging — Contracts in Entity’s Own Equity
(Subtopic 815-40): Accounting for Convertible Instruments and
Contracts in an Entity’s Own Equity”, which simplifies the
accounting for certain financial instruments with characteristics
of liabilities and equity, including convertible instruments and
contracts on an entity’s own equity. ASU 2020-06 is effective for
us for fiscal years beginning after December 15, 2021, and
interim periods within those fiscal years. Early adoption is
permitted for fiscal years beginning after December 15, 2020,
and interim periods within those fiscal years. Adoption is applied
on a modified or full retrospective transition approach. We are
currently evaluating the adoption date and impact, if any, adoption
will have on our consolidated and combined financial position and
consolidated and combined results of operations.
Financial Instruments and Other Instruments
Fair Value of Financial Instruments
Our financial instruments consist of cash and cash equivalents,
accounts receivables, investments, notes receivable trade payables,
accrued liabilities, operating lease liabilities and notes payable.
All assets and liabilities for which fair value is measured or
disclosed in the financial statements are categorized within the
fair value hierarchy. This is described, as follows, based on the
lowest level input that is significant to the fair value
measurement as a whole:
Level 1 – inputs are quoted prices in active markets for identical
assets or liabilities at the measurement date.
Level 2 – inputs are observable inputs other than quoted prices
included within Level 1, such as quoted prices for similar assets
or liabilities in active markets, quoted prices for identical
assets or liabilities in markets that are not active, or other
inputs that are observable directly or indirectly.
Level 3 – inputs are unobservable inputs for the asset or liability
that reflect the reporting entity’s own assumptions and are not
based on observable market data.
There have been no transfers between fair value levels during the
years.
Other Risks and Uncertainties
Credit Risk
Credit risk is the risk of a potential loss to us if a customer or
third party to a financial instrument fails to meet its contractual
obligations. The maximum credit exposure at December 31, 2020
and 2019 is the carrying values of cash and cash equivalents,
restricted cash, accounts receivable, and due from related party.
We do not have significant credit risk with respect to our
customers. All cash and cash equivalents are placed with major U.S.
financial institutions. We provide credit to our customers in the
normal course of business and has established credit evaluation and
monitoring processes to mitigate credit risk but has limited risk
as the majority of our sales are transacted with cash.
Liquidity Risk
Liquidity risk is the risk that we will not be able to meet our
financial obligations associated with financial liabilities. We
manage liquidity risk through the management of its capital
structure. Our approach to managing liquidity risk is to ensure
that we will have sufficient liquidity to settle obligations and
liabilities when due. As of December 31, 2020 and 2019, cash
generated from ongoing operations was not sufficient to fund
operations and growth strategy as discussed above in “Financial
Condition, Liquidity and Capital Resources.”
Currency Risk
Our operating results and financial position are reported in U.S.
dollars. Some of our financial transactions are denominated in
currencies other than the U.S. dollar. The results of our
operations are subject to currency transaction and translation
risks. Our main risk is associated with fluctuations in Canadian
dollars. We hold cash in U.S. dollars, investments denominated in
U.S. dollars, debt denominated in U.S. dollars and equity
denominated in U.S. and Canadian dollars. Such assets and
liabilities denominated in currencies other than the U.S. dollar
are translated based on the Company’s foreign currency translation
policy. As of December 31, 2020 and 2019, we had no hedging
agreements in place with respect to foreign exchange rates. We have
not entered into any agreements or purchased any instruments to
hedge possible currency risks at this time.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash
flows of a financial instrument will fluctuate because of changes
in market interest rates. Cash and cash equivalents bear interest
at market rates. The Company’s financial liabilities have fixed
rates of interest and therefore expose the Company to a limited
interest rate fair value risk.
Price Risk
Price risk is the risk of variability in fair value due to
movements in equity or market prices. Our investments are
susceptible to price risk arising from uncertainties about their
future outlook, future values and the impact of market conditions.
The fair value of investments held in privately-held entities are
based on a market approach, which uses prices and other relevant
information generated by market transactions involving identical or
comparable assets or liabilities.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations for the Three Months Ended March 31,
2021 and March 31, 2020 – Mercer Park Brand Acquisition
Corp.
Introduction
The following management’s discussion and analysis (“MD&A”) of
the financial condition and results of the operations of Mercer
Park Brand Acquisition Corp. (“Brand”, the “Corporation”, “we”,
“our” or “us”) constitutes management’s review of the factors that
affected the Corporation’s financial and operating performance for
the three months ended March 31, 2021. This MD&A was written to
comply with the requirements of National Instrument 51-102 –
Continuous Disclosure Obligations. This discussion should be
read in conjunction with the audited financial statements as at
December 31, 2020 and for the year ended December 31, 2020, and the
related notes thereto, as well as the condensed interim financial
statements as at March 31, 2021 and for the three months ended
March 31, 2021, and the related notes thereto. Results are reported
in United States dollars, unless otherwise noted. In the opinion of
management, all adjustments (which consist only of normal recurring
adjustments) considered necessary for a fair presentation have been
included. The results presented for the three months ended March
31, 2021, are not necessarily indicative of the results that may be
expected for any future period. The financial statements and the
financial information contained in this MD&A were prepared in
accordance with accounting principles generally accepted in the
United States of America (“GAAP”). Further information about the
Corporation and its operations can be obtained on
www.sedar.com.
The Corporation intends to focus its search for target businesses
that operate branded product businesses in cannabis and/or
cannabis-adjacent industries; however, the Corporation is not
limited to a particular industry or geographic region for purposes
of completing its Qualifying Transaction (as defined below). Please
refer to the Corporation’s latest annual information form for risk
factors and regulatory information (the “AIF”) regarding the
cannabis industry.
Cautionary Note Regarding Forward-Looking Information
This MD&A contains certain forward-looking information and
forward-looking statements, as defined in applicable securities
laws (collectively referred to herein as “forward-looking
statements”). These statements relate to future events or the
Corporation’s future performance. All statements other than
statements of historical fact are forward-looking statements.
Often, but not always, forward-looking statements can be identified
by the use of words such as “plans”, “expects”, “is expected”,
“budget”, “scheduled”, “estimates”, “continues”, “forecasts”,
“projects”, “predicts”, “intends”, “anticipates” or “believes”, or
variations of, or the negatives of, such words and phrases, or
statements that certain actions, events or results “may”, “could”,
“would”, “should”, “might” or “will” be taken, occur or be
achieved. Forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual
results to differ materially from those anticipated in such
forward-looking statements. The forward-looking statements in this
MD&A speak only as of the date of this MD&A or as of the
date specified in such statement. The following table outlines
certain significant forward-looking statements contained in this
MD&A and provides the material assumptions used to develop such
forward-looking statements and material risk factors that could
cause actual results to differ materially from the forward-looking
statements.
|
Forward-looking
statements |
Assumptions |
Risk
factors |
|
The
Corporation expects to complete a Qualifying Transaction (as
defined below). |
The
Corporation expects to identify an asset or business/businesses to
acquire and close a Qualifying Transaction, on terms favourable to
the Corporation. |
The
Corporation’s inability to find a target to complete a Qualifying
Transaction within the Permitted Timeline (as defined below), as it
may be extended. If we are unable to consummate our Qualifying
Transaction within the Permitted Timeline, we will be required to
redeem 100% of the outstanding Class A Restricted Voting Shares (as
defined below), as described herein. |
|
The
Corporation’s ability to meet its working capital needs at the
current level for the twelve-month period ending March 31,
2022. |
The
operating activities of the Corporation for the twelve-month period
ending March 31, 2022, and the costs associated therewith, will be
consistent with the Corporation’s current expectations; debt and
equity markets, exchange and interest rates and other applicable
economic conditions favourable to the Corporation. |
Changes
in debt and equity markets; timing and availability of external
financing on acceptable terms; increases in costs; regulatory
compliance and changes in regulatory compliance and other local
legislation and regulation; interest rate and exchange rate
fluctuations; changes in economic conditions; impact of COVID-19
and timing of a Qualifying Transaction. |
Inherent in forward-looking statements are risks, uncertainties,
and other factors beyond the Corporation’s ability to predict or
control. Please also refer to those risk factors referenced in the
“Risk Factors” section below and in the AIF. Readers are cautioned
that the above chart does not contain an exhaustive list of the
factors or assumptions that may affect the forward-looking
statements, and that the assumptions underlying such statements may
prove to be incorrect. Actual results and developments are likely
to differ, and may differ materially, from those expressed or
implied by the forward-looking statements contained in this
MD&A.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the Corporation’s
actual results, performance, or achievements to be materially
different from any of its future results, performance or
achievements expressed or implied by forward-looking statements.
All forward-looking statements herein are qualified by this
cautionary statement. Accordingly, readers should not place undue
reliance on forward-looking statements. The Corporation undertakes
no obligation to update publicly or otherwise revise any
forward-looking statements whether because of new information or
future events or otherwise, except as may be required by law. If
the Corporation does update one or more forward-looking statements,
no inference should be drawn that it will make additional updates
with respect to those or other forward-looking statements, unless
required by law.
Description of Business
Brand is a corporation which was incorporated for the purpose of
effecting an acquisition of one or more businesses or assets, by
way of a merger, amalgamation, arrangement, share exchange, asset
acquisition, share purchase, reorganization, or any other similar
business combination involving the Corporation (a “Qualifying
Transaction”). The Corporation’s business activities are carried
out in a single business segment.
The Corporation was incorporated on April 16, 2019 under the
Business Corporations Act (British Columbia), commenced
operations on April 16, 2019. The head office of the Sponsor (as
defined below) is located at 590 Madison Avenue, 26th Floor, New
York, New York, 10022.
On May 13, 2019, the Corporation completed its initial public
offering (the “Offering”) of 40,250,000 Class A Restricted Voting
Units (including 5,250,000 Class A Restricted Voting Units issued
pursuant to the exercise in full of the over-allotment option) at
$10.00 per Class A Restricted Voting Unit. Each Class A Restricted
Voting Unit consisted of one Class A restricted voting share
(“Class A Restricted Voting Share”) of the Corporation and one-half
of a share purchase warrant (each, a “Warrant”). In accordance with
the Corporation’s articles, each Class A Restricted Voting Share,
unless previously redeemed, will be automatically converted into
one Subordinate Voting Share following the closing of a Qualifying
Transaction. All Warrants will become exercisable at a price of
$11.50 per share, commencing 65 days after the completion of a
Qualifying Transaction, and will expire on the day that is five
years after the completion of a Qualifying Transaction or may
expire earlier if a Qualifying Transaction does not occur within
the permitted timeline of 21 months (or 24 months if we have
executed a letter of intent, agreement in principle or definitive
agreement for a Qualifying Transaction within 21 months but have
not completed the Qualifying Transaction within such 21-month
period) (“Permitted Timeline”) (subject to extension, as further
described herein) from the closing of the Offering or if the expiry
date is accelerated. Each Whole Warrant is exercisable to purchase
one Class A Restricted Voting Share (which, following the closing
of the Qualifying Transaction, would become one Subordinate Voting
Share).
In connection with the Offering, the Corporation granted the
underwriter a 30-day non-transferable option to purchase up to an
additional 5,250,000 Class A Restricted Voting Units, at a price of
$10.00 per Class A Restricted Voting Unit, to cover
over-allotments, if any, and for market stabilization purposes. The
overallotment option was exercised prior to the close of the
initial public offering. As a result of the exercise of the
over-allotment option, the Founders, (as defined below) own an
aggregate of 10,089,750 Class B Shares, including 109,000 Class B
Units and 9,810,000 Founders’ Warrants (as defined below).
Concurrent with the completion of the Offering, Mercer Park Brand,
L.P. (formerly Mercer Park CB II, L.P.) (the “Sponsor”), a limited
partnership formed under the laws of the State of Delaware,
indirectly controlled by Mercer Park, L.P., a privately-held family
office based in New York, New York and Charles Miles and Sean
Goodrich (or persons or companies controlled by them) (collectively
with the Sponsor, the “Founders”) purchased an aggregate of
10,089,750 Class B Shares, consisting of 10,069,750 Class B Shares
purchased by the Sponsor, 10,000 Class B Shares purchased by
Charles Miles, and 10,000 Class B Shares purchased by Sean
Goodrich. In addition, the Sponsor purchased an aggregate of
9,810,000 Warrants (“Founders’ Warrants”) at $1.00 per Founders’
Warrant.
Upon closing of the Qualifying Transaction, the Class B Shares
would, in accordance with the Corporation’s articles, convert on a
100-for-1 basis into Multiple Voting Shares.
Each Class A Restricted Voting Unit commenced trading on May 13,
2019 on the Neo Exchange Inc. (the “Exchange”) under the symbol
“BRND.U” and separated into Class A Restricted Voting Shares and
Warrants on June 24, 2019, which trade under the symbols
“BRND.A.U”, and “BRND.WT”, respectively. The Class B Shares issued
to the Founders will not be listed prior to the completion of the
Qualifying Transaction.
The proceeds of $402,500,000 from the Offering are held by Odyssey
Trust Company, as Escrow Agent, in an escrow account (the “Escrow
Account”) at a Canadian chartered bank or subsidiary thereof, in
accordance with the escrow agreement. Subject to applicable law and
payment of certain taxes, permitted redemptions and certain
expenses, as further described herein, none of the funds held in
the Escrow Account will be released to the Corporation prior to the
closing of a Qualifying Transaction. The escrowed funds will be
held to enable the Corporation to (i) satisfy redemptions made by
holders of Class A Restricted Voting Shares (including in the event
of a Qualifying Transaction, or an extension to the Permitted
Timeline to up to 36 months with shareholder approval from the
holders of Class A Restricted Shares and the Corporation’s board of
directors, or in the event a Qualifying Transaction does not occur
within the Permitted Timeline), (ii) fund a Qualifying Transaction
with the net proceeds following payment of any such redemptions and
deferred underwriting commissions, and/or (iii) pay taxes on
amounts earned on the escrowed funds and certain permitted
expenses. Such escrowed funds and all amounts earned, subject to
such obligations and applicable law, will be assets of the
Corporation. These escrowed funds will also be used to pay the
deferred underwriting commissions in the amount of $16,100,000, 75%
of which will be payable by the Corporation to the underwriter only
upon the closing of a Qualifying Transaction (subject to
availability, failing which any short fall would be required to be
made up from other sources) and the remaining 25% of which (or, if
a lesser amount, the balance of the non-redeemed shares' portion of
the Escrow Account, less tax liabilities on amounts earned on the
escrowed funds and certain expenses directly related to
redemptions) will be payable by the Corporation as it sees fit,
including for payment to other agents or advisors who have assisted
with or participated in the sourcing, diligence and completion of
its Qualifying Transaction.
In connection with consummating a Qualifying Transaction, the
Corporation will require approval by a majority of the directors
unrelated to the Qualifying Transaction. In connection with the
Qualifying Transaction, holders of Class A Restricted Voting Shares
will be given the opportunity to elect to redeem all or a portion
of their Class A Restricted Voting Shares at a per share price,
payable in cash, equal to the pro-rata portion per Class A
Restricted Voting Share of: (A) the escrowed funds available in the
Escrow Account at the time immediately prior to the redemption
deposit timeline, including interest and other amounts earned
thereon; less (B) an amount equal to the total of (i) applicable
taxes payable by the Corporation on such interest and other amounts
earned in the Escrow Account and (ii) actual and expected direct
expenses related to the redemption, each as reasonably determined
by the Corporation, subject to certain limitations. Each holder of
Class A Restricted Voting Shares, together with any affiliate of
such holder or any other person with whom such holder or affiliate
is acting jointly or in concert, will be subject to a redemption
limitation of an aggregate 15% of the number of Class A Restricted
Voting Shares issued and outstanding. Class B Shares will not be
redeemable in connection with a Qualifying Transaction or an
extension to the Permitted Timeline and holders of Class B Shares
shall not be entitled to access the Escrow Account should a
Qualifying Transaction not occur within the Permitted Timeline.
If the Corporation is unable to complete its Qualifying Transaction
within the Permitted Timeline (or within an extension of the
Permitted Timeline), the Corporation will be required to redeem
each of the Class A Restricted Voting Shares. The Corporation’s
Warrants (including the Warrants underlying the Class A Restricted
Voting Units and the Class B Units and the Founders’ Warrants) will
expire worthless. In such case, each holder of a Class A Restricted
Voting Share will receive for an amount, payable in cash, equal to
the pro-rata portion per Class A Restricted Voting Share of: (A)
the Escrow Account, including any interest and other amounts
earned; less (B) an amount equal to the total of (i) any applicable
taxes payable by the Corporation on such interest and other amounts
earned in the Escrow Account, (ii) any taxes of the Corporation
arising in connection with the redemption of the Class A Restricted
Voting Shares, and (iii) up to a maximum of $50,000 of interest and
other amounts earned to pay actual and expected expenses related to
the dissolution and certain other related costs as reasonably
determined by the Corporation. The underwriter will have no right
to the deferred underwriting commissions held in the Escrow Account
in such circumstances.
On February 2, 2020, the Corporation announced that it has an
executed letter of intent in connection with a potential
transaction, which would, if consummated, qualify as its qualifying
transaction. Accordingly, the Corporation will be permitted until
May 13, 2021 (24 months following the closing of its initial public
offering) to conclude its qualifying transaction. After
quarter-end, the Corporation has sought an extension to the
permitted timeline, see Subsequent Events, below.
On March 24, 2021, the Corporation began trading on the OTCQX® Best
Market, under the ticker ‘MRCQF’.
Overall Performance
The Corporation has not conducted commercial operations and it is
focused on the identification and evaluation of businesses or
assets to acquire and there were no notable events that occurred
during the reporting periods presented.
For the three months ended March 31, 2021, the Corporation earned
interest income of $60,900 (three months ended March 31, 2020 -
$1,495,772) and reported a loss of $1,348,294 ($0.13 basic and
diluted loss per Class B Share) (three months ended March 31, 2020,
income of $1,336,473 ($0.13 basic and diluted income per Class B
Share)). The expenses for the three months ended March 31, 2021
primarily related to general and administrative expenses of
$1,328,203, foreign exchange loss of $26,199, travel of $54,792,
current income tax recovery of $244,184 and deferred income tax of
$244,184. The expenses for the three months ended March 31, 2020
primarily related to general and administrative expenses of
$164,180, foreign exchange gain of $4,881, travel of $nil, current
income tax recovery of $nil and deferred income tax of $nil.
Current liabilities as of March 31, 2021 total $1,843,980 (December
31, 2020 - $745,813). Shareholders’ deficiency as of March 31, 2021
is comprised of Class B Shares, unlimited, 10,198,751 issued of
$nil (December 31, 2020 - $nil), additional paid-in-capital of
($11,684,284) (December 31, 2020 - ($11,684,284)) and retained
earnings of $2,430,543 (December 31, 2020 - $3,778,837) for a net
amount of ($9,253,741) (December 31, 2020 – ($7,905,447)) in
shareholders’ deficiency.
Commitments and contingencies as of March 31, 2021 total
$402,500,000 (December 31, 2020 - $402,500,000). It is comprised of
Class A Restricted Voting Shares subject to redemption, 40,250,000
shares (at a redemption value of $10.00 per share).
Working capital, which consists of current assets less current
liabilities, is $3,353,497 (December 31, 2020 - $2,559,062) as of
March 31, 2021. Management believes the Corporation’s working
capital is sufficient for the Corporation to meet its ongoing
obligations and meet its objective of completing a Qualifying
Transaction.
The weighted average number of Class B Shares outstanding for the
three months ended March 31, 2021 was 10,198,751 (three months
ended March 31, 2020 – 10,198,751).
Liquidity and Capital Resources
|
Restricted cash and marketable securities held in escrow |
|
March 31, 2021 |
|
|
United States Treasury Bills |
|
$ |
203,709,233 |
|
|
Accrued interest |
|
$ |
33,751 |
|
|
Restricted cash |
|
$ |
201,895,527 |
|
|
Total restricted cash and marketable securities held in escrow |
|
$ |
405,638,511 |
|
| |
|
|
|
|
|
Per Class A Restricted Voting Shares subject to redemption |
|
$ |
10.00 |
|
| |
|
|
|
|
|
Cash held outside the escrow account |
|
$ |
3,630,795 |
|
We intend to use substantially all the funds held in the Escrow
Account, including interest (which interest shall be net of taxes
payable and certain expenses, as well as redemptions) to consummate
a Qualifying Transaction. To the extent that, after redemptions,
our share capital or debt is used, in whole or in part, as
consideration to consummate a Qualifying Transaction, the remaining
proceeds held in the Escrow Account may be used as working capital
to finance the operations of the target business or businesses,
make other acquisitions and/or pursue a growth strategy.
As of March 31, 2021, we had cash held outside of our Escrow
Account of $3,630,795, which is available to fund our working
capital requirements, including any further transaction costs that
may be incurred. We expect to generate negative cash flow from
operating activities in the future until our Qualifying Transaction
is completed and we commence income generation. We intend to employ
a proactive acquisition targeting strategy that identifies
potential acquisition targets that align with the Corporation’s
investment objectives. Consistent with this strategy, we have
identified the following general criteria and guidelines that we
believe are important in evaluating prospective acquisition
targets:
| |
· |
Opportunity
to consolidate a highly fragmented marketplace where even the
largest brands represent less than 10% market share. |
| |
|
|
| |
· |
Ability
to build an institutional-quality cannabis corporation focused on
brands and branded products. |
| |
|
|
| |
· |
Companies
with strong marketing and brand development expertise. |
| |
|
|
| |
· |
Companies
that will benefit from a defined branding strategy. |
| |
|
|
| |
· |
Companies
with additional, strategic capabilities-such as distribution,
manufacturing, or product development-that support brand
value. |
| |
|
|
| |
· |
Orphaned
or underinvested brands within existing companies. |
| |
|
|
| |
· |
Companies
exhibiting growth and profitability performance that could be
enhanced through improved access to capital and financial
expertise. |
| |
|
|
| |
· |
Opportunity
to provide rescue financing for undercapitalized
operators. |
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|
| |
· |
Companies
that will benefit from being a public company. |
Management seeks to ensure that our operational and administrative
costs are minimal prior to the completion of a Qualifying
Transaction, with a view to preserving the Corporation’s working
capital.
We do not believe that we will need to raise additional funds to
meet expenditures required for operating our business until the
consummation of our Qualifying Transaction. We believe that we will
have sufficient available funds outside of the Escrow Account to
operate the business. However, we cannot be assured that this will
be the case. To the extent that the Corporation may require
additional funding for general ongoing expenses or in connection
with sourcing a proposed Qualifying Transaction, we may seek
funding by way of unsecured loans from our Sponsor and/or its
affiliates, up to a maximum aggregate principal amount equal to 10%
of the escrowed funds, subject to the consent of the Exchange,
which loans would, unless approved otherwise by the Exchange, bear
interest at no more than the prime rate plus 1%. Our Sponsor will
not have recourse under such loans against the amounts in escrow.
Such loans will collectively be subject to a maximum principal
amount of 10% of the escrowed funds and may be repayable in cash
following the closing of a Qualifying Transaction and may only be
convertible into Class B Shares and/or Warrants in connection with
the closing of a Qualifying Transaction, subject to Exchange
consent.
Discussion of Operations
Three Months Ended March 31, 2021 Compared to Three Months Ended
March 31, 2020
The Corporation’s net loss totaled $1,348,294 for the three months
ended March 31, 2021, with basic and diluted loss per Class B Share
of $0.13. Activities for this period principally related to general
and administrative expenses of $1,328,203, foreign exchange loss of
$26,199, travel of $54,792, current income tax recovery of $244,184
and deferred income tax of $244,184. These expenses were offset by
interest income of $60,900.
The Corporation’s net income totaled $1,336,473 for the three
months ended March 31, 2020, with basic and diluted income per
Class B Share of $0.13. Activities for this period principally
related to general and administrative expenses of $164,180, foreign
exchange gain of $4,881, travel of $nil, current income tax of $nil
and deferred income tax recovery of $nil. These expenses were
offset by interest income of $1,495,772.
Interest Income
Since completion of the Offering, the Corporation’s activity has
been limited to the evaluation of business acquisition targets, and
we do not expect to generate any operating income until the closing
and completion of a Qualifying Transaction. In the interim, we
expect to generate small amounts of non-operating income in the
form of interest income on cash and short-term investments,
including restricted cash and short-term investments held in
escrow. As of March 31, 2021, all funds held in escrow were
included in United States Treasury Bills, except for $201,895,527
held in a restricted cash account and $33,751 held in accrued
interest. Interest income on these investments is not expected to
be significant in view of the current low interest rates.
During the three months ended March 31, 2021, the Corporation
earned interest income of $60,900 (three months ended March 31,
2020 - $1,495,772).
General and Administrative Expenses
The Corporation’s general and administrative expenses consist of
costs required to maintain its public company status in good
standing, and expenses incurred to evaluate and identify companies,
businesses, assets, or properties for potential acquisition in
connection with the Corporation’s Qualifying Transaction. General
and administrative costs were $1,328,203 for the three months ended
March 31, 2021. General and administrative costs were $164,180 for
the three months ended March 31, 2020.
Off-Balance Sheet Arrangements
As of the date of this filing, the Corporation does not have any
off-balance sheet arrangements that have, or are reasonably likely
to have, a current or future effect on the results of operations or
financial condition of the Corporation including, without
limitation, such considerations as liquidity and capital resources
that have not previously been discussed.
Proposed Transactions
See “Subsequent Events”, below
New standards not yet adopted, and interpretations issued but
not yet effective
The Corporation does not believe that any accounting standards that
have been recently issued but which are not yet effective would
have a material effect on the Financial Statements if such
accounting standards were currently adopted.
Selected Quarterly Information
A
summary of selected information for each of the quarters presented
below is as follows:
| |
|
Income
($) |
|
|
Net (Loss) Income
($) |
|
|
Basic
and Diluted
Loss
per Class B Share
($) (9) |
|
|
March 31, 2021 |
|
|
- |
|
|
$ |
(1,348,294 |
)(8) |
|
|
(0.13 |
) |
| December 31,
2020 |
|
|
- |
|
|
$ |
(144,116 |
)(7) |
|
|
(0.01 |
) |
| September 30,
2020 |
|
|
- |
|
|
$ |
(161,569 |
)(6) |
|
|
(0.02 |
) |
| June 30,
2020 |
|
|
- |
|
|
$ |
(83,442 |
)(5) |
|
|
(0.01 |
) |
| March 31,
2020 |
|
|
- |
|
|
$ |
1,336,473 |
(4) |
|
|
0.13 |
|
| December 31,
2019 |
|
|
- |
|
|
$ |
1,412,880 |
(3) |
|
|
0.16 |
|
| September 30,
2019 |
|
|
- |
|
|
$ |
1,611,697 |
(2) |
|
|
0.16 |
|
| Incorporation
date to June 30, 2019 |
|
|
- |
|
|
$ |
(193,086 |
)(1) |
|
|
(0.03 |
) |
Notes:
(1)
From the Incorporation date to June 30, 2019, the Corporation
earned interest income of $40.00 and reported a loss of $193,086
($0.03 basic and diluted loss per Class B Share). The loss in the
current period primary related to general and administrative
expenses of $191,614 and foreign exchange of $1,512;
(2)
For the three months ended September 30, 2019, the Corporation
earned interest income of $1,695,696 and reported income of
$1,611,697 ($0.16 basic and diluted income per Class B Share). The
income in the current period primary related to general and
administrative expenses of $89,125 and foreign exchange gain of
$5,126;
(3)
For the three months ended December 31, 2019, the Corporation
earned interest income of $1,601,241 and reported income of
$1,412,880 ($0.16 basic and diluted income per Class B Share). The
income in the current period primary related to general and
administrative expenses of $100,398, travel of $85,000, foreign
exchange loss of $2,963, current income tax of $713,425 and
deferred income tax recovery of $713,425;
(4)
For the three months ended March 31, 2020, the Corporation earned
interest income of $1,495,772 and reported income of $1,336,473
($0.13 basic and diluted income per Class B Share). The income in
the current period primary related to general and administrative
expenses of $164,180 and foreign exchange income of $4,881;
(5)
For the three months ended June 30, 2020, the Corporation earned
interest income of $49,036 and reported a loss of $83,442 ($0.01
basic and diluted loss per Class B Share). The loss in the current
period primary related to general and administrative expenses of
$83,493, foreign exchange loss of $28,088 and a current tax expense
of $20,897;
(6)
For the three months ended September 30, 2020, the Corporation
earned interest income of $113,246 and reported a loss of $161,569
($0.02 basic and diluted loss per Class B Share). The loss in the
current period primary related to general and administrative
expenses of $252,429 and foreign exchange loss of $22,386;
(7)
For the three months ended December 31, 2020, the Corporation
earned interest income of $84,693 and reported a loss of $144,116
($0.01 basic and diluted income per Class B Share). The loss in the
current period primary related to general and administrative
expenses of $202,157, foreign exchange gain of $2,451, travel of
$50,000, current income tax recovery of $135,887 and deferred
income tax of $114,990; and
(8)
For the three months ended March 31, 2021, the Corporation earned
interest income of $60,900 and reported a loss of $1,348,294 ($0.13
basic and diluted loss per Class B Share). The loss in the current
period primary related to general and administrative expenses of
$1,328,203, foreign exchange loss of $26,199, travel of $54,792,
current income tax recovery of $244,184 and deferred income tax of
$244,184; and
(9)
Per share amounts are rounded to the nearest cent, therefore
aggregating quarterly amounts may not reconcile to year-to-date per
share amounts.
Related Party Transactions
In May 2019 the Corporation entered into an administrative services
agreement with the Sponsor for an initial term of 18 months,
subject to possible extension, for office space, utilities and
administrative support, which may include payment for services of
related parties, for, but not limited to, various administrative,
managerial or operational services or to help effect a Qualifying
Transaction. The Corporation has agreed to pay $10,000 per month,
plus applicable taxes for such services. As at March 31, 2021, the
Corporation accrued $235,000 (December 31, 2020 - $205,000) in
respect of these services.
On May 13, 2019, the Sponsor executed a make whole agreement and
undertaking in favour of the Corporation, whereby the Sponsor
agreed to indemnify the Corporation in certain limited
circumstances where the funds held in the Escrow Account are
reduced to below $10.00 per Class A Restricted Voting Share.
For the three months ended March 31, 2021, the Corporation paid
professional fees of $15,206 (three months ended March 31, 2020 -
$6,372) to Marrelli Support Services Inc. (“Marrelli Support”), an
organization of which the Corporation's Chief Financial Officer is
Managing Director. These services were incurred in the normal
course of operations for general accounting and financial reporting
matters. As at March 31, 2021, Marrelli Support was owed $15,283
(December 31, 2020 - $9,034) and was included in accounts payable
and accrued liabilities on the Corporation's balance sheet.
From April 16, 2019 (Date of Incorporation) to December 31, 2020
and for the three months ended March 31, 2021, Ayr Wellness Inc.
("Ayr"), a company with common management, incurred travel costs on
behalf of the Corporation. As at March 31, 2021, the Corporation
owed Ayr $188,046 (December 31, 2020 - $135,000) and which included
in due to related parties on the Corporation's balance sheets. This
is based on a cash-call-basis from Ayr.
Accounting Policies and Critical Accounting Estimates
The preparation of the Corporation’s financial statements in
conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, and items in net income or loss and the related
disclosure of contingent assets and liabilities. Critical
accounting estimates represent estimates made by management that
are, by their very nature, uncertain. The Corporation evaluates its
estimates on an ongoing basis. Such estimates are based on
assumptions that the Corporation believes are reasonable under the
circumstances, and these estimates form the basis for making
judgments about the carrying value of assets and liabilities and
the reported amount of items in net income or loss that are not
readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Warrant Valuation
Pursuant to the Offering, the Corporation issued Warrants.
Estimating the fair value of warrants requires determining the most
appropriate valuation model that is dependent on the terms and
conditions of the warrant. The Corporation applies an
option-pricing model to measure the fair value of the Warrants
issued. Application of the option-pricing model requires estimates
in expected dividend yields, expected volatility in the underlying
assets and the expected life of the warrant. These estimates may
ultimately be different from amounts subsequently realized,
resulting in an overstatement or understatement of net income or
loss.
Income Tax
The determination of the Corporation’s income taxes, and other tax
assets and liabilities requires interpretation of complex laws and
regulations. Judgment is required in determining whether deferred
income tax assets should be recognized on the balance sheet.
Deferred income tax assets, including those arising from unutilized
tax losses, require management to assess the likelihood that the
Corporation will generate taxable income in future periods to
utilize recognized deferred tax assets. Estimates of future taxable
income are based on forecasted cash flows from operations and the
application of existing laws in each applicable jurisdiction.
Future taxable income is also significantly dependent upon the
Corporation completing a Qualifying Acquisition, the underlying
structure of a Qualifying Acquisition, and the resulting nature of
operations. To the extent that future cash flows and/or the
probability, structure and timing, and the nature of operations of
a future Qualifying Acquisition differ significantly from estimates
made, the ability of the Corporation to realize a deferred tax
asset could be materially impacted.
Controls and Procedures
The Corporation’s Chief Executive Officer and Chief Financial
Officer are responsible for establishing and maintaining disclosure
controls and procedures and internal control over financial
reporting as defined in the Canadian Securities Administrators’
National Instrument 52-109, “Certification of Disclosure in
Issuer’s Annual and Interim Filings”.
Under their supervision, the Chief Executive Officer and Chief
Financial Officer have implemented disclosure controls and
procedures and internal controls over financial reporting
appropriate for the nature of operations of the Corporation.
Disclosure controls and procedures are designed to ensure that
information required to be disclosed by the Corporation in the
reports it files or submits under securities legislation is
recorded, processed, summarized and reported on a timely basis and
that such information is accumulated and reported to management,
including the Corporation’s Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow required disclosures to
be made in a timely fashion. Internal controls over financial
reporting are designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with IFRS.
The Corporation’s design of its internal controls over financial
reporting is based on the principles set out in the “Internal
Control – Integrated Framework (2013)” issued by The Committee of
Sponsoring Organizations of the Treadway Commission
(COSO)”.
In accordance with National Instrument 52-109 - Certification of
Disclosure in Issuers’ Annual and Interim Filings, the
Corporation has filed certificates signed by its Chief Executive
Officer and the Chief Financial Officer certifying certain matters
with respect to the design of disclosure controls and procedures
and the design of internal control over financial reporting as of
March 31, 2021.
Financial Instruments
The Corporation follows the guidance in ASC 820 for its financial
assets and liabilities that are re-measured and reported at fair
value at each reporting period, and non-financial assets and
liabilities that are re-measured and reported at fair value at
least annually.
The fair value of the Corporation’s financial assets and
liabilities reflects management’s estimate of amounts that the
Corporation would have received in connection with the sale of the
assets or paid in connection with the transfer of the liabilities
in an orderly transaction between market participants at the
measurement date. In connection with measuring the fair value of
its assets and liabilities, the Corporation seeks to maximize the
use of observable inputs (market data obtained from independent
sources) and to minimize the use of unobservable inputs (internal
assumptions about how market participants would price assets and
liabilities). The following fair value hierarchy is used to
classify assets and liabilities based on the observable inputs and
unobservable inputs used in order to value the assets and
liabilities:
Level
1: Quoted prices in active markets for identical assets
or liabilities. An active market for an asset or liability is a
market in which transactions for the asset or liability occur with
sufficient frequency and volume to provide pricing information on
an ongoing basis.
Level
2: Observable inputs other than Level 1 inputs. Examples
of Level 2 inputs include quoted prices in active markets for
similar assets or liabilities and quoted prices for identical
assets or liabilities in markets that are not active.
Level
3: Unobservable inputs based on our assessment of the
assumptions that market participants would use in pricing the asset
or liability.
The following table presents information about the Corporation’s
assets that are measured at fair value on a recurring basis on
March 31, 2021, and indicates the fair value hierarchy of the
valuation inputs the Corporation utilized to determine such fair
value:
| |
|
Carrying
value as of |
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
|
Level 1 (*) |
|
|
Level 2 (*) |
|
|
Level 3 (*) |
|
|
|
|
($) |
|
|
($) |
|
|
($) |
|
|
($) |
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash and marketable securities held in escrow |
|
|
405,638,511 |
|
|
|
405,638,511 |
|
|
|
nil |
|
|
|
nil |
|
(*) Fair values as of March 31, 2021
The Corporation is exposed to financial risks due to the nature of
its business and the financial assets and liabilities that it
holds. The Corporation’s overall risk management strategy seeks to
minimize potential adverse effects of the Corporation’s financial
performance. In particular, the Corporation intends to only invest
the proceeds deposited in the Escrow Account in instruments that
are the obligation of, or guaranteed by, the federal government of
the United States of America or Canada. The Corporation believes
this to be a low-risk strategy until the Corporation completes a
Qualifying Transaction.
Market risk
Market risk is the risk that a material loss may arise from
fluctuations in the fair value of a financial instrument. For
purposes of this disclosure, the Corporation segregates market risk
into three categories: fair value risk, interest rate risk and
currency risk.
Fair value risk
Fair value risk is the potential for loss from an adverse movement,
excluding movements relating to changes in interest rates and
foreign exchange rates, because of changes in market prices. The
Corporation is exposed to minimal fair value risk.
Interest rate risk
Interest rate risk relates to the risk that the fair value or
future cash flows of a financial instrument will fluctuate because
of changes in market interest rates. Due to the fixed interest rate
on the Corporation's restricted cash and short-term balance held in
escrow, its exposure to interest rate risk is nominal.
Currency risk
Currency risk relates to the risk that the fair value or future
cash flows of a financial instrument will fluctuate because of
changes in foreign exchange rates relative to the Corporation’s
presentation currency of the United States dollar. The Corporation
does not currently have any exposure risk as the Corporation
transacts minimally in any currency other than the United States
dollar.
Capital Management
(a) The Corporation defines the capital that it manages as its
shareholders’ deficiency, net of its Class A Restricted Voting
Shares subject to redemption. The following table summarizes the
carrying value of the Corporation’s capital as of March 31,
2021:
| |
|
$ |
|
|
Shareholders’ deficiency |
|
|
(9,253,741 |
) |
| Class
A Restricted Voting Shares subject to redemption |
|
|
402,500,000 |
|
| Balance,
March 31, 2021 |
|
|
393,246,259 |
|
The Corporation’s primary objective in managing capital is to
ensure capital preservation to benefit from acquisition
opportunities as they arise.
(b) Liquidity
As of March 31, 2021, the Corporation had $3,630,795 (December 31,
2020 - $2,095,023) in cash and cash equivalents. The Corporation
expects to incur significant costs in pursuit of its acquisition
plans.
To the extent that the Corporation may require additional funding
for general ongoing expenses or in connection with sourcing a
proposed Qualifying Transaction, the Corporation may obtain such
funding by way of unsecured loans from the Sponsor and/or its
affiliates, subject to consent of the Exchange, which loans would,
unless approved otherwise by the Exchange, bear interest at no more
than the prime rate plus 1%. The Sponsor would not have recourse
under such loans against the Escrow Account, and thus the loans
would not reduce the value of such Escrow Account. Such loans would
collectively be subject to a maximum principal amount of 10% of the
escrowed funds and may be repayable in cash following the closing
of a Qualifying Transaction and may only be convertible into Class
B Shares and/or Warrants in connection with the closing of a
Qualifying Transaction subject to Exchange consent.
Otherwise, and subject to any relief granted by the Exchange, the
Corporation may seek to raise additional funds through a rights
offering in respect of shares available to its shareholders, in
accordance with the requirements of applicable securities
legislation, and subject to placing the required funds raised in
the Escrow Account in accordance with applicable Exchange
rules.
Outlook
For the immediate future, the Corporation intends to identify and
evaluate potential Qualifying Transactions. The Corporation
continues to monitor its spending and will amend its plans based on
business opportunities that may arise in the future.
Share Capital
As of the date of this MD&A, the Corporation had 17,843,851
Class A Restricted Voting Shares of the Corporation issued and
outstanding. In addition, the Corporation had an aggregate of
10,089,751 Class B Shares issued and outstanding.
Risk Factors
Please refer to the Corporation’s AIF for information on the risk
factors to which the Corporation is subject. In addition, see
“Cautionary Note Regarding Forward-Looking Information” above.
COVID-19
The outbreak of the novel strain of coronavirus, specifically
identified as “COVID-19”, has resulted in governments worldwide
enacting emergency measures to combat the spread of the virus.
These measures, which include the implementation of travel bans,
self-imposed quarantine periods and social distancing, have caused
material disruption to businesses globally resulting in an economic
slowdown. Global equity markets have experienced significant
volatility and weakness. It is uncertain what impact this
volatility and weakness will have on the Corporation’s securities
held at fair value and short-term investments. Governments and
central banks have reacted with significant monetary and fiscal
interventions designed to stabilize economic conditions. The
duration and impact of the COVID-19 pandemic is unknown at this
time, as is the efficacy of the government and central bank
interventions. It is not possible to reliably estimate the length
and severity of these developments and the impact on the financial
results and condition of the Corporation in future periods,
including the ability of the Corporation to complete a Qualifying
Transaction.
Subsequent Events
| |
(a) |
On
April 8, 2021, the Corporation announced that it had entered into a
definitive agreement to merge with GH Group, Inc. (the “Glass House
Group Transaction”), a fully-integrated cannabis business in
California, with the right to combine with a state-of-the-art
greenhouse and up to 17 additional dispensary locations that are in
the process of applying for licenses. |
| |
|
|
| |
(b) |
On
May 5, 2021, the Corporation obtained shareholder approval for a
brief extension in its permitted timeline, from May 13, 2021 to
July 30, 2021, in order to enable the Glass House Group Transaction
to be completed. |
| |
|
|
| |
(c) |
On
May 7, 2021, the Corporation received a receipt for a final
non-offering prospectus from the applicable Canadian securities
regulatory authorities in connection with the completion of the
Glass House Group Transaction. On the same date, the Corporation
filed a management information circular in connection with the
shareholders’ meeting scheduled to be held on June 2, 2021 to
approve the Glass House Group Transaction and related
matters. |
| |
|
|
| |
(d) |
Effective
May 13, 2021, in connection with the extension in the permitted
timeline described above, 22,406,149 of the Corporation’s Class A
Restricted Voting Shares were redeemed for US$10.11 per share. An
additional right to redeem the Corporation’s Class A Restricted
Voting Shares will be available to the holders thereof in
connection with the closing of the Glass House Group Transaction.
Subject to the satisfaction or waiver of the applicable conditions
of closing, the Glass House Group Transaction is currently
anticipated to close in the first half of June 2021. |
Management’s Discussion and Analysis of Financial Condition and
Results of Operations for the Three Months Ended March 31, 2021 and
March 31, 2020 – GH Group, Inc.
Overview
GH Group, Inc. (“GH Group” or the “Company”), is a vertically
integrated cannabis company that operates in the state of
California. The Company cultivates, manufactures, and distributes
cannabis consumer packaged goods, primarily to third-party retail
stores in the state of California. The Company also owns and
operates retail cannabis stores in the state of California.
Through these activities, GH Group has established the foundation
for its ultimate strategy – to create the preeminent California
cannabis brand company through a fully vertically integrated
commercial cannabis company engaged in all licensed verticals –
(i) cultivation; (ii) manufacturing;
(iii) distribution; and (iv) retail – and providing
customers with consistently high-quality products across a range of
trusted and recognizable brands.
Recent Developments
Series A Preferred Stock
On June 29, 2021, the Company completed a Preferred Stock
offering exchanging both principal and interest accrued to
participating investors and issued both Company Preferred Stock and
warrants. The completion of the Preferred Stock offering triggered
the conversion of all of the Company’s outstanding Convertible
Promissory Notes. The completion of this transaction eliminated
over $35,500,000 of debt as described above. The warrants issued,
upon the closing of the Mercer Park transaction (see below), would
be exchanged at a rate that provide for one Mercer Park warrant for
each $10 of Preferred Stock issued and having an exercise price of
$10.
Acquisition of Farmacy Berkeley
On January 1, 2021 the Company completed an acquisition of
100% of the equity interests of iCANN, LLC dba Farmacy Berkeley
(“iCANN”) a licensed retail cannabis company located in Berkeley,
California. Pursuant to the terms of the merger agreement between
as subsidiary of the Company and iCANN the following occurred:
(i) the Company elected to convert earlier issued convertible
notes with principal amount of $2,000,000 and accrued interest of
$45,309 into equity interests of iCANN; (ii) the Company paid
$400,000 in cash to four holders of iCANN equity interests:
(iii) the Company issued 7,511,728 Class A Common shares
to holders of iCANN equity interests; and (iv) $42,956 in cash
to the remaining holders of iCANN equity interests.
Mercer Park Brand Acquisition Corp.
On December 29, 2020 the Company and Mercer Park Brand
Acquisition Corp., an Ontario special purpose acquisition
corporation (“Mercer Park”) that is traded on the NEO exchange in
Canada entered into a letter of intent (“LOI”) whereby Mercer Park
would acquire all of the equity interests by merger of the Company
for $325,000,000 in Mercer Park shares at $10.00 per share. At the
close of the proposed merger: (i) Mercer Park is required to
possess $185,000,000 in cash net of all closing and other expenses;
(ii) the founders of the Company would possess the majority of
voting rights; (iii) Mercer Park would designate one board
director, Glass House would designate four directors and an
additional two will be neutral and chosen by mutual agreement.
Further, of the 10,889,750 founders shares of Mercer Park 25% will
be earned only if the share price exceeds certain thresholds and
for any earned Glass House Group shareholders will receive 1.5
times such number of shares; an additional 25% will be earned based
on outcomes of capital raising activities, if required, or if the
share price exceeds certain further thresholds. On April 8,
2021 a series of definitive agreements were entered into containing
the terms outlined above. Subsequently, on June 29, 2021, the
transaction was complete.
Greenhouse Option Acquisition
GH Group is seeking to acquire (and subsequently exercise) an
option to acquire the land and buildings on which a greenhouse is
located in Ventura County, California (the “Greenhouse Option
Acquisition”). GH Group is currently conducting due diligence on
the Greenhouse Option Acquisition and expects the transaction to
close in Q3 2021.
The Greenhouse Option Acquisition involves the proposed acquisition
of an option to acquire a greenhouse (land and building)
(collectively, the “Greenhouse”). The Greenhouse is currently
leased by one or more farmers from its owner to grow non-cannabis
crops. At the time of acquiring the Greenhouse, the current owner
granted the prior owner (the “Optionholder”) an option (the
“Greenhouse Option”) to acquire the Greenhouse for approximately
$120,000,000. The Greenhouse is uniquely suited to meet the license
requirements for cannabis cultivation in Ventura County,
California. GH Group is interested in this opportunity and are in
discussions with the Optionholder for the purchase of the
Greenhouse Option (either directly or by acquiring 100% of the
equity in the entity that owns the Greenhouse). The Company
believes, as does the Optionholder, that the Greenhouse would have
substantial value if repurposed for cannabis production. In
connection with completing the Greenhouse Option Acquisition, GH
Group intends to apply for a license to use the Greenhouse to
produce cannabis. The proposed transaction is as follows:
a. GH Group would acquire the Greenhouse Option from
the Optionholder for approximately $100,000,000 (before including
any earn-out consideration), and then exercise it at a cost of
approximately $120 million, payable in cash. The $100,000,000 would
be payable in common or subordinate voting shares of Mercer Park
(or shares of a subsidiary exchangeable therefor) at a value of
$10.00 per share.
b. Once licensed, GH Group would commence a phased
construction project to alter the Greenhouse to produce cannabis in
lieu of its current function of growing non-cannabis crops.
c. In addition, GH Group would retain the Optionholder,
who GH Group considers to be a greenhouse operations expert, in a
consulting or employment capacity, and would agree to pay him up to
$75 million as an earnout as part of the purchase price for the
Greenhouse Option Acquisition based on the success of the
construction project and the performance of the proposed cannabis
operations at the Greenhouse
Retail Expansion
GH Group has executed an agreement with Element 7, LLC (“Element
7”) whereby GH Group has the right, subject to satisfactory
completion of due diligence and other conditions, to acquire
entities which are in the process of applying for up to 17 local
retail cannabis licenses in California. A subsidiary of GH Group
will have the right to acquire membership interests of Element 7
entities, by way of merger, in exchange for shares of Mercer Park,
with shares issued at $10.00 per share. This could result in the
issuance of up to 2,400,000 shares in the amount up to
$24,000,000.
Major Business Lines and Geographies
GH Group views its financial results under one business line – the
creation of dominant, extensible CPG products and brands through
cannabis cultivation, production, and sales. GH Group generates all
of its revenue in the State of California.
While many cannabis businesses prioritized brand building and
customer acquisition before securing a reliable product flow, the
Company believes that in a consumer-focused CPG space, consistent
delivery of high-quality product at an attractive price point is a
first principle, and a prerequisite for any other activity.
Cannabis Cultivation, Production, and Sales
GH Group operates greenhouse cultivation facilities in Carpinteria
and [Santa Barbara], California. GH Group’s production facility is
located in Lompoc, California.
GH Group generates revenue by selling its products both to its own
and third-party dispensaries in California, including both raw
cannabis, cannabis oil, and cannabis consumer goods. GH Group’s
dispensaries are located in Santa Barbara, Santa Ana, and Berkeley,
California.
Geographic Areas
All of GH Group’s revenue is derived from the California cannabis
market.
Market Update and Objectives
The state of California represents the largest single market for
cannabis in the U.S., with over $7 billion in revenues in 2020 and
an adult population of over 31 million. The California market is
highly fragmented, with over 6,000 cultivation licenses in
operation, over 1,000 distribution licenses over 700 operational
dispensaries and greater than 1,000 brands. With this backdrop, GH
Group looks to use scale in cultivation and distribution (through
its own dispensaries and third party retailers) to achieve
economies of scale that allow GH Group to outperform competitors
and build superior brand awareness and loyalty.
Results of Operations
The following are the results of our operations for the three
months ended March 31, 2021 compared to three months ended
March 31, 2020:
| |
|
2021 |
|
|
2020 |
|
|
Revenues, Net |
|
$ |
15,240,281 |
|
|
$ |
6,449,327 |
|
|
Cost of Goods Sold |
|
|
9,798,285 |
|
|
|
4,985,843 |
|
| |
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
5,441,996 |
|
|
|
1,463,484 |
|
| |
|
|
|
|
|
|
|
|
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
General and Administrative |
|
|
5,835,731 |
|
|
|
4,107,858 |
|
|
Sales and Marketing |
|
|
488,535 |
|
|
|
354,425 |
|
|
Professional Fees |
|
|
3,352,751 |
|
|
|
645,046 |
|
|
Depreciation and Amortization |
|
|
724,454 |
|
|
|
531,405 |
|
| |
|
|
|
|
|
|
|
|
|
Total Operating Expenses |
|
|
10,401,471 |
|
|
|
5,638,734 |
|
| |
|
|
|
|
|
|
|
|
|
Loss from Operations |
|
|
(4,959,475 |
) |
|
|
(4,175,250 |
) |
| |
|
|
|
|
|
|
|
|
| Other
Expense (Income): |
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
1,010,428 |
|
|
|
363,069 |
|
|
Interest Income |
|
|
(16,086 |
) |
|
|
(98,341 |
) |
|
(Income) Loss on Investments |
|
|
(1,388 |
) |
|
|
19,197 |
|
|
(Gain) Loss on Change in Fair Value of Derivative Liabilities |
|
|
(671,000 |
) |
|
|
129,699 |
|
|
Loss on Disposition of Subsidiary |
|
|
6,090,339 |
|
|
|
- |
|
|
Other Expense (Income), Net |
|
|
6,024 |
|
|
|
(14,813 |
) |
| |
|
|
|
|
|
|
|
|
|
Total Other Expense, Net |
|
|
6,418,317 |
|
|
|
398,811 |
|
| |
|
|
|
|
|
|
|
|
| Loss
from Operations Before Provision for Income Taxes |
|
|
(11,377,792 |
) |
|
|
(4,574,061 |
) |
|
Provision for Income Taxes |
|
|
1,776,001 |
|
|
|
566,593 |
|
|
Net Loss |
|
$ |
(13,153,793 |
) |
|
$ |
(5,140,654 |
) |
Revenue
Revenue for the three months ended March 31, 2021 was $15.2
million, which represents an increase of $8.8 million or 136% from
$6.4 million for the three months ended March 31, 2020. The
increase in revenue was primarily due to an increase in cannabis
production from the Company’s second greenhouse cultivation
facility, which commenced operations in Q1 2020. The expansion of
the cultivation facility was increased from 113,000 square feet
during 2020 to over 390,000 square feet by the end of 2020. The
Company’s wholesale and wholesale CPG revenue increased by $7.2
million or 230% for the three months ended March 31, 2021 from
the three months ended March 31, 2020. The Company’s cannabis
retail dispensaries also contributed consistent revenue growth, and
had an increase of $1.6 million, or 49%, in retail sales during the
three months ended March 31, 2021 compared to retail sales
during the comparative period in the prior year.
Cost of Goods Sold and Gross Profit
Cost of goods sold for the three months ended March 31, 2021
was $9.7 million, an increase of $4.8 million, or 97%, compared
with $4.9 million for the three months ended March 31, 2020.
Gross profit for the three months ended March 31, 2021 was
$5.4 million, representing a gross margin of 36%, compared with a
gross profit of $1.4 million, representing a gross margin of 23%
for the three months ended March 31, 2020. The increase in
cost of goods sold was primarily attributable to the Company’s
increase in revenues during the three months ended March 31,
2021 which resulted in increased cost of goods sold. The Company’s
gross profit for the three months ended March 31, 2021 as a
percentage of revenues improved compared to the same period in the
prior year as a result of the Company’s continual improvement in
efficiencies in relation to its cultivation facilities during the
year ended 2020 through March 31, 2021.
Total Operating Expenses
Total operating expenses for the three months ended March 31,
2021 was $10.4 million, an increase of $4.7 million, or 84%,
compared to total expenses of $5.6 million for the three months
ended March 31, 2020. The increase in total expenses was
attributable to the factors described below.
General and administrative expenses for the three months ended
March 31, 2021 and March 31, 2020 was $5.8 million and
$4.1 million, respectively, an increase of $1.7 million, or 42%.
The increase in general and administrative expenses is primarily
attributed to the Company’s initiatives of operational expansion
and used to support corporate, cultivation and retail operations
which resulted in an increase in salaries and wages of $1.0 million
and an increase in stock based compensation of $1.0 million during
the three months ended March 31, 2021.
Sales and marketing expenses for the three months ended
March 31, 2021 and March 31, 2020 were $0.5 million and
$0.4 million, respectively, an increase of $0.1 million, or 38%.
The increase in sales and marketing expenses is primarily
attributed to the increase in the Company’s efforts related to
digital media and marketing research expenses of $0.1 million.
Sales and marketing expenses include trade marketing, point of sale
marketing for our CPG product lines and promotions in various media
outlets.
Professional fees for the three months ended March 31, 2021
and March 31, 2020 was $3.4 million and $0.6 million,
respectively, an increase of $2.7 million, or 420%. During the
first quarter of 2021, the Company recognized increased legal fee
of $0.7 million coupled with increased accounting and consulting
professional fees of $2.0 million related to the preparation of the
merger with Mercer Park.
Depreciation and amortization for the three months ended
March 31, 2021 and March 31, 2020 was $0.7 million and
$0.5 million, respectively, an increase of $0.2 million, or 28%.
The increase is attributed to the growth of the Company’s
operations through acquisitions and purchase of additional $1.3
million of fixed assets during the three months ended
March 31, 2021.
Total Other Expense, Net
Total other expense for the three months ended March 31, 2021
and 2020 was $6.4 million and $0.4 million, respectively, an
increase of $6.0 million, or 1509%. The increase in total other
expense was due to $6.0 million expensed during the three months
ended March 31, 2021 due to the deconsolidation of Field
Investment Co, LLC a subsidiary and its subsidiaries Field Taste
Matters, Inc., ATES Enterprises, LLC, and Zero One Seven
Management, LLC for de minimis consideration to an unrelated party
coupled with an increase of interest expense of $0.6 million offset
by a change in fair value of derivative liabilities of $0.8 million
compared to the same period in the prior year.
Provision for Income Taxes
The provision for income taxes for the three months ended
March 31, 2021 was $1.8 million, an increase of $1.2 million,
or 213%, compared to provision for income taxes of $0.6 million for
the three months ended March 31, 2020. The increase in
provision for income taxes was directly impacted by the Company’s
increase in operations and revenues for the current period.
Non-GAAP Financial Measures
Earnings before interest, taxes, depreciation, and amortization
(EBITDA) and Adjusted EBITDA are non-GAAP measures and do not have
standardized definitions under U.S. GAAP. The Company has provided
the non-GAAP financial measures, which are not calculated or
presented in accordance with U.S. GAAP, as supplemental information
and in addition to the financial measures that are calculated and
presented in accordance with U.S. GAAP and may not be comparable to
similar measures presented by other issuers. These supplemental
non-GAAP financial measures are presented because management has
evaluated the financial results both including and excluding the
adjusted items and believe that the supplemental non-GAAP financial
measures presented provide additional perspective and insights when
analyzing the core operating performance of the business. These
supplemental non-GAAP financial measures should not be considered
superior to, as a substitute for or as an alternative to, and
should only be considered in conjunction with, the U.S. GAAP
financial measures presented herein. Accordingly, the Company has
included below reconciliations of the supplemental non-GAAP
financial measures to the most directly comparable financial
measures calculated and presented in accordance with U.S. GAAP.
The following table provides a reconciliation of the Company’s net
loss to Adjusted EBITDA (non-GAAP):
| |
|
2021 |
|
|
2020 |
|
|
Net Loss (GAAP) |
|
$ |
(13,153,793 |
) |
|
$ |
(5,140,654 |
) |
|
Depreciation and Amortization |
|
|
724,454 |
|
|
|
531,405 |
|
|
Interest Expense |
|
|
1,010,428 |
|
|
|
363,069 |
|
|
Income Tax Expense |
|
|
1,776,001 |
|
|
|
566,593 |
|
|
EBITDA |
|
|
(9,642,910 |
) |
|
|
(3,679,587 |
) |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
Shared-Based Compensation |
|
|
1,606,462 |
|
|
|
556,692 |
|
|
(Income) Loss on Equity Method Investments |
|
|
(1,388 |
) |
|
|
19,197 |
|
|
(Gain) Loss on Change in Fair Value of Derivative Liabilities |
|
|
(671,000 |
) |
|
|
129,699 |
|
|
Other Non-Recurring Items: |
|
|
|
|
|
|
|
|
|
Acquisition Related Professional Fees |
|
|
3,186,451 |
|
|
|
239,751 |
|
|
Loss on Disposition of Subsidiary |
|
|
6,090,339 |
|
|
|
- |
|
|
Adjusted EBITDA (non-GAAP) |
|
$ |
567,954 |
|
|
$ |
(2,734,248 |
) |
Adjusted EBITDA (non-GAAP)
Adjusted EBITDA, a non-GAAP measure which excludes depreciation and
amortization, interest expense, income taxes, share-based
compensation, (income) loss on equity method investments, (gain)
loss on change in fair value of derivative liabilities, acquisition
related professional fees, and loss on disposition of subsidiary
was $0.5 million for the three months ended March 31, 2021
compared to a $2.7 million loss for the three months ended
March 31, 2020. The increase in adjusted EBITDA of $3.2
million is due to higher gross profit partially offset by higher
operating expenses.
Liquidity and Capital Resources
Overview
Historically, GH Group’s primary source of liquidity has been
capital contributions made by equity investors and debt issuances.
GH Group expects to generate positive cash flow from its operations
going forward and expects such positive cash flow to be its
principal source of future liquidity. Liquidity risk is the risk
that the Company will not be able to meet its financial obligations
associated with financial liabilities. The Company manages
liquidity risk through the management of its capital structure. The
Company’s approach to managing liquidity is to ensure that it will
have sufficient liquidity to settle obligations and liabilities
when due. In the event sufficient cash flow is not available from
operating activities, GH Group may continue to raise equity or debt
capital from investors in order to meet liquidity needs.
Financial Condition
Cash Flows
The following table summarizes GH Group’s consolidated statement of
cash flows from continuing operations for the three months ended
March 31, 2021 and 2020:
| |
|
2021 |
|
|
2020 |
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES |
|
$ |
(945,124 |
) |
|
$ |
(5,247,564 |
) |
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES |
|
|
(1,727,889 |
) |
|
|
(3,274,691 |
) |
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES |
|
|
9,748,392 |
|
|
|
9,451,887 |
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS |
|
|
7,075,379 |
|
|
|
929,632 |
|
|
Cash and Cash Equivalents, Beginning of Period |
|
|
4,535,251 |
|
|
|
2,631,886 |
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
$ |
11,610,630 |
|
|
$ |
3,561,518 |
|
Cash Flow from Operating Activities
Net cash used in operating activities was $0.9 million for the
three months ended March 31, 2021, a decrease of $4.3 million,
or 82%, compared to $5.2 million for the three months ended
March 31, 2020. The decrease in cash used was primarily due to
an increase of $4.0 million of gross margin.
Cash Flow Used in Investing Activities
Net cash used in investing activities was $1.7 million for the
three months ended March 31, 2021, a decrease of $1.6 million,
or 47%, compared to $3.3 million for the three months ended
March 31, 2020. This was primarily driven by the decrease in
issuance of notes receivables in the amount of $1.1 million during
the three months ended March 31, 2020, compared to nil during
the current period.
Cash Flow Provided by Financing Activities
Net cash provided by financing activities totaled $9.7 million for
the three months ended March 31, 2021, an increase of $0.3
million, or 3%, compared to $9.4 million for the three months ended
March 31, 2020. This was primarily driven by cash proceeds
from the issuance of notes and convertible notes payable during the
current period of $12.5 million, compared to $9.6 million during
the first quarter of 2020. Cash proceeds provided during the
current period were offset by payments on notes and convertible
notes during the current period of $0.6 million, compared to $0.2
million during the first quarter of 2020.
As previously noted, GH Group’s primary source of liquidity has
been capital contributions and debt capital made available from
investors. GH Group expects to generate positive cash flow from its
operations going forward and expects such positive cash flow to be
its principal source of future liquidity. In the event sufficient
cash flow is not available from operating activities, GH Group may
continue to raise equity capital from investors in order to meet
liquidity needs. GH Group does not have any committed sources of
financing, nor significant outstanding capital expenditure
commitments.
Contractual Obligations
GH Group has contractual obligations to make future payments,
including debt agreements and lease agreements from third parties
and related parties.
The following table summarizes such obligations as of
March 31, 2021:
| |
|
2021 |
|
|
2022 |
|
|
2023- 2024 |
|
|
After 2024 |
|
|
Total |
|
| |
|
(remaining) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable from Third Parties and Related Parties |
|
$ |
10,004,848 |
|
|
$ |
2,048,764 |
|
|
$ |
25,830,228 |
|
|
$ |
52,528 |
|
|
$ |
37,936,368 |
|
|
Leases Obligations |
|
|
472,306 |
|
|
|
633,127 |
|
|
|
1,270,379 |
|
|
|
2,980,019 |
|
|
|
5,355,831 |
|
|
Total Contractual Obligations |
|
$ |
10,477,154 |
|
|
$ |
2,681,891 |
|
|
$ |
27,100,607 |
|
|
$ |
3,032,547 |
|
|
$ |
43,292,199 |
|
On June 29, 2021, over $37,600,000 of Notes Payable was
converted to equity.
Transactions with Related Parties During the Three Months
Ended March 31, 2021
Private Placement
On January 8, 2020, the board of directors approved
approximately $17,500,000 of private placement of Senior
Convertible Notes. On January 4, 2021, the board of directors
approved an increase of the Senior Convertible Notes offering to
$22,599,844. The Senior Convertible Notes are automatically
converted in the event of a Qualified Equity Financing (“QEF”) at
the better of an 80% discount or a valuation cap of $250,000,000 or
may be optionally converted at the election of the holder. The
Senior Convertible Notes bear cash interest at a rate of 4% per
year paid quarterly and generally accrue interest at a rate of 4.3%
per year. The Senior Convertible Note holders were issued a
security interest in the stock and membership interests held by the
Company in its subsidiaries. As of March 31, 2021 and
December 31, 2020, the balance due under these Senior
Convertible Notes from related parties was $2,088,331 and
$2,049,037, respectively.
Magu Farm Lenders Debt Transactions
In 2018, Magu Farm LLC issued approximately $9,925,000 in secured
promissory notes convertible into equity interests in Magu
Investment Fund (collectively, the “Magu Farm Convertible
Notes”) to certain lenders who are affiliates of shareholders
of the Company (collectively, the “Magu Farm Lenders,” and
individually, a “Magu Farm Lender”)
On October 7, 2019, Magu Farm LLC and Magu Investment Fund
notified each Magu Farm Lender of Magu Investment Fund’s intention
to merge with and into the Company at the closing of the Roll-Up.
Subsequent to such notification, effective as of October 7,
2019, each Magu Farm Lender other than Kings Bay Investment Company
Ltd., a Cayman Islands company (“KBIC”), entered into a
letter agreement pursuant to which such Magu Farm Lender, among
other things, (a) converted its respective Magu Farm
Convertible Note with an aggregate value of $8,000,000 into equity
interests in Magu Investment Fund and (b) agreed to terminate
both the Co-Lending Agreement and its respective security interest
as defined in the agreement. All accrued and unpaid interest were
paid prior to conversion. Effective as of March 1, 2020, KBIC
assigned its Magu Farm Convertible Notes (“Kings Bay Note”) to
Kings Bay Capital Management Ltd., a Cayman Islands company
(“KBCM”).
Effective as of April 10, 2020, KBCM and the Company entered
into an Assignment, Novation and Note Modification Agreement and a
Security Agreement, pursuant to which, among other things,
(a) the company assumed all of Magu Farm LLC’s rights, duties,
liabilities and obligations under the Kings Bay Note, (b) the
Kings Bay Note was modified, among other things, such that KBCM has
the right to convert the Kings Bay Note into Class A Shares at
the same conversion price accorded to the other Magu Farm Lenders,
and (c) the obligations under the Kings Bay Note were secured
by a pledge of the securities of Glass House’s subsidiaries but
expressly subordinated to the holders of the Senior Convertible
Notes. As of March 31, 2021 and December 31, 2020, the
balance due to KBCM is $2,158,195 and $2,189,264, respectively.
BFP Debt Transaction
On February 22, 2021, Beach Front Properties, LLC, a
California limited liability company (“BFP”), issued
$2,000,000 in promissory note to the Company. The debt matures in
February 2023 and bears interest at 15.00 percent per year. As
of March 31, 2021 and December 31, 2020, the balance was
$2,029,932 and nil, respectively.
Qualified Equity Financing
In March 2021, the Company began to raise Series A
Preferred Stock Financing round of $12,000,000. The Preferred Stock
will carry an annual 15.00 percent cumulative dividend in year 1.
During March 2021, the Company raised $2,125,000 from related
parties. Until the financing round closes, the amount raised
through March 31, 2021 was recorded as short-term debt. As of
March 31, 2021 and December 31, 2020, the note payable
balance was $2,138,223 and nil, respectively.
Asset Management Fees
The Company has an agreement with certain related parties which
provide asset management services. Fees are paid quarterly. For the
three months ended March 31, 2021 and 2020, the Company
incurred expenses of nil and nil, respectively.
Critical Accounting Estimates
Use of Estimates
The preparation of the unaudited Condensed Interim Consolidated
Financial Statements in accordance with GAAP requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities at the dates of unaudited Condensed Interim
Consolidated Financial Statements and the reported amounts of total
net revenue and expenses during the reporting period. The Company
regularly evaluates significant estimates and assumptions related
to the consolidation or non-consolidation of variable interest
entities, estimated useful lives, depreciation of property and
equipment, amortization of intangible assets, inventory valuation,
share-based compensation, business combinations, goodwill
impairment, long-lived asset impairment, purchased asset
valuations, fair value of financial instruments, compound financial
instruments, derivative liabilities, deferred income tax asset
valuation allowances, incremental borrowing rates, lease terms
applicable to lease contracts and going concern. These estimates
and assumptions are based on current facts, historical experience
and various other factors that the Company believes to be
reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and
liabilities and the recording of revenue, costs and expenses that
are not readily apparent from other sources. The actual results the
Company experiences may differ materially and adversely from these
estimates. To the extent there are material differences between the
estimates and actual results, the Company’s future results of
operations will be affected.
Estimated Useful Lives and Depreciation of Property and
Equipment
Depreciation of property and equipment is dependent upon estimates
of useful lives which are determined through the exercise of
judgment. The assessment of any impairment of these assets is
dependent upon estimates of recoverable amounts that take into
account factors such as economic and market conditions and the
useful lives of assets.
Estimated Useful Lives and Amortization of Intangible
Assets
Amortization of intangible assets is dependent upon estimates of
useful lives and residual values which are determined through the
exercise of judgment. Intangible assets that have indefinite useful
lives are not subject to amortization and are tested annually for
impairment, or more frequently if events or changes in
circumstances indicate that they might be impaired. The assessment
of any impairment of these assets is dependent upon estimates of
recoverable amounts that take into account factors such as economic
and market conditions.
Impairment of Long-Lived Assets
For purposes of the impairment test, long-lived assets such as
property, plant and equipment and definite-lived intangible assets
are grouped with other assets and liabilities at the lowest level
for which identifiable independent cash flows are available (“asset
group”). The Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. In order to
determine if assets have been impaired, the impairment test is a
two-step approach wherein the recoverability test is performed
first to determine whether the long-lived asset is recoverable. The
recoverability test (Step 1) compares the carrying amount of the
asset to the sum of its future undiscounted cash flows using
entity-specific assumptions generated through the asset’s use and
eventual disposition. If the carrying amount of the asset is less
than the cash flows, the asset is recoverable and an impairment is
not recorded. If the carrying amount of the asset is greater than
the cash flows, the asset is not recoverable and an impairment loss
calculation (Step 2) is required. The measurement of the impairment
loss to be recognized is based on the difference between the fair
value and the carrying value of the asset group. Fair value can be
determined using a market approach, income approach or cost
approach. The cash flow projection and fair value represents
management’s best estimate, using appropriate and customary
assumptions, projections and methodologies, at the date of
evaluation. The reversal of impairment losses is prohibited.
Leased Assets
As a result of the adoption of Audit Standards Update (“ASU”)
2016-02, “Leases (Topic 842)” (“ASC 842”) using the full
retrospective approach, which provides a method for recording
existing leases at adoption using the effective date as its date of
initial application. Accordingly, the Company has recorded its
leases at inception of the Company. The Company elected the package
of practical expedients provided by ASC 842, which forgoes
reassessment of the following upon adoption of the new standard:
(1) whether contracts contain leases for any expired or
existing contracts, (2) the lease classification for any
expired or existing leases, and (3) initial direct costs for
any existing or expired leases. In addition, the Company elected an
accounting policy to exclude from the balance sheet the
right-of-use assets and lease liabilities related to short-term
leases, which are those leases with a lease term of twelve months
or less that do not include an option to purchase the underlying
asset that the Company is reasonably certain to exercise.
The Company applies judgment in determining whether a contract
contains a lease and if a lease is classified as an operating lease
or a finance lease. The Company applies judgement in determining
the lease term as the non-cancellable term of the lease, which may
include options to extend or terminate the lease when it is
reasonably certain that the Company will exercise that option. All
relevant factors that create an economic incentive for it to
exercise either the renewal or termination are considered. The
Company reassesses the lease term if there is a significant event
or change in circumstances that is within its control and affects
its ability to exercise or not to exercise the option to renew or
to terminate. In adoption of ASC 842, the Company applied the
practical expedient which applies hindsight in determining the
lease term and assessing impairment of right-of-use assets by using
its actual knowledge or current expectation as of the effective
date. The Company also applies judgment in allocating the
consideration in a contract between lease and non-lease components.
It considers whether the Company can benefit from the right-of-use
asset either on its own or together with other resources and
whether the asset is highly dependent on or highly interrelated
with another right of-use asset. Lessees are required to record a
right of use asset and a lease liability for all leases with a term
greater than twelve months. Lease liabilities and their
corresponding right-of-use assets are recorded based on the present
value of lease payments over the expected remaining lease term. The
incremental borrowing rate is determined using estimates which are
based on the information available at commencement date and
determines the present value of lease payments if the implicit rate
is unavailable.
Income Taxes
Deferred tax assets and liabilities are recorded for the estimated
future tax effects of temporary differences between the tax basis
of assets and liabilities and amounts reported in the combined
balance sheet. Effects of enacted tax law changes on deferred tax
assets and liabilities are reflected as adjustments to tax expense
in the period in which the law is enacted. Deferred tax assets may
be reduced by a valuation allowance if it is deemed more likely
than not that some or all of the deferred tax assets will not be
realized.
The Company follows accounting guidance issued by the Financial
Accounting Standards Board (“FASB”) related to the application of
accounting for uncertainty in income taxes. Under this guidance,
the Company assesses the likelihood of the financial statement
effect of a tax position that should be recognized when it is more
likely than not that the position will be sustained upon
examination by a taxing authority based on the technical merits of
the tax position, circumstances, and information available as of
the reporting date.
Convertible Instruments
The Company evaluates and accounts for conversion options embedded
in its convertible instruments in accordance with ASC 815,
“Accounting for Derivative Instruments and Hedging Activities”.
Professional standards generally provide three criteria that, if
met, require companies to bifurcate conversion options from their
host instruments and account for them as free standing derivative
financial instruments. These three criteria include circumstances
in which (a) the economic characteristics and risks of the
embedded derivative instrument are not clearly and closely related
to the economic characteristics and risks of the host contract,
(b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not remeasured at
fair value under otherwise applicable generally accepted accounting
principles with changes in fair value reported in earnings as they
occur and (c) a separate instrument with the same terms as the
embedded derivative instrument would be considered a derivative
instrument. Professional standards also provide an exception to
this rule when the host instrument is deemed to be
conventional as defined under professional standards as “The
Meaning of Conventional Convertible Debt Instrument”.
The Company accounts for convertible instruments (when it has
determined that the embedded conversion options should not be
bifurcated from their host instruments) in accordance ASC 470,
“Accounting for Convertible Securities with Beneficial Conversion
Features”, as those professional standards pertain to “Certain
Convertible Instruments”. Accordingly, the Company records, when
necessary, discounts to convertible notes for the intrinsic value
of conversion options embedded in debt instruments based upon the
differences between the fair value of the underlying common stock
at the commitment date of the note transaction and the effective
conversion price embedded in the note. Debt discounts under these
arrangements are amortized over the term of the related debt to
their earliest date of redemption. The Company also records when
necessary deemed dividends for the intrinsic value of conversion
options embedded in preferred shares based upon the differences
between the fair value of the underlying common stock at the
commitment date of the note transaction and the effective
conversion price embedded in the note. ASC 815-40 provides that
generally, if an event is not within the entity’s control could or
require net cash settlement, then the contract shall be classified
as an asset or a liability.
Derivative Liabilities
The Company evaluates its agreements to determine if such
instruments have derivatives or contain features that qualify as
embedded derivatives. For derivative financial instruments that are
accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each
reporting date, with changes in the fair value reported in the
unaudited Condensed Interim Consolidated Statements of Operations.
In calculating the fair value of derivative liabilities, the
Company uses a valuation model when Level 1 inputs are not
available to estimate fair value at each reporting date. The
classification of derivative instruments, including whether such
instruments should be recorded as liabilities or as equity, is
evaluated at the end of each reporting period. Derivative
instrument liabilities are classified in the unaudited Condensed
Interim Consolidated Balance Sheets as current or non-current based
on whether or not net-cash settlement of the derivative instrument
could be required within twelve months of the Consolidated Balance
Sheets date.
Business Combinations
Business combinations are accounted for using the acquisition
method. The consideration transferred in a business combination is
measured at fair value at the date of acquisition. Acquisition
related transaction costs are expensed as incurred and included in
the unaudited Condensed Interim Consolidated Statements of
Operations. Identifiable assets and liabilities, including
intangible assets, of acquired businesses are recorded at their
fair value at the date of acquisition. When the Company acquires
control of a business, any previously held equity interest also is
remeasured to fair value. The excess of the purchase consideration
and any previously held equity interest over the fair value of
identifiable net assets acquired is goodwill. If the fair value of
identifiable net assets acquired exceeds the purchase consideration
and any previously held equity interest, the difference is
recognized in the unaudited Condensed Interim Consolidated
Statements of Operations immediately as a gain on acquisition.
Contingent consideration is measured at its acquisition-date fair
value and included as part of the consideration transferred in a
business combination. The Company allocates the total cost of the
acquisition to the underlying net assets based on their respective
estimated fair values. As part of this allocation process, the
Company identifies and attributes values and estimated lives to the
intangible assets acquired. These determinations involve
significant estimates and assumptions regarding multiple, highly
subjective variables, including those with respect to future cash
flows, discount rates, asset lives, and the use of different
valuation models, and therefore require considerable judgment. The
Company’s estimates and assumptions are based, in part, on the
availability of listed market prices or other transparent market
data. These determinations affect the amount of amortization
expense recognized in future periods. The Company bases its fair
value estimates on assumptions it believes to be reasonable but are
inherently uncertain. Contingent consideration that is classified
as equity is not remeasured at subsequent reporting dates and its
subsequent settlement is accounted for within equity. Contingent
consideration that is classified as an asset or a liability is
remeasured at subsequent reporting dates in accordance with ASC
450, “Contingencies”, as appropriate, with the corresponding gain
or loss being recognized in earnings in accordance with ASC
805.
Share-Based Compensation
The Company has a share-based compensation plan comprised of stock
options (“Options”) and stock appreciation rights (“SARs”). Options
provide the right to the purchase of one Series A Common share
per option. Stock appreciation rights provide the right to receive
cash from the exercise of such right based on the increase in value
between the exercise price and the fair market value of
Series A Common shares of the Company at the time of exercise.
The Company has issued both incentive stock options and
non-qualified stock options.
The Company accounts for its share-based awards in accordance with
ASC Subtopic 718-10, “Compensation – Stock Compensation”, which
requires fair value measurement on the grant date and recognition
of compensation expense for all share-based payment awards made to
employees and directors, including restricted share awards. For
stock options, the Company estimates the fair value using a closed
option valuation (Black-Scholes) model. When there are
market-related vesting conditions to the vesting term of the
share-based compensation, the Company uses a valuation model to
estimate the probability of the market-related vesting conditions
being met and will record the expense. The fair value of restricted
share awards is based upon the quoted market price of the common
shares on the date of grant. The fair value is then expensed over
the requisite service periods of the awards, net of estimated
forfeitures, which is generally the performance period and the
related amount is recognized in the Condensed Interim Consolidated
Statements of Operations.
The fair value models require the input of certain assumptions that
require the Company’s judgment, including the expected term and the
expected share price volatility of the underlying share. The
assumptions used in calculating the fair value of share-based
compensation represent management’s best estimates, but these
estimates involve inherent uncertainties and the application of
judgment. As a result, if factors change resulting in the use of
different assumptions, share-based compensation expense could be
materially different in the future. In addition, the Company is
required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. If the actual
forfeiture rate is materially different from management’s
estimates, the share-based compensation expense could be
significantly different from what the Company has recorded in the
current period.
Financial Instruments
Measurement
All financial instruments are required to be measured at fair value
on initial recognition, plus, in the case of a financial asset or
financial liability not at FVTPL, transaction costs that are
directly attributable to the acquisition or issuance of the
financial asset or financial liability. Transaction costs of
financial assets and financial liabilities carried at FVTPL are
expensed in profit or loss. Financial assets and financial
liabilities with embedded derivatives are considered separately
when determining whether their cash flows are solely payment of
principal and interest. Financial assets that are held within a
business model whose objective is to collect the contractual cash
flows, and that have contractual cash flows that are solely
payments of principal and interest on the principal outstanding are
generally measured at amortized cost at the end of the subsequent
accounting periods. All other financial assets including equity
investments are measured at their fair values at the end of
subsequent accounting periods, with any changes taken through
profit and loss or other comprehensive income (irrevocable election
at the time of recognition). For financial liabilities measured
subsequently at FVTPL, changes in fair value due to credit risk are
recorded in other comprehensive income.
Fair Value
The Company applies fair value accounting for all financial assets
and liabilities and non-financial assets and liabilities that are
recognized or disclosed at fair value in the financial statements
on a recurring basis. The Company defines fair value as the price
that would be received from selling an asset or paid to transfer a
liability in an orderly transaction between market participants at
the measurement date. When determining the fair value measurements
for assets and liabilities that are required to be recorded at fair
value, the Company considers the principal or most advantageous
market in which the Company would transact and the market-based
risk measurements or assumptions that market participants would use
in pricing the asset or liability, such as risks inherent in
valuation techniques, transfer restrictions and credit risk. Fair
value is estimated by applying the following hierarchy, which
prioritizes the inputs used to measure fair value into three levels
and bases the categorization within the hierarchy upon the lowest
level of input that is available and significant to the fair value
measurement:
Level 1 – Quoted prices in active markets for identical assets or
liabilities.
Level 2 – Observable inputs other than quoted prices in active
markets for identical assets and liabilities, quoted prices for
identical or similar assets or liabilities in inactive markets, or
other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the
assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically
reflect management’s estimate of assumptions that market
participants would use in pricing the asset or liability.
Impairment
The Company assesses all information available, including on a
forward-looking basis the expected credit loss associated with its
assets carried at amortized cost. The impairment methodology
applied depends on whether there has been a significant increase in
credit risk. To assess whether there is a significant increase in
credit risk, the Company compares the risk of a default occurring
on the asset at the reporting date with the risk of default at the
date of initial recognition based on all information available, and
reasonable and supportive forward-looking information. For accounts
receivable only, the Company applies the simplified approach as
permitted by ASU 2016-13, “Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial
Instruments”. The simplified approach to the recognition of
expected losses does not require the Company to track the changes
in credit risk; rather, the Company recognizes a loss allowance
based on lifetime expected credit losses at each reporting date
from the date of the trade receivable.
Expected credit losses are measured as the difference in the
present value of the contractual cash flows that are due to the
Company under the contract, and the cash flows that the Company
expects to receive. The Company assesses all information available,
including past due status, credit ratings, the existence of
third-party insurance, and forward-looking macro-economic factors
in the measurement of the expected credit losses associated with
its assets carried at amortized cost. The Company measures expected
credit loss by considering the risk of default over the contract
period and incorporates forward-looking information into its
measurement.
Changes in Accounting Policies Including Adoption
In December 2019, the FASB issued ASU 2019-12, “Simplifying
the Accounting for Income Taxes” (“ASU 2019-12”), which eliminates
certain exceptions related to the approach for intra-period tax
allocation, the methodology for calculating income taxes in an
interim period and the recognition of deferred tax liabilities for
outside basis differences. It also clarifies and simplifies other
aspects of the accounting for income taxes. ASU 2019-12 is
effective for fiscal years beginning after December 15, 2020,
and interim periods within those fiscal years. The Company adopted
ASU 2019-12 on January 1, 2021. The adoption of the standard
did not have a material impact on the Company’s unaudited Condensed
Interim Consolidated Financial Statements.
In January 2020, the FASB issued ASU 2020-01,
“Investments—Equity Securities (Topic 321)”, “Investments—Equity
Method and Joint Ventures (Topic 323)”, and “Derivatives and
Hedging (Topic 815)” (“ASU 2020-01”), which is intended to clarify
the interaction of the accounting for equity securities under Topic
321 and investments accounted for under the equity method of
accounting in Topic 323 and the accounting for certain forward
contracts and purchased options accounted for under Topic 815. The
Company adopted ASU 2020-01 on January 1, 2021. The adoption
of the standard did not have a material impact on the Company’s
unaudited Condensed Interim Consolidated Financial Statements.
In August 2020, the FASB issued ASU 2020-06, “Debt — Debt With
Conversion and Other Options (Subtopic 470-20)” and “Derivatives
and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s
Own Equity” (“ASU 2020-06”), which simplifies the accounting for
certain financial instruments with characteristics of liabilities
and equity, including convertible instruments and contracts on an
entity’s own equity. ASU 2020-06 is effective for the Company for
fiscal years beginning after December 15, 2021, and interim
periods within those fiscal years. Early adoption is permitted for
fiscal years beginning after December 15, 2020, and interim
periods within those fiscal years. Adoption is applied on a
modified or full retrospective transition approach. The Company
early adopted ASU 2020-06 on January 1, 2021. The adoption of
the standard did not have a material impact on the Company’s
unaudited Condensed Interim Consolidated Financial
Statements.
Financial Instruments and Other Instruments
Fair Value of Financial Instruments
GH Group’s financial instruments consist of cash and cash
equivalents, accounts receivables, investments, notes receivable,
trade payables, accrued liabilities, operating lease liabilities,
derivatives, notes payable, acquisition consideration of assets and
liabilities. All assets and liabilities for which fair value is
measured or disclosed in the financial statements are categorized
within the fair value hierarchy. This is described, as follows,
based on the lowest level input that is significant to the fair
value measurement as a whole:
Level 1 – inputs are quoted prices in active markets for identical
assets or liabilities at the measurement date.
Level 2 – inputs are observable inputs other than quoted prices
included within Level 1, such as quoted prices for similar assets
or liabilities in active markets, quoted prices for identical
assets or liabilities in markets that are not active, or other
inputs that are observable directly or indirectly.
Level 3 – inputs are unobservable inputs for the asset or liability
that reflect the reporting entity’s own assumptions and are not
based on observable market data.
There have been no transfers between fair value levels during the
years.
Other Risks and Uncertainties
Credit Risk
Credit risk is the risk of a potential loss to the Company if a
customer or third party to a financial instrument fails to meet its
contractual obligations. The maximum credit exposure as of
March 31, 2020 and December 31, 2020 is the carrying
values of cash and cash equivalents, accounts receivable, due from
related party. The Company does not have significant credit risk
with respect to its customers. All cash and cash equivalents are
placed with major U.S. financial institutions. The Company provides
credit to its customers in the normal course of business and has
established credit evaluation and monitoring processes to mitigate
credit risk but has limited risk as the majority of its sales are
transacted with cash.
Liquidity Risk
Liquidity risk is the risk that the Company will not be able to
meet its financial obligations associated with financial
liabilities. The Company manages liquidity risk through the
management of its capital structure. The Company’s approach to
managing liquidity risk is to ensure that it will have sufficient
liquidity to settle obligations and liabilities when due. As of
March 31, 2021 and December 31, 2020, cash generated from
ongoing operations was not sufficient to fund operations and growth
strategy as discussed above in “Liquidity and Capital Resources
”.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash
flows of a financial instrument will fluctuate because of changes
in market interest rates. Cash and cash equivalents bear interest
at market rates. The Company’s financial liabilities have fixed
rates of interest and therefore expose the Company to a limited
interest rate fair value risk.
Price Risk
Price risk is the risk of variability in fair value due to
movements in equity or market prices. The Company’s investments are
susceptible to price risk arising from uncertainties about their
future outlook, future values and the impact of market conditions.
The fair value of investments held in privately-held entities are
based on a market approach, which uses prices and other relevant
information generated by market transactions involving identical or
comparable assets or liabilities.
Cautionary Note Regarding Forward-Looking Information
This MD&A contains certain forward-looking information and
forward-looking statements, as defined in applicable securities
laws (collectively referred to herein as “forward-looking
statements”). These statements relate to future events or the
Company’s future performance. All statements other than statements
of historical fact are forward-looking statements. Often, but not
always, forward-looking statements can be identified by the use of
words such as “plans”, “expects”, “is expected”, “budget”,
“scheduled”, “estimates”, “continues”, “forecasts”, “projects”,
“predicts”, “intends”, “anticipates” or “believes”, or variations
of, or the negatives of, such words and phrases, or statements that
certain actions, events or results “may”, “could”, “would”,
“should”, “might” or “will” be taken, occur or be achieved.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause actual results to
differ materially from those anticipated in such forward-looking
statements. Forward looking statements include, but are not limited
to: statements concerning the completion of, and matters relating
to, the various proposed transactions discussed by the Company
herein and the expected timing related thereto; the expected
operations, financial results and condition of the Company; general
economic trends; the regulatory and legal environment relating to
cannabis in the United States; any potential future legalization of
adult-use and/or medical marijuana under U.S. federal law;
expectations of market size and growth in the United States and the
States the Company operates; cannabis cultivation, production and
extraction capacity estimates and projections; additional funding
requirements; statements based on the Company’s Q1 2021 financial
statements; the Company’s future objectives and strategies to
achieve those objectives; the Company’s estimated cash flow,
capitalization and adequacy thereof; and other statements with
respect to management’s beliefs, plans, estimates and intentions,
and similar statements concerning anticipated future events,
results, circumstances, performance or expectations that are not
historical facts.
The material assumptions used to develop such forward-looking
statements, include, without limitation: the anticipated completion
of the acquisition of the Greenhouse Option; the completion of the
anticipated merger of the Company with certain subsidiary entities
of Element 7 and that Element 7 will be successful in applying for
the licenses; the anticipated receipt of any required regulatory
approvals and consents; the expectation that no event, change or
other circumstance will occur that could give rise to the
termination of definitive agreements entered into or to be entered
into in connection with the transactions discussed herein; that no
unforeseen changes in the legislative and operating frameworks for
the Company will occur; that the Company will meet its future
objectives and priorities; that the Company will have access to
adequate capital to fund its future projects and plans; that the
Company’s future projects and plans will proceed as anticipated;
that there will be no material adverse changes in the U.S. legal
and regulatory environment relating to cannabis, customer growth,
pricing, usage; data based on good faith estimates that are derived
from management’s knowledge of the industry and other independent
sources; and assumptions concerning general economic and industry
growth rates, commodity prices, currency exchange and interest
rates and competitive intensity.
Inherent in forward-looking statements are risks, uncertainties,
and other factors beyond the Corporation’s ability to predict or
control. Factors that could cause such differences include, but are
not limited to: cannabis is a controlled substance under applicable
legislation; the enforcement of cannabis laws could change;
differing regulatory requirements across State jurisdictions may
hinder economies of scale; legal, regulatory or other political
change; the unpredictable nature of the cannabis industry;
regulatory scrutiny; the impact of regulatory scrutiny on the
ability to raise capital; anti-money laundering laws and
regulations; any reclassification of cannabis or changes in U.S.
controlled substances and regulations; restrictions on the
availability of favourable locations; enforceability of contracts;
general regulatory and licensing risks; California regulatory
regime and transfer and grant of licenses; limitations on ownership
of licenses; regulatory action from the Food and Drug
Administration; competition; ability to attract and retain
customers; unfavourable publicity or consumer perception; results
of future clinical research and/or controversy surrounding
vaporizers and vaporizer products; limited market data and
difficulty to forecast; constraints on marketing products; effects
of the COVID-19 pandemic; execution of the Company’s business
strategy; reliance on management; the Greenhouse Option Acquisition
and/or Element 7 Merger may not be completed or, if completed, may
not be successful; ability to establish and maintain effective
internal control over financial reporting; competition from
synthetic production and technological advances; fraudulent or
illegal activity by employees, contractors and consultants; product
liability and recalls; risks related to product development and
identifying markets for sale; dependence on suppliers,
manufacturers, and contractors; reliance on inputs; reliance on
equipment and skilled labour; service providers; litigation;
intellectual property risks; information technology systems,
cyber-attacks, security, and privacy breaches; bonding and
insurance coverage; transportation; energy costs; risks inherent in
an agricultural business; management of growth; risks of leverage;
future acquisitions or dispositions; difficulty attracting and
retaining personnel; and past performance not being indicative of
future results.
Readers are cautioned that the factors outlined herein are not an
exhaustive list of the factors or assumptions that may affect the
forward-looking statements, and that the assumptions underlying
such statements may prove to be incorrect. Actual results and
developments are likely to differ, and may differ materially, from
those expressed or implied by the forward-looking statements
contained in this MD&A. Forward-looking statements involve
known and unknown risks, uncertainties and other factors that may
cause the Corporation’s actual results, performance, or
achievements to be materially different from any of its future
results, performance or achievements expressed or implied by
forward-looking statements. All forward-looking statements herein
are qualified by this cautionary statement. The forward-looking
statements in this MD&A speak only as of the date of this
MD&A or as of the date specified in such statement.
Accordingly, readers should not place undue reliance on
forward-looking statements. The Company undertakes no obligation to
update publicly or otherwise revise any forward-looking statements
whether because of new information or future events or otherwise,
except as may be required by law. If the Company does update one or
more forward-looking statements, no inference should be drawn that
it will make additional updates with respect to those or other
forward-looking statements, unless required by law.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations for the Year Ended December 31, 2020
and the Period from April 16, 2019 – Mercer Park Brand Acquisition
Corp.
Introduction
The following management’s discussion and analysis (“MD&A”) of
the financial condition and results of the operations of Mercer
Park Brand Acquisition Corp. (“Brand”, the “Corporation”, “we”,
“our” or “us”) constitutes management’s review of the factors that
affected the Corporation’s financial and operating performance for
the year ended December 31, 2020. This MD&A was written to
comply with the requirements of National Instrument 51- 102 –
Continuous Disclosure Obligations. This discussion should be
read in conjunction with the audited financial statements for the
year ended December 31, 2020 and from the April 16, 2019
(Incorporation Date) to December 31, 2019, and the related
notes thereto. Results are reported in United States dollars,
unless otherwise noted. In the opinion of management, all
adjustments (which consist only of normal recurring adjustments)
considered necessary for a fair presentation have been included.
The results presented for the year ended December 31, 2020,
are not necessarily indicative of the results that may be expected
for any future period. The financial statements and the financial
information contained in this MD&A were prepared in accordance
with accounting principles generally accepted in the United States
of America (“GAAP”). Further information about the Corporation and
its operations can be obtained on www.sedar.com.
The Corporation intends to focus its search for target businesses
that operate branded product businesses in cannabis and/or
cannabis-adjacent industries; however, the Corporation is not
limited to a particular industry or geographic region for purposes
of completing its Qualifying Transaction (as defined below). Please
refer to the Corporation’s latest annual information form for risk
factors and regulatory information (the “AIF”) regarding the
cannabis industry.
Cautionary Note Regarding Forward-Looking Information
This MD&A contains certain forward-looking information and
forward-looking statements, as defined in applicable securities
laws (collectively referred to herein as “forward-looking
statements”). These statements relate to future events or the
Corporation’s future performance. All statements other than
statements of historical fact are forward-looking statements.
Often, but not always, forward-looking statements can be identified
by the use of words such as “plans”, “expects”, “is expected”,
“budget”, “scheduled”, “estimates”, “continues”, “forecasts”,
“projects”, “predicts”, “intends”, “anticipates” or “believes”, or
variations of, or the negatives of, such words and phrases, or
statements that certain actions, events or results “may”, “could”,
“would”, “should”, “might” or “will” be taken, occur or be
achieved. Forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause actual
results to differ materially from those anticipated in such
forward-looking statements. The forward-looking statements in this
MD&A speak only as of the date of this MD&A or as of the
date specified in such statement. The following table outlines
certain significant forward-looking statements contained in this
MD&A and provides the material assumptions used to develop such
forward-looking statements and material risk factors that could
cause actual results to differ materially from the forward-looking
statements.
|
Forward-looking
statements |
Assumptions |
Risk
factors |
|
The
Corporation expects to complete a Qualifying Transaction (as
defined below). |
The
Corporation expects to identify an asset or business/businesses to
acquire and close a Qualifying Transaction, on terms favourable to
the Corporation. |
The
Corporation’s inability to find a target to complete a Qualifying
Transaction within the Permitted Timeline (as defined below). If we
are unable to consummate our Qualifying Transaction within the
Permitted Timeline, we will be required to redeem 100% of the
outstanding Class A Restricted Voting Shares (as defined
below), as described herein. |
|
The
Corporation’s ability to meet its working capital needs at the
current level for the twelve-month period ending December 31,
2021. |
The
operating activities of the Corporation for the twelve-month period
ending December 31, 2021, and the costs associated therewith,
will be consistent with the Corporation’s current expectations;
debt and equity markets, exchange and interest rates and other
applicable economic conditions favourable to the
Corporation. |
Changes
in debt and equity markets; timing and availability of external
financing on acceptable terms; increases in costs; regulatory
compliance and changes in regulatory compliance and other local
legislation and regulation; interest rate and exchange
rate fluctuations; changes in economic conditions; impact of
COVID-19 and timing of a Qualifying Transaction. |
Inherent in forward-looking statements are risks, uncertainties,
and other factors beyond the Corporation’s ability to predict or
control. Please also refer to those risk factors referenced in the
“Risk Factors” section below and in the AIF. Readers are cautioned
that the above chart does not contain an exhaustive list of the
factors or assumptions that may affect the forward-looking
statements, and that the assumptions underlying such statements may
prove to be incorrect. Actual results and developments are likely
to differ, and may differ materially, from those expressed or
implied by the forward-looking statements contained in this
MD&A.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the Corporation’s
actual results, performance, or achievements to be materially
different from any of its future results, performance or
achievements expressed or implied by forward-looking statements.
All forward-looking statements herein are qualified by this
cautionary statement. Accordingly, readers should not place undue
reliance on forward-looking statements. The Corporation undertakes
no obligation to update publicly or otherwise revise any
forward-looking statements whether because of new information or
future events or otherwise, except as may be required by law. If
the Corporation does update one or more forward-looking statements,
no inference should be drawn that it will make additional updates
with respect to those or other forward-looking statements, unless
required by law.
Description of Business
Brand is a corporation which was incorporated for the purpose of
effecting an acquisition of one or more businesses or assets, by
way of a merger, amalgamation, arrangement, share exchange, asset
acquisition, share purchase, reorganization, or any other similar
business combination involving the Corporation (a “Qualifying
Transaction”). The Corporation’s business activities are carried
out in a single business segment.
The Corporation was incorporated on April 16, 2019 under the
Business Corporations Act (British Columbia), commenced
operations on April 16, 2019. The head office of the Sponsor
(as defined below) is located at 590 Madison Avenue, 26th Floor,
New York, New York, 10022.
On May 13, 2019, the Corporation completed its initial public
offering (the “Offering”) of 40,250,000 Class A Restricted
Voting Units (including 5,250,000 Class A Restricted Voting
Units issued pursuant to the exercise in full of the over-allotment
option) at $10.00 per Class A Restricted Voting Unit. Each
Class A Restricted Voting Unit consisted of one Class A
restricted voting share (“Class A Restricted Voting Share”) of
the Corporation and one-half of a share purchase warrant (each, a
“Warrant”). In accordance with the Corporation’s articles, each
Class A Restricted Voting Share, unless previously redeemed,
will be automatically converted into one Subordinate Voting Share
following the closing of a Qualifying Transaction. All Warrants
will become exercisable at a price of $ 11.50 per share, commencing
65 days after the completion of a Qualifying Transaction, and will
expire on the day that is five years after the completion of a
Qualifying Transaction or may expire earlier if a Qualifying
Transaction does not occur within the permitted timeline of 21
months (or 24 months if we have executed a letter of intent,
agreement in principle or definitive agreement for a Qualifying
Transaction within 21 months but have not completed the Qualifying
Transaction within such 21-month period) (“Permitted Timeline”)
(subject to extension, as further described herein) from the
closing of the Offering or if the expiry date is accelerated. Each
Whole Warrant is exercisable to purchase one Class A
Restricted Voting Share (which, following the closing of the
Qualifying Transaction, would become one Subordinate Voting
Share).
In connection with the Offering, the Corporation granted the
underwriter a 30- day non-transferable option to purchase up to an
additional 5,250,000 Class A Restricted Voting Units, at a
price of $10.00 per Class A Restricted Voting Unit, to cover
over-allotments, if any, and for market stabilization purposes. The
over-allotment option was exercised prior to the close of the
initial public offering. As a result of the exercise of the
over-allotment option, the Founders, (as defined below) own an
aggregate of 10,089,750 Class B Shares, including 109,000
Class B Units and 9,810,000 Founders’ Warrants (as defined
below).
Concurrent with the completion of the Offering, Mercer Park CB II,
L.P. (the “Sponsor”), a limited partnership formed under the laws
of the State of Delaware, indirectly controlled by Mercer Park,
L.P., a privately-held family office based in New York, New York
and Charles Miles and Sean Goodrich (or persons or companies
controlled by them) (collectively with the Sponsor, the “Founders”)
purchased an aggregate of 10,089,750 Class B Shares,
consisting of 10,069,750 Class B Shares purchased by the
Sponsor, 10,000 Class B Shares purchased by Charles Miles, and
10,000 Class B Shares purchased by Sean Goodrich. In addition,
the Sponsor purchased an aggregate of 9,810,000 Warrants
(“Founders’ Warrants”) at $1.00 per Founders’ Warrant.
Upon closing of the Qualifying Transaction, the Class B Shares
would, in accordance with the Corporation’s articles, convert on a
100-for-1 basis into Multiple Voting Shares.
Each Class A Restricted Voting Unit commenced trading on
May 13, 2019 on the Neo Exchange Inc. (the “Exchange”) under
the symbol “BRND.U” and separated into Class A Restricted
Voting Shares and Warrants on June 24, 2019, which trade under
the symbols “BRND.A.U”, and “BRND.WT”, respectively. The
Class B Shares issued to the Founders will not be listed prior
to the completion of the Qualifying Transaction.
The proceeds of $402,500,000 from the Offering are held by Odyssey
Trust Company, as Escrow Agent, in an escrow account (the “Escrow
Account”) at a Canadian chartered bank or subsidiary thereof, in
accordance with the escrow agreement. Subject to applicable law and
payment of certain taxes, permitted redemptions and certain
expenses, as further described herein, none of the funds held in
the Escrow Account will be released to the Corporation prior to the
closing of a Qualifying Transaction. The escrowed funds will be
held to enable the Corporation to (i) satisfy redemptions made
by holders of Class A Restricted Voting Shares (including in
the event of a Qualifying Transaction, or an extension to the
Permitted Timeline to up to 36 months with shareholder approval
from the holders of Class A Restricted Shares and the
Corporation’s board of directors, or in the event a Qualifying
Transaction does not occur within the Permitted Timeline),
(ii) fund a Qualifying Transaction with the net proceeds
following payment of any such redemptions and deferred underwriting
commissions, and/or (iii) pay taxes on amounts earned on the
escrowed funds and certain permitted expenses. Such escrowed funds
and all amounts earned, subject to such obligations and applicable
law, will be assets of the Corporation. These escrowed funds will
also be used to pay the deferred underwriting commissions in the
amount of $16,100,000, 75% of which will be payable by the
Corporation to the underwriter only upon the closing of a
Qualifying Transaction (subject to availability, failing which any
short fall would be required to be made up from other sources) and
the remaining 25% of which (or, if a lesser amount, the balance of
the non-redeemed shares' portion of the Escrow Account, less tax
liabilities on amounts earned on the escrowed funds and certain
expenses directly related to redemptions) will be payable by the
Corporation as it sees fit, including for payment to other agents
or advisors who have assisted with or participated in the sourcing,
diligence and completion of its Qualifying Transaction.
In connection with consummating a Qualifying Transaction, the
Corporation will require approval by a majority of the directors
unrelated to the Qualifying Transaction. In connection with the
Qualifying Transaction, holders of Class A Restricted Voting
Shares will be given the opportunity to elect to redeem all or a
portion of their Class A Restricted Voting Shares at a per
share price, payable in cash, equal to the pro-rata portion per
Class A Restricted Voting Share of: (A) the escrowed
funds available in the Escrow Account at the time immediately prior
to the redemption deposit timeline, including interest and other
amounts earned thereon; less (B) an amount equal to the total
of (i) applicable taxes payable by the Corporation on such
interest and other amounts earned in the Escrow Account and
(ii) actual and expected direct expenses related to the
redemption, each as reasonably determined by the Corporation,
subject to certain limitations. Each holder of Class A
Restricted Voting Shares, together with any affiliate of such
holder or any other person with whom such holder or affiliate is
acting jointly or in concert, will be subject to a redemption
limitation of an aggregate 15% of the number of Class A
Restricted Voting Shares issued and outstanding. Class B
Shares will not be redeemable in connection with a Qualifying
Transaction or an extension to the Permitted Timeline and holders
of Class B Shares shall not be entitled to access the Escrow
Account should a Qualifying Transaction not occur within the
Permitted Timeline.
If the Corporation is unable to complete its Qualifying Transaction
within the Permitted Timeline (or within an extension of the
Permitted Timeline), the Corporation will be required to redeem
each of the Class A Restricted Voting Shares. The
Corporation’s Warrants (including the Warrants underlying the
Class A Restricted Voting Units and the Class B Units and
the Founders’ Warrants) will expire worthless. In such case, each
holder of a Class A Restricted Voting Share will receive for
an amount, payable in cash, equal to the pro-rata portion per
Class A Restricted Voting Share of: (A) the Escrow
Account, including any interest and other amounts earned; less
(B) an amount equal to the total of (i) any applicable
taxes payable by the Corporation on such interest and other amounts
earned in the Escrow Account, (ii) any taxes of the
Corporation arising in connection with the redemption of the
Class A Restricted Voting Shares, and (iii) up to a
maximum of $50,000 of interest and other amounts earned to pay
actual and expected expenses related to the dissolution and certain
other related costs as reasonably determined by the Corporation.
The underwriter will have no right to the deferred underwriting
commissions held in the Escrow Account in such circumstances.
Overall Performance
The Corporation has not conducted commercial operations and it is
focused on the identification and evaluation of businesses or
assets to acquire and there were no notable events that occurred
during the reporting periods presented.
For the year ended December 31, 2020, the Corporation earned
interest income of $1,742,747 and reported income of $947,346
($0.09 basic and diluted income per Class B Share). From the
Incorporation Date to December 31, 2019, the Corporation
earned interest income of $3,296,977 and reported income of
$2,831,491 ($0.31 basic and diluted income per Class B Share).
The expenses for the year ended December 31, 2020 primarily
related to general and administrative expenses of $702,259, foreign
exchange loss of $43,142, travel of $50,000, current income tax
recovery of $114,990 and deferred income tax of $ 114,990. The
expenses from the Incorporation date to December 31, 2019
primary relate to general and administrative expenses of $ 381,137,
foreign exchange gain of $651, travel of $85,000, current income
tax of $713,425 and deferred income tax recovery of $713,425.
Current liabilities as of December 31, 2020 total $745,813
(December 31, 2019 - $1,030,396). Shareholders’ deficiency as
of December 30, 2020 is comprised of Class B Shares,
unlimited, 10,198,751 issued of $nil (December 31, 2019 -
$nil), additional paid-in-capital of ($11,684,284)
(December 31, 2019 - ($11,684,284)) and retained earnings of
$3,778,837 (December 31, 2019 - $2,831,491) for a net amount
of ($7,905,447) (December 31, 2019 – ($8,852,793)) in
shareholders’ deficit.
Commitments and contingencies as of December 31, 2020 total
$402,500,000 (December 31, 2019 - $402,500,000). It is
comprised of Class A Restricted Voting Shares subject to
redemption, 40,250,000 shares (at a redemption value of $10.00 per
share).
Working capital, which consists of current assets less current
liabilities, is $2,559,062 (December 31, 2019 - $3,237,735) as
of December 31, 2020. Management believes the Corporation’s
working capital is sufficient for the Corporation to meet its
ongoing obligations and meet its objective of completing a
Qualifying Transaction.
The weighted average number of Class B Shares outstanding for
the year ended December 31, 2020 was 10,198,751
(December 31, 2019 – 9,253,693).
Liquidity and Capital Resources
|
Marketable securities held in an escrow account |
|
December 31, 2020 |
|
|
United States Treasury Bills |
|
$ |
407,509,774 |
|
|
Accrued interest |
|
$ |
26,301 |
|
|
Restricted cash |
|
$ |
981 |
|
|
Total marketable securities held in an escrow account |
|
$ |
407,537,056 |
|
| |
|
|
|
|
|
Per Class A Restricted Voting Shares subject to
redemption |
|
$ |
10.00 |
|
| |
|
|
|
|
|
Cash held outside the escrow account |
|
$ |
2,095,023 |
|
We intend to use substantially all the funds held in the Escrow
Account, including interest (which interest shall be net of taxes
payable and certain expenses) to consummate a Qualifying
Transaction. To the extent that, after redemptions, our share
capital or debt is used, in whole or in part, as consideration to
consummate a Qualifying Transaction, the remaining proceeds held in
the Escrow Account may be used as working capital to finance the
operations of the target business or businesses, make other
acquisitions and/or pursue a growth strategy.
As of December 31, 2020, we had cash held outside of our
Escrow Account of $2,095,023, which is available to fund our
working capital requirements, including any further transaction
costs that may be incurred. We expect to generate negative cash
flow from operating activities in the future until our Qualifying
Transaction is completed and we commence income generation. We
intend to employ a proactive acquisition targeting strategy that
identifies potential acquisition targets that align with the
Corporation’s investment objectives. Consistent with this strategy,
we have identified the following general criteria and guidelines
that we believe are important in evaluating prospective acquisition
targets:
| |
· |
Opportunity
to consolidate a highly fragmented marketplace where even the
largest brands represent less than 10% market share. |
| |
· |
Ability
to build an institutional-quality cannabis corporation focused on
brands and branded products. |
| |
· |
Companies
with strong marketing and brand development expertise. Companies
that will benefit from a defined branding strategy. |
| |
· |
Companies
with additional, strategic capabilities-such as distribution,
manufacturing, or product development-that support brand
value. |
| |
· |
Orphaned
or underinvested brands within existing companies. |
| |
· |
Companies
exhibiting growth and profitability performance that could be
enhanced through improved access to capital and financial
expertise. |
| |
|
|
| |
· |
Opportunity
to provide rescue financing for undercapitalized operators.
Companies that will benefit from being a public
company. |
Management seeks to ensure that our operational and administrative
costs are minimal prior to the completion of a Qualifying
Transaction, with a view to preserving the Corporation’s working
capital.
We do not believe that we will need to raise additional funds to
meet expenditures required for operating our business until the
consummation of our Qualifying Transaction. We believe that we will
have sufficient available funds outside of the Escrow Account to
operate the business. However, we cannot be assured that this will
be the case. To the extent that the Corporation may require
additional funding for general ongoing expenses or in connection
with sourcing a proposed Qualifying Transaction, we may seek
funding by way of unsecured loan