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.

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:

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:

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.

Notes:

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:

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:

●     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;

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 (4^th) 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.

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.

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.

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.

Wholesale Sales

In addition to sending cultivated biomass to the CMS Asset for manufacture, we also sell our biomass on various wholesale markets.

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

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.

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.

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.

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.

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:

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:

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:

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.

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

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:

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:

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:

(*) 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:

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

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:

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):

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:

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:

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.

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

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:

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 December 31, 2020 Compared to Three Months Ended December 31, 2019

The Corporation’s net loss totaled $ 144,116 for the three months ended December 31, 2020, with basic and diluted loss per Class B Share of $0.01. Activities for this period principally 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. These expenses were offset by interest income of $84,693.

The Corporation’s net income totaled $1,412,880 for the three months ended December 31, 2019, with basic and diluted income per Class B Share of $0.16. Activities for this period principally related to general and administrative expenses of $100,398, foreign exchange loss of $2,963, travel of $85,000, current income tax of $713,425 and deferred income tax recovery of $713,425. These expenses were offset by interest income of $1,601,241.

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 December 31, 2020, all funds held in escrow were included in United States Treasury Bills, except for $981 held in a restricted cash account. Interest income on these investments is not expected to be significant in view of the current low interest rates.

During the three months ended December 31, 2020, the Corporation earned interest income of $84,693 (three months ended December 31, 2019 - $1,601,241).

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 $202,157 for the three months ended December 31, 2020. General and administrative costs were $100,398 for the three months ended December 31, 2019.

Year Ended December 31, 2020 Compared to the Incorporation Date to December 31, 2019

The Corporation’s net income totaled $947,346 for the year ended December 31, 2020, with basic and diluted income per Class B Share of $0.09. Activities for this period principally 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 expense of $114,990. These expenses were offset by interest income of $1,742,747.

The Corporation’s net income totaled $2,831,491 from the Incorporation Date to December 31, 2019, with basic and diluted income per Class B Share of $ 0.31. Activities for this period principally related 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. These expenses were offset by interest income of $3,296,977.

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 December 31, 2020, all funds held in escrow were included in United States Treasury Bills, except for $981 held in a restricted cash account. Interest income on these investments is not expected to be significant in view of the current low interest rates.

During the year ended December 31, 2020, the Corporation earned interest income of $1,742,747. During the period from the Corporation’s commencement of operations on the Incorporation Date to December 31, 2019 the Corporation earned interest income of $3,296,977.

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 $702,259 for the year ended December 31, 2020. General and administrative costs were $381,137 from the Incorporation Date to December 31, 2019.

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

Although the Corporation has commenced the process of identifying potential acquisitions with a view to completing a Qualifying Transaction, the Corporation has not yet entered into a definitive agreement. See “Subsequent Event”, below.

Selected Quarterly Information

A summary of selected information for each of the quarters presented below is as follows: